~~-18-~~

~~Table of Contents~~-26-

The selected consolidated financial data set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information including the Consolidated Financial Statements and related Notes, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current year classification.


Selected Financial Data	(Dollars in thousands, except per share amounts)													(Dollars in thousands, except per share amounts)

At or for the years ended December 31,	2009			2008			2007		2006		2005			2012			2011			2010			2009			2008
Financial Results:
Interest income	$	129,630		$	140,662		$	136,434	$	131,134	$	115,693			$121,061			$121,346			$123,254			$129,630			$140,662
Interest expense		63,738			75,149			76,490		69,660		55,037		30,365			36,391			46,063			63,738			75,149
Net interest income		65,892			65,513			59,944		61,474		60,656		90,696			84,955			77,191			65,892			65,513
Provision for loan losses		8,500			4,800			1,900		1,200		1,200		2,700			4,700			6,000			8,500			4,800
Net interest income after provision for loan losses		57,392			60,713			58,044		60,274		59,456		87,996			80,255			71,191			57,392			60,713
Noninterest income:
Net realized gains on sales of securities		314			2,224			455		443		389		1,223			698			729			314			2,224
Net other-than-temporary impairment losses on securities		(3,137	)		(5,937	)		–		–		(32	)	(221		)	(191		)	(417		)	(3,137		)	(5,937		)
Other noninterest income		45,041			44,233			45,054		41,740		30,589		64,212			52,257			48,161			45,476			44,550
Total noninterest income		42,218			40,520			45,509		42,183		30,946		65,214			52,764			48,473			42,653			40,837
Noninterest expense		77,168			71,742			68,906		65,335		56,393		102,338			90,373			85,311			77,603			72,059
Income before income taxes		22,442			29,491			34,647		37,122		34,009		50,872			42,646			34,353			22,442			29,491
Income tax expense		6,346			7,319			10,847		12,091		10,985		15,798			12,922			10,302			6,346			7,319
Net income	$	16,096		$	22,172		$	23,800	$	25,031	$	23,024			$35,074			$29,724			$24,051			$16,096			$22,172
Per share information ($):
Earnings per share:
Basic		1.01			1.59			1.78		1.86		1.73		2.13			1.82			1.49			1.01			1.59
Diluted		1.00			1.57			1.75		1.82		1.69		2.13			1.82			1.49			1.00			1.57
Cash dividends declared (1)		0.84			0.83			0.80		0.76		0.72		0.94			0.88			0.84			0.84			0.83
Book value		15.89			14.75			13.97		12.89		11.86		18.05			17.27			16.63			15.89			14.75
Market value - closing stock price		15.58			19.75			25.23		27.89		26.18		26.31			23.86			21.88			15.58			19.75
Performance Ratios (%):
Return on average assets		0.55			0.82			0.99		1.04		0.98		1.16			1.02			0.82			0.55			0.82
Return on average shareholders’ equity		6.56			11.12			13.48		14.99		14.80		11.97			10.61			9.09			6.56			11.12
Average equity to average total assets		8.40			7.35			7.33		6.93		6.62		9.65			9.57			9.08			8.40			7.35
Dividend payout ratio (2)		84.00			52.87			45.71		41.76		42.60		44.13			48.35			56.38			84.00			52.87
Asset Quality Ratios (%):
Total past due loans to total loans		1.64			0.96			0.45		0.49		0.27		1.22			1.22			1.27			1.64			0.96
Nonperforming loans to total loans		1.43			0.42			0.27		0.19		0.17		0.98			0.99			0.93			1.43			0.42
Nonperforming assets to total assets		1.06			0.30			0.17		0.11		0.10		0.83			0.81			0.79			1.06			0.30
Allowance for loan losses to nonaccrual loans		99.75			305.07			471.12		693.87		742.25		136.95			140.33			154.42			99.75			305.07
Allowance for loan losses to total loans		1.43			1.29			1.29		1.29		1.28		1.35			1.39			1.43			1.43			1.29
Net charge-offs (recoveries) to average loans		0.25			0.08			0.03		0.02		(0.01	)
Net charge-offs to average loans														0.07			0.17			0.24			0.25			0.08
Capital Ratios (%):
Tier 1 leverage capital ratio		7.82			7.53			6.09		6.01		5.45		9.30			8.70			8.25			7.82			7.53
Tier 1 risk-based capital ratio		11.14			11.29			9.10		9.57		9.06		12.01			11.61			11.53			11.14			11.29
Total risk-based capital ratio		12.40			12.54			10.39		10.96		10.51		13.26			12.86			12.79			12.40			12.54

____________


(1)	Represents historical per share dividends declared by the Bancorp.


(2)	Represents the ratio of historical per share dividends declared by the Bancorp to diluted earnings per share.

~~-19-~~

~~Table of Contents~~-27-

~~Selected Financial Data~~

~~(Dollars in thousands)~~



Selected Financial Data											(Dollars in thousands)
December 31,	2009		2008		2007		2006		2005		2012		2011		2010		2009		2008
Assets:
Cash and cash equivalents	$	57,260	$	58,190	$	41,112	$	71,909	$	66,163		$73,474		$87,020		$92,736		$57,260		$58,190
Total securities		691,484		866,219		751,778		703,851		783,941	415,879		593,392		594,100		691,484		866,219
FHLBB stock		42,008		42,008		31,725		28,727		34,966	40,418		42,008		42,008		42,008		42,008
Loans:
Commercial and other		984,550		880,313		680,266		587,397		554,734	1,252,419		1,124,628		1,027,065		984,550		880,313
Residential real estate		605,575		642,052		599,671		588,671		582,708	717,681		700,414		645,020		605,575		642,052
Consumer		329,543		316,789		293,715		283,918		264,466	323,903		322,117		323,553		329,543		316,789
Total loans		1,919,668		1,839,154		1,573,652		1,459,986		1,401,908	2,294,003		2,147,159		1,995,638		1,919,668		1,839,154
Less allowance for loan losses		27,400		23,725		20,277		18,894		17,918	30,873		29,802		28,583		27,400		23,725
Net loans		1,892,268		1,815,429		1,553,375		1,441,092		1,383,990	2,263,130		2,117,357		1,967,055		1,892,268		1,815,429
Investment in bank-owned life insurance		44,957		43,163		41,363		39,770		30,360	54,823		53,783		51,844		44,957		43,163
Goodwill and other intangibles		67,057		68,266		61,912		57,374		54,372	64,287		65,015		65,966		67,057		68,266
Other assets		89,439		72,191		58,675		56,442		48,211	159,873		105,523		95,816		89,439		72,191
Total assets	$	2,884,473	$	2,965,466	$	2,539,940	$	2,399,165	$	2,402,003		$3,071,884		$3,064,098		$2,909,525		$2,884,473		$2,965,466
Liabilities:
Deposits:
Demand deposits	$	194,046	$	172,771	$	175,542	$	186,533	$	196,102		$379,889		$339,809		$228,437		$194,046		$172,771
NOW accounts		202,367		171,306		164,944		175,479		178,677	291,174		257,031		241,974		202,367		171,306
Money market accounts		403,333		305,879		321,600		286,998		223,255	496,402		406,777		396,455		403,333		305,879
Savings accounts		191,580		173,485		176,278		205,998		212,499	274,934		243,904		220,888		191,580		173,485
Time deposits		931,684		967,427		807,841		822,989		828,725	870,232		878,794		948,576		931,684		967,427
Total deposits		1,923,010		1,790,868		1,646,205		1,677,997		1,639,258	2,312,631		2,126,315		2,036,330		1,923,010		1,790,868
FHLBB advances		607,328		829,626		616,417		474,561		545,323	361,172		540,450		498,722		607,328		829,626
Junior subordinated debentures		32,991		32,991		22,681		22,681		22,681	32,991		32,991		32,991		32,991		32,991
Other borrowings		21,501		26,743		32,560		14,684		9,774	1,212		19,758		23,359		21,501		26,743
Other liabilities		44,697		50,127		35,564		36,186		26,521	68,226		63,233		49,259		44,697		50,127
Shareholders' equity		254,946		235,111		186,513		173,056		158,446
Shareholders’ equity											295,652		281,351		268,864		254,946		235,111
Total liabilities and shareholders’ equity	$	2,884,473	$	2,965,466	$	2,539,940	$	2,399,165	$	2,402,003		$3,071,884		$3,064,098		$2,909,525		$2,884,473		$2,965,466


Asset Quality:
Nonaccrual loans	$	27,470	$	7,777	$	4,304	$	2,723	$	2,414		$22,543		$21,237		$18,510		$27,470		$7,777
Nonaccrual investment securities		1,065		633		–		–		–	843		887		806		1,065		633
Property acquired through foreclosure
or repossession		1,974		392		–		–		–
Property acquired through foreclosure or repossession											2,047		2,647		3,644		1,974		392
Total nonperforming assets	$	30,509	$	8,802	$	4,304	$	2,723	$	2,414		$25,433		$24,771		$22,960		$30,509		$8,802


Wealth Management Assets:
Market value of assets under administration	$	3,770,193	$	3,147,649	$	4,014,352	$	3,609,180	$	3,215,763		$4,199,640		$3,900,061		$3,967,207		$3,735,646		$3,097,729

-28-



Selected Quarterly Financial Data		(Dollars and shares in thousands, except per share amounts)
2012		Q1			Q2		Q3		Q4			Year
Interest income			$30,530			$30,190		$30,251		$30,090			$121,061
Interest expense		8,145			7,779		7,515		6,926			30,365
Net interest income		22,385			22,411		22,736		23,164			90,696
Provision for loan losses		900			600		600		600			2,700
Net interest income after provision for loan losses		21,485			21,811		22,136		22,564			87,996
Noninterest income:
Net realized gains on sales of securities		—			299		—		924			1,223
Net other-than-temporary impairment losses on securities		(209		)	—		—		(12		)	(221		)
Other noninterest income		14,441			15,875		16,921		16,975			64,212
Total noninterest income		14,232			16,174		16,921		17,887			65,214
Noninterest expense		23,399			25,228		26,290		27,421			102,338
Income before income taxes		12,318			12,757		12,767		13,030			50,872
Income tax expense		3,880			4,044		3,867		4,007			15,798
Net income			$8,438			$8,713		$8,900		$9,023			$35,074

Weighted average common shares outstanding - basic		16,330			16,358		16,366		16,376			16,358
Weighted average common shares outstanding - diluted		16,370			16,392		16,414		16,425			16,401
Per share information:	Basic earnings per common share		$0.51			$0.53		$0.54		$0.55			$2.13
	Diluted earnings per common share		$0.51			$0.53		$0.54		$0.55			$2.13
	Cash dividends declared per share		$0.23			$0.23		$0.24		$0.24			$0.94

~~-20-~~



Selected Quarterly Financial Data		(Dollars and shares in thousands, except per share amounts)
2011		Q1			Q2		Q3			Q4		Year
Interest income			$29,892			$30,413		$30,534			$30,507		$121,346
Interest expense		9,565			9,349		8,985			8,492		36,391
Net interest income		20,327			21,064		21,549			22,015		84,955
Provision for loan losses		1,500			1,200		1,000			1,000		4,700
Net interest income after provision for loan losses		18,827			19,864		20,549			21,015		80,255
Noninterest income:
Net realized gains on sales of securities		(29		)	226		—			501		698
Net other-than-temporary impairment losses on securities		(33		)	—		(158		)	—		(191		)
Other noninterest income		11,759			13,059		13,114			14,325		52,257
Total noninterest income		11,697			13,285		12,956			14,826		52,764
Noninterest expense		20,740			22,264		22,595			24,774		90,373
Income before income taxes		9,784			10,885		10,910			11,067		42,646
Income tax expense		2,984			3,320		3,328			3,290		12,922
Net income			$6,800			$7,565		$7,582			$7,777		$29,724

Weighted average common shares outstanding - basic		16,197.2			16,251.6		16,277.8			16,288.1		16,254
Weighted average common shares outstanding - diluted		16,229.8			16,284.3		16,293.7			16,326.5		16,283.9
Per share information:	Basic earnings per common share		$0.42			$0.46		$0.46			$0.48		$1.82
	Diluted earnings per common share		$0.42			$0.46		$0.46			$0.47		$1.82
	Cash dividends declared per share		$0.22			$0.22		$0.22			$0.22		$0.88

~~Table of Contents~~-29-

Selected Quarterly Financial Data (Dollars and shares in thousands, except per share amounts)

2009 Q1 Q2 Q3 Q4 Year
Interest income:
Interest and fees on loans $ 24,139 $ 24,147 $ 24,303 $ 24,207 $ 96,796
Income on securities:
Taxable 8,449 7,588 7,028 6,358 29,423
Nontaxable 780 778 781 777 3,116
Dividends on corporate stock and FHLBB stock 72 55 63 55 245
Other interest income 17 9 13 11 50
Total interest income 33,457 32,577 32,188 31,408 129,630
Interest expense:
Deposits 9,547 8,481 7,577 7,033 32,638
FHLBB advances 7,227 7,112 7,094 6,739 28,172
Junior subordinated debentures 479 479 545 444 1,947
Other interest expense 245 244 246 246 981
Total interest expense 17,498 16,316 15,462 14,462 63,738
Net interest income 15,959 16,261 16,726 16,946 65,892
Provision for loan losses 1,700 3,000 1,800 2,000 8,500
Net interest income after provision for loan losses 14,259 13,261 14,926 14,946 57,392
Noninterest income:
Wealth management services:
Trust and investment advisory fees 4,122 4,402 4,717 4,887 18,128
Mutual fund fees 915 993 1,089 1,143 4,140
Financial planning, commissions and other service fees 376 559 243 340 1,518
Wealth management services 5,413 5,954 6,049 6,370 23,786
Service charges on deposit accounts 1,113 1,201 1,257 1,289 4,860
Merchant processing fees 1,349 2,086 2,619 1,790 7,844
Income from bank-owned life insurance 444 447 451 452 1,794
Net gains on loan sales and commissions
on loans originated for others 1,044 1,552 591 1,165 4,352
Net realized gains on securities 57 257 – – 314
Net unrealized gains on interest rate swap contracts 60 341 92 204 697
Other income 419 465 445 379 1,708
Noninterest income, excluding other-than-temporary
impairment losses 9,899 12,303 11,504 11,649 45,355
Total other-than-temporary impairment losses on securities (4,244 ) – (2,293 ) (113 ) (6,650 )
Portion of loss recognized in other comprehensive
income (before taxes) 2,253 – 1,826 (566 ) 3,513
Net impairment losses recognized in earnings (1,991 ) – (467 ) (679 ) (3,137 )
Total noninterest income 7,908 12,303 11,037 10,970 42,218
Noninterest expense:
Salaries and employee benefits 10,475 10,359 10,416 10,667 41,917
Net occupancy 1,226 1,122 1,232 1,210 4,790
Equipment 975 1,036 916 990 3,917
Merchant processing costs 1,143 1,780 2,213 1,516 6,652
FDIC deposit insurance costs 651 2,143 808 795 4,397
Outsourced services 786 568 683 697 2,734
Legal, audit and professional fees 675 664 546 558 2,443
Advertising and promotion 301 491 422 473 1,687
Amortization of intangibles 308 308 303 290 1,209
Other expenses 1,850 1,858 1,653 2,061 7,422
Total noninterest expense 18,390 20,329 19,192 19,257 77,168
Income before income taxes 3,777 5,235 6,771 6,659 �� 22,442
Income tax expense 1,107 1,470 1,858 1,911 6,346
Net income $ 2,670 $ 3,765 $ 4,913 $ 4,748 $ 16,096
Weighted average shares outstanding - basic 15,942.7 15,983.6 16,016.8 16,035.4 15,994.9
Weighted average shares outstanding - diluted 15,997.8 16,037.4 16,074.5 16,082.0 16,040.9
Per share information: Basic earnings per share $ 0.17 $ 0.24 $ 0.31 $ 0.30 $ 1.01
Diluted earnings per share $ 0.17 $ 0.23 $ 0.31 $ 0.30 $ 1.00
Cash dividends declared per share $ 0.21 $ 0.21 $ 0.21 $ 0.21 $ 0.84

~~-21-~~

~~Table of Contents~~

Selected Quarterly Financial Data (Dollars and shares in thousands, except per share amounts)

2008 Q1 Q2 Q3 Q4 Year
Interest income:
Interest and fees on loans $ 24,970 $ 24,406 $ 25,520 $ 26,043 $ 100,939
Income on securities:
Taxable 8,416 8,302 8,504 9,160 34,382
Nontaxable 780 786 778 781 3,125
Dividends on corporate stock and FHLBB stock 620 489 407 366 1,882
Other interest income 140 50 128 16 334
Total interest income 34,926 34,033 35,337 36,366 140,662
Interest expense:
Deposits 11,899 9,248 9,884 10,164 41,195
FHLBB advances 7,299 7,794 8,011 7,790 30,894
Junior subordinated debentures 338 509 524 508 1,879
Other interest expense 314 275 274 318 1,181
Total interest expense 19,850 17,826 18,693 18,780 75,149
Net interest income 15,076 16,207 16,644 17,586 65,513
Provision for loan losses 450 1,400 1,100 1,850 4,800
Net interest income after provision for loan losses 14,626 14,807 15,544 15,736 60,713
Noninterest income:
Wealth management services:
Trust and investment advisory fees 5,342 5,321 5,238 4,415 20,316
Mutual fund fees 1,341 1,445 1,383 1,036 5,205
Financial planning, commissions and other service fees 575 884 570 723 2,752
Wealth management services 7,258 7,650 7,191 6,174 28,273
Service charges on deposit accounts 1,160 1,208 1,215 1,198 4,781
Merchant processing fees 1,272 1,914 2,221 1,493 6,900
Income from bank-owned life insurance 447 453 452 448 1,800
Net gains on loan sales and commissions
on loans originated for others 491 433 239 233 1,396
Net realized gains on securities 813 1,096 – 315 2,224
Net unrealized gains (losses) on interest rate swap contracts 119 26 (24 ) (663 ) (542 )
Other income 342 528 278 477 1,625
Noninterest income, excluding other-than-temporary
impairment losses 11,902 13,308 11,572 9,675 46,457
Total other-than-temporary impairment losses on securities (858 ) (1,149 ) (982 ) (2,948 ) (5,937 )
Portion of loss recognized in other comprehensive
income (before taxes) – – – – –
Net impairment losses recognized in earnings (858 ) (1,149 ) (982 ) (2,948 ) (5,937 )
Total noninterest income 11,044 12,159 10,590 6,727 40,520
Noninterest expense:
Salaries and employee benefits 10,343 10,411 10,580 9,703 41,037
Net occupancy 1,138 1,064 1,123 1,211 4,536
Equipment 944 977 956 961 3,838
Merchant processing costs 1,068 1,598 1,857 1,246 5,769
FDIC deposit insurance costs 256 251 265 272 1,044
Outsourced services 636 742 700 781 2,859
Legal, audit and professional fees 543 430 626 726 2,325
Advertising and promotion 386 467 376 500 1,729
Amortization of intangibles 326 326 320 309 1,281
Other expenses 1,502 1,788 1,668 2,366 7,324
Total noninterest expense 17,142 18,054 18,471 18,075 71,742
Income before income taxes 8,528 8,912 7,663 4,388 29,491
Income tax expense 2,712 2,817 1,623 167 7,319
Net income $ 5,816 $ 6,095 $ 6,040 $ 4,221 $ 22,172
Weighted average shares outstanding - basic 13,358.1 13,381.1 13,409.5 15,765.4 13,981.9
Weighted average shares outstanding - diluted 13,560.6 13,566.7 13,588.3 15,871.6 14,146.3
Per share information: Basic earnings per share $ 0.44 $ 0.45 $ 0.45 $ 0.27 $ 1.59
Diluted earnings per share $ 0.43 $ 0.45 $ 0.44 $ 0.27 $ 1.57
Cash dividends declared per share $ 0.20 $ 0.21 $ 0.21 $ 0.21 $ 0.83

~~-22-~~

~~Table of Contents~~

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Corporation for the periods shown. For a full understanding of this analysis, it should be read in conjunction with other sections of this Annual Report on Form 10-K, including Part I, “Item 1. Business”, Part II, “Item 6. Selected Financial Data” and Part II, “Item 8. Financial Statements and Supplementary Data.” Certain prior year amounts have been reclassified to conform to current year classification.

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: ~~changes~~continued weakness in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility 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 this Annual Report on Form 10-K 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: allowance for loan losses, ~~accounting for acquisitions and~~ review of goodwill and intangible assets for impairment and ~~other-than-temporary impairment~~valuation of investment ~~securities. As a result of the early adoption of provisions of the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification~~TM (“Codification” or “ASC”) ASC 320, “Investments – Debt and Equity Securities,” effective January 1, 2009, the Corporation has revised its critical accounting policy pertaining to other-than-temporary impairment of investment securities. These provisions applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted. Therefore, the revised accounting policy below under the caption “Valuation of Investment Securities for ~~Impairment~~” represents the only significant change in the Corporation’s critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and applies prospectively beginning January 1, 2009.impairment.

Allowance for Loan Losses

Determining 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. The methodology includes three elements:


(1)	Loss allocations are identified for individual loans deemed to be impaired in accordance with GAAP. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due

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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 ~~homogenous~~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 ~~at the fair value of the collateral~~ if the loan is collateral ~~dependent. Impairment is measured based on~~dependent, at the fair value of the collateral less costs to ~~sell if it is determined that foreclosure is probable.~~sell. For collateral dependent loans, management may 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.

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(2)	Loss allocation factors are used for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar ~~economic~~credit quality indicators.

Individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using an 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 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. 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 over periods deemed to be relevant to the inherent risk of loss in the commercial loans and commercial mortgage loan portfolios as of the balance sheet date. We adjust loss allocations for various factors including ~~declining~~ trends in real estate values, ~~and deterioration~~trends in rental rates on commercial real estate, consideration of general economic ~~conditions.~~conditions, and our assessments of credit risk associated with certain industries and an ongoing trend toward larger credit relationships.

Portfolios of more ~~homogenous~~homogeneous populations of loans, including the various categories of residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators and our historical loss experience for each type of credit product. We analyze historical loss experience over periods deemed to be relevant to the inherent risk of loss in residential mortgage and consumer loan portfolios as of the balance sheet date. We periodically update these analyses and adjust the loss allocations for various factors that we believe are not adequately presented in historical loss experience including ~~declining~~ trends in real estate values, changes in unemployment levels and increases in delinquency levels. These factors are also evaluated taking into account the geographic location of the underlying loans.

(3)

An additional unallocated allowance is maintained ~~based on a judgmental process whereby management considers~~to allow for measurement imprecision attributable to uncertainty in the economic environment and ever changing conditions and to reflect management’s consideration of qualitative and quantitative assessments of other environmental ~~factors. For example, a significant portion of our loan portfolio is concentrated among borrowers in southern New England~~factors, including, but not limited to, conditions that may affect the collateral position such as environmental matters, tax liens, and ~~a substantial portion of~~regulatory changes affecting the portfolio is collateralized by real estate in this area. A portion of the commercial loans and commercial mortgage loans are to borrowers in the hospitality, tourism and recreation industries. Further, economicforeclosure process, as well as conditions ~~which~~that may affect the ability of borrowers to meet debt service requirements are considered, including interest rates and energy costs. Results of regulatory examinations, portfolio composition, including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered.requirements.

Because the methodology is based upon historical loss experience and trends, current economic data as well as ~~management's~~management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in our market area, concentration of risk, and declines in local property values. Adversely different conditions or assumptions could lead to ~~increase~~increases in the allowance. In addition, various regulatory agencies periodically review the allowance for loans losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. As of December 31, ~~2009,~~2012, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators.

The Corporation’s Audit Committee of the Board of Directors is responsible for oversight of the loan review process. This process includes review of the Bank’s procedures for determining the adequacy of the allowance for loan losses, administration of its internal credit rating systems and the reporting and monitoring of credit granting standards.

Review of Goodwill and Identifiable Intangible Assets for Impairment

Goodwill is recorded as part of the Corporation’s acquisitions of businesses where the purchase price exceeds the fair market value of the net tangible and identifiable intangible assets. Goodwill is not amortized, but rather is subject to ongoing periodic impairment tests at least annually or more frequently upon the occurrence of significant adverse events. See Part I, Item 1A, “Risk Factors” for additional information. Goodwill was reviewed in ~~2009~~2012 by performing a discounted cash flow analysis (“income approach”) and by estimates of selected market information (“market approach”) for both the commercial banking and the wealth management segments of the Corporation. The

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values determined using the income approach and the market approach were weighted equally for each segment. The results of the ~~2009~~2012 review indicated that the fair value significantly exceeded the carrying value for both segments.

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For acquisitions accounted for using the purchase method of accounting, assets acquired and liabilities assumed are required to be recorded at their fair value. Intangible assets acquired are primarily comprised of wealth management advisory ~~contracts and core deposit intangibles.~~contracts. The ~~values~~value of ~~these~~this intangible ~~assets were~~asset was estimated using valuation techniques, based on discounted cash flow analysis. ~~These~~This intangible ~~assets are~~asset is being amortized over the period the ~~assets are~~asset is expected to contribute to the cash flows of the Corporation, which reflect the expected pattern of benefit. ~~These~~This intangible ~~assets are amortized based upon the projected cash flows the Corporation will receive from the customer relationships during the estimated useful lives. These intangible assets are~~asset is subject to an impairment ~~tests~~test in accordance with GAAP. The carrying value of the wealth management advisory contracts ~~and other identifiable intangibles are~~is reviewed for impairment on an annual basis, or sooner, whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable. Wealth management assets under administration are analyzed to determine if there has been a reduction since acquisition that could indicate possible impairment of the advisory contracts. Impairment would be recognized if the carrying value exceeded the sum of the undiscounted expected future cash flows from the intangible assets. Impairment would result in a write-down to the estimated fair value based on the anticipated discounted future cash flows. The remaining useful life of an intangible asset that is being amortized is also evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.

The Corporation makes certain estimates and assumptions that affect the determination of the expected future cash flows from the advisory ~~contracts and other identifiable intangibles.~~contracts. These estimates and assumptions include account attrition, market appreciation for wealth management assets under administration and anticipated fee rates, projected costs and other factors. Significant changes in these estimates and assumptions could cause a different valuation for the intangible assets. Changes in the original assumptions could change the amount of the intangible recognized and the resulting amortization. Subsequent changes in assumptions could result in recognition of impairment of the intangible assets.

These assumptions used in the impairment tests of goodwill and intangible assets are susceptible to change based on changes in economic conditions and other factors. Significant assumptions used to test goodwill for impairment include estimated discount rates and the timing and amount of projected cash flows. Any change in the estimates which the Corporation uses to determine the carrying value of the Corporation’s goodwill and identifiable intangible assets, or which otherwise adversely affects their value or estimated lives could adversely affect the Corporation’s results of operations. See Note 8 to the Consolidated Financial Statements for additional information.

Valuation of Investment Securities for Impairment

Securities that the Corporation has the ability and intent to hold until maturity are classified as held-to-maturity and are accounted for using historical cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are carried at fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. The fair values of securities are based on either quoted market prices, third party pricing services or third party valuation specialists. When the fair value of an investment security is less than its amortized cost basis, the Corporation assesses whether the decline in value is other-than-temporary. The Corporation considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in the value subsequent to the reporting date, forecasted performance of the issuer, changes in the dividend or interest payment practices of the issuer, changes in the credit rating of the issuer or the specific security, and the general market condition in the geographic area or industry the issuer operates in.

Future adverse changes in market conditions, continued poor operating results of the issuer, projected adverse changes in cash flows which might impact the collection of all principal and interest related to the security, or other factors could result in further losses that may not be reflected in an investment’s current carrying value, possibly requiring an additional impairment charge in the future.

~~Equity securities:~~

In determining whether an other-than-temporary impairment has occurred for common equity securities, the Corporation also considers whether it has the ability and intent to hold the investment until a market price recovery in the foreseeable future. Management evaluates the near-term prospects of the issuers in relation to the severity and

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~~duration of the impairment. If necessary, the investment is written down to its current fair value through a charge to earnings at the time the impairment is deemed to have occurred.~~

With respect to perpetual preferred stocks, the Corporation’s assessment of other-than-temporary impairment is made using an impairment model (including an anticipated recovery period) similar to a debt security, provided there has been no evidence of a deterioration in credit of the issuer.

~~Debt securities:~~

In determining whether an other-than-temporary impairment has occurred for debt securities, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost of the security. If the present value of expected cash flows is less than the amortized cost of the security, then the entire amortized cost of the security will not be recovered; that is, a credit loss exists, and an other-than-temporary impairment shall be considered to have occurred.

With respect to holdings of collateralized debt obligations representing pooled trust preferred debt securities, estimates of cash flows are evaluated upon consideration of information including, but not limited to, past events, current conditions, and reasonable and supporting forecasts for the respective holding. Such information generally includes the remaining

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payment terms of the security, prepayment speeds, the financial condition of the issuer(s), expected defaults, and the value of any underlying collateral. The estimated cash flows shall be discounted at a rate equal to the current yield used to accrete the beneficial interest.

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings for a debt security depends on whether the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost less any current period credit loss. If the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the amortized cost and fair value of the security. If the Corporation does not intend to sell or more likely than not will not be required to sell the security before recovery of its amortized cost, the amount of the other-than-temporary impairment related to credit loss shall be recognized in earnings and the noncredit-related portion of the other-than-temporary impairment shall be recognized in other comprehensive income.

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 ~~southeastern Connecticut, ATMs,~~Connecticut; ATMs; and its Internet website (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 other borrowings. In addition, we generate noninterest income from a number of sources including wealth management services, ~~deposit services, merchant credit card processing, bank-owned life insurance,~~ loan sales and commissions on loans originated for others, merchant credit card processing, deposit services, bank-owned life insurance (“BOLI”) and sales of investment securities. Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, merchant processing ~~costs, FDIC deposit insurance~~ costs, technology and other administrative expenses.

Our financial results are affected by interest rate volatility, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles. ~~During~~While the ~~latter part of 2008 and continuing into 2009, market and~~regional economic ~~conditions have~~climate has been ~~severely impacted by deterioration~~improving in ~~credit conditions as well as illiquidity with respect to various parts of the financial markets and elevated levels of volatility. Concerns about~~recent quarters, uncertainty surrounding future economic growth, ~~lower~~ consumer confidence, ~~contraction of~~ credit availability and ~~lower~~ corporate earnings continue to challenge the economy. The rate of unemployment continued to increase, reaching its highest level in several years. Corporate and related counterparty credit spreads widened and heightened concerns about numerous financial services companies adversely impacted the financial markets. As a result of these unparalleled market conditions, federal government agencies initiated several intervening actions in the U.S. financial services industry.

remains. Management believes that overall credit quality continues to be affected by weaknesses in national and regional economic conditions, including high unemployment levels, particularly in Rhode Island.

During 2012, Washington Trust expanded with the ~~downturn~~opening of its fourth mortgage lending office and a new full-service branch. We believe that the Corporation’s financial strength and stability, capital resources and reputation as the largest independent bank headquartered in Rhode Island, were key factors in the ~~local and national economies negatively impacted the credit quality~~continued expansion of our ~~loans, particularly~~retail and mortgage banking businesses and in delivering solid results in 2012. Going forward, we will 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 ~~commercial portfolio. We have increased the allowance for loan losses in response~~commitment to

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this condition as well as growth in the commercial portfolio. In response to these conditions, the Corporation has continued to refine its loan underwriting standards and has continued to enhance its credit monitoring and collection practices. The weakness in the financial markets described above also contributed to declines in the values of portions of our investment securities portfolio. In addition, wealth management revenues are largely dependent on the value of assets under administration and are closely tied to the performance of the financial markets. provide superior service.

Opportunities and Risks

A significant portion of the Corporation’s commercial banking and wealth management business is conducted in the Rhode Island and greater southern New England area. Management recognizes that substantial competition exists in this marketplace and views this as a key business risk. A substantial portion of the banking industry market share in this region is held by much larger financial institutions with greater resources and larger delivery systems than the Bank. Market competition also includes the expanded commercial banking presence of credit unions and savings banks. While these competitive forces will continue to present risk, we have been successful in growing our commercial banking base and wealth management ~~business, and management~~business. Management believes that the breadth of our product line, ~~and~~ our size and the continued flight of depositors and borrowers to community banks provide opportunities to compete effectively in our marketplace.

Significant challenges also exist with respect to credit risk, interest rate risk, the condition of the financial markets and related impact on wealth management assets and operational risk.

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Credit risk is the risk of loss due to the inability of borrower customers to repay loans or lines of credit. Credit risk on loans is reviewed below under the heading “Asset Quality.” Credit risk also exists with respect to debt instrument investment securities, which is reviewed below under the heading “Investment Securities.”

Interest rate risk exists because the repricing frequency and magnitude of interest earning assets and interest bearing liabilities are not identical. This risk is reviewed in more detail below under the heading “Asset/Liability Management and Interest Rate Risk.”

Wealth management service revenues, which represented approximately ~~22%~~19% of total revenues in ~~2009,~~2012, are substantially dependent on the market value of wealth management assets under administration. These values may be negatively affected by changes in economic conditions and volatility in the financial markets.

Operational risk is the risk of loss resulting from data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. Operational risk is discussed above under Item 1A. “Risk Factors.”

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Composition of Earnings

Comparison of ~~2009~~2012 with ~~2008~~2011

Net income for the year ended December 31, ~~2009~~2012, amounted to ~~$16.1~~$35.1 million, or ~~$1.00~~$2.13 per diluted share, ~~compared to $22.2~~up from $29.7 million, or ~~$1.57~~$1.82 per diluted share, reported for ~~2008.~~2011. On a diluted earnings per share basis, 2012 earnings were up by 17% over 2011. The returns on average equity and average assets for ~~2009~~2012 were ~~6.56%~~11.97% and ~~0.55%~~1.16%, respectively, compared to ~~11.12%~~10.61% and ~~0.82%~~1.02%, respectively, for ~~2008. Earnings in 2009 were influenced by several factors as described below.~~2011.

~~Net~~The increase in profitability over 2011 primarily reflected strong mortgage banking results (net gains on loan sales and commissions on loans originated for others), higher net interest income, ~~increased~~a lower provision for loan losses and higher wealth management revenues, offset, in part, by ~~$379 thousand, or 1%,~~increases in ~~2009. No dividend was received from~~salaries and employee benefit costs and income taxes. Also included in 2012 and 2011 results were the following items:

Balance sheet management transactions were conducted in 2012 and 2011 and were comprised of sales of mortgage-backed securities, prepayment of Federal Home Loan Bank of Boston (“FHLBB”) advances and modifications of terms of FHLBB advances.


◦	During 2012, $39.1 million in mortgage-backed securities were sold and $86.2 million in FHLBB advances were prepaid, resulting in $1.1 million of net realized gains on securities and $3.9 million in debt prepayment penalty expense being recognized. Also in 2012, the terms of $113.0 million in FHLBB advances were modified, extending these advances into longer terms with a lower average rate.


◦	During 2011, $9.7 million in mortgage-backed securities were sold and $9.0 million in FHLBB advances were prepaid, resulting in $368 thousand of net realized gains on securities and $694 thousand in debt prepayment penalty expense being recognized. Also in 2011, the terms of $153.8 million in FHLBB advances were modified extending these advances into longer terms with a lower average rate.

2012 BOLI income included a non-taxable gain of $528 thousand recognized in ~~2009. Dividend~~the third quarter of 2012, due to the receipt of life insurance proceeds.

Charitable contribution expense, included in other expense, for the years ended December 31, 2012 and 2011 totaled $400 thousand and $990 thousand, respectively.

Net interest income onfor 2012 increased by $5.7 million, or 7%, over 2011, largely reflecting the ~~Corporation’s investment~~benefit of lower funding costs as well as growth in ~~FHLBB stock totaled to $1.3 million for 2008.~~average loan balances. The net interest margin (fully taxable equivalent net interest income as a percentage of average ~~interest-earning~~interest-earnings assets) declined 16 basis points in 2009. This decrease in net interest margin reflects the elimination of FHLBB dividend income and margin compression, in general, on core deposit rates, as well as the impact of higher levels of nonaccrual loans in 2009 compared to 2008.was 3.29% for 2012, up from 3.20% reported for 2011.

The loan loss provision charged to earnings ~~in 2009 was $8.5~~for 2012 amounted to $2.7 million ~~an increase~~, a reduction of ~~$3.7~~$2.0 million from ~~2008. The~~2011. In 2012, net charge-offs totaled $1.6 million, or 0.07% of total average loans, compared to $3.5 million, or 0.17% of

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average total loans, in 2011. Management believes that the level of the provision for loan losses ~~was based on management’s assessment of economic~~has been consistent with the trend in asset quality and credit ~~conditions, with particular emphasis on commercial and commercial real estate categories, as well as growth in the loan portfolio. In 2009, net charge-offs totaled $4.8~~quality indicators.

Noninterest income for 2012 increased by $12.5 million, or ~~0.25% of average total loans, compared to $1.4 million, or 0.08% of average total loans,~~24%, over 2011, primarily reflecting increases in ~~2008.~~mortgage banking and wealth management revenues.

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Revenue from wealth management services is our ~~primary~~largest source of noninterest ~~income, is largely dependent on~~income. For the ~~value of assets under administration. For 2009,~~year ended December 31, 2012, wealth management revenues ~~decreased~~totaled $29.6 million, up by ~~$4.5~~$1.3 million, or ~~16%~~5%, from 2008. The decline in the revenue source was primarily due to lower valuations in the financial markets in 2009, compared to 2008. While the balance of assets under administration at December 31, 2009 was approximately 20% higher than the balance a year earlier, the average balance for the year ended December 31, 2009 was lower than the comparable average balance in 2008.

~~Due to strong residential mortgage refinancing and sales activity, net gains on loan sales and commissions on loans originated for others for 2009 increased by $3.0 million from 2008.~~

Credit-related impairment losses of $3.1 million were charged to earnings in 2009 for investment securities deemed to be other-than-temporarily impaired. Impairment losses of $5.9 million were recognized in earnings in 2008. Also included in noninterest income in the year ended December 31, 2009 and 2008, were net realized gains on sales of securities of $314 thousand and $2.2 million, respectively.

Noninterest expenses were up by $5.4 million, or 8%, from 2008, which included a $3.4 million increase in FDIC deposit insurance costs. In the second quarter of 2009, the Corporation recognized a FDIC special assessment of $1.35 million ($869 thousand after tax). In addition to the special assessment, the year over ~~year increase in FDIC deposit insurance costs also reflects higher assessment rates, which are generally expected to continue in effect for the foreseeable future.~~

Income tax expense amounted to $6.3 million in 2009, a decrease of $973 thousand from 2008. The effective tax rate for 2009 was 28.3%, compared to 24.8% in 2008. In 2008, income tax benefits of $1.4 million, or 10 cents per diluted share were recognized resulting from a change in state corporate income tax legislation and the resolution of certain state tax positions. Excluding these income tax benefits, the effective income tax rate for 2008 was 29.6%.

~~Comparison of 2008 with 2007~~

Net income for 2008 amounted to $22.2 million, or $1.57 per diluted share, compared to $23.8 million, or $1.75 per diluted share, for 2007. The rates of return on average equity and average assets for 2008 were 11.12% and 0.82%, respectively. Comparable amounts for 2007 were 13.48% and 0.99%, respectively. The $1.6 million, or 6.8%, decrease in net income in 2008 as compared to 2007 was attributable to several factors as described below.

Net interest income increased by $5.6 million, or 9.3%, in 2008, reflecting higher interest-earning asset levels and lower deposit costs. The net interest margin declined 12 basis points in 2008 primarily due to compression of asset yields and funding costs resulting from the 450 basis point aggregate impact of FRB rate-cutting actions from October 2007 through December 2008.

The loan loss provision charged to earnings in 2008 was $4.8 million, up by $2.9 million from 2007 largely due to growth in the loan portfolio as well as our ongoing evaluation of credit quality and general economic conditions. Asset quality remained manageable during the year with net charge-offs of only 0.08% of average total loans in 2008, compared to a ratio of 0.03% in 2007.

Noninterest income amounted to $40.5 million in 2008, down $5.0 million, or 11.0%, from 2007. This decline in noninterest income was largely due to the recognition of losses on write-downs of investment securities to fair value of $5.9 million ($3.8 million after tax, or 27 cents per diluted share)2011. Wealth management revenues are largely dependent on the value of assets under administration. Included in the $1.3 million increase was a $715 thousand, or 3% increase in asset-based fees. The average balance of wealth management assets for the year 2012 was 2% higher than the average balance for 2011. This revenue source also includes fees that are not primarily derived from the value of assets, such as financial planning fees, commissions and other service fees.

Mortgage banking revenues, which are dependent on mortgage origination volume and are sensitive to interest rates and the condition of the housing markets, amounted to $14.1 million in 2012, up by $9.0 million from 2011. To a certain extent, the mortgage origination volume during 2012 reflected strong refinancing activity in response to sustained low market rates of interest. The increase over 2011 also reflected continued origination volume growth in our residential mortgage lending offices.

Noninterest expenses for 2012 increased by $12.0 million, or 13%, over the 2011 period, primarily due to increases in salaries and employee benefit costs and the debt prepayment penalties associated with the balance sheet management transactions discussed above. The increase in salaries and employee benefit costs over 2011 reflected higher staffing levels to support growth and higher levels of business development based compensation primarily in mortgage banking, as well as higher defined benefit plan costs primarily due to a lower discount rate in 2012 compared to 2011.

Income tax expense amounted to $15.8 million for 2012, up by $2.9 million from 2011. The effective tax rate for 2012 was 31.1%, compared to 30.3% for 2011. The increase in the effective tax rate from 2011 reflected a higher portion of taxable income to pretax book income in 2012.

Comparison of 2011 with 2010

Net income for the year ended December 31, 2011 amounted to $29.7 million, or $1.82 per diluted share, compared to $24.1 million, or $1.49 per diluted share, reported for 2010. On a diluted earnings per share basis, 2011 earnings were up by 22% over 2010. The returns on average equity and average assets for 2011 were 10.61% and 1.02%, respectively, compared to 9.09% and 0.82%, respectively, for 2010.

Contributing to the growth in 2011 earnings were increased net interest income, higher wealth management revenues, higher mortgage banking results and a lower loan loss provision, offset, in part, by increases in noninterest expenses and income tax expense. Also included in 2011 and 2010 results were certain balance sheet management transactions:

The 2011 transactions are detailed above in the comparison of 2012 with 2011.

During 2010, $63.3 million in mortgage-backed securities were sold and $65.5 million in FHLBB advances were prepaid, resulting in $800 thousand of net realized gains on securities and $752 thousand in debt prepayment penalty expense being recognized. Also in 2010, the terms of $151.0 million in FHLBB advances were modified extending these advances into longer terms with a lower average rate.

Net interest income increased by $7.8 million, or 10%, over 2010 reflecting improvement in the net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earning assets). The net interest margin was 3.20% for 2011, an increase of 27 basis points from 2010. This result was driven largely by a continued reduction in funding costs, as indicated by a 37 basis point decline in the cost of interest-bearing liabilities from 2010.

The loan loss provision charged to earnings for 2011 amounted to $4.7 million, a decrease of $1.3 million compared to 2010. In 2011, net charge-offs amounted to $3.5 million, or 0.17% of average total loans, down from $4.8 million, or 0.24% of average total loans, in 2010.

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Revenue from wealth management services increased by $1.9 million, or 7%, over 2010. For the year 2011, the average balance of wealth management assets under administration ~~and are closely tied~~was 7% higher than 2010, which contributed to the ~~performance of the financial markets. Revenues from wealth management services declined~~increase in revenues.

Mortgage banking revenues totaled $5.1 million in 2011, up by ~~$743 thousand, or 2.6%, in 2008. Wealth management assets under administration were down $866.7~~$1.0 million, or ~~21.6%~~25%, from ~~December 31, 2007.~~2010, reflecting increased mortgage refinancing and sales activity fueled by the low interest rate environment and the expansion of our mortgage banking business.

~~Noninterest~~Total noninterest expenses ~~totaled $71.7 million~~ for ~~2008, up~~2011 increased by ~~$2.8~~$5.1 million, or ~~4.1%~~6%, ~~from 2007. Noninterest expenses for 2007 included $1.1 million~~over 2010, largely due to increases in ~~debt prepayment charges recorded as~~salaries and employee benefits costs, offset, in part, by a result of prepayments of higher cost FHLBB advances in the first quarter of 2007. There were no debt prepayment penalty charges recognized in 2008. Excluding the 2007 debt prepayment charge, noninterest expenses rose by $3.9 million, or 5.8%. Approximately 40% of the 2008 increase, on this basis, represents costs attributable to our wealth management business, an increasedecline in FDIC deposit insurance ~~costs~~costs. Also included in noninterest expenses in 2011 and ~~operating expenses related to a de novo branch opened in June 2007.~~2010 were debt prepayment penalties associated with the balance sheet management transactions discussed above.

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Income tax expense amounted to ~~$7.3~~$12.9 million ~~in 2008, a decrease of $3.5~~ for 2011, up by $2.6 million from 2007. Income tax benefits of $1.4 million, or 10 cents per diluted share, were recognized in 2008 resulting from a change in state corporate income tax legislation and the resolution of certain state tax positions. Excluding these income tax benefits, the Corporation’s2010. The effective ~~income~~ tax rate for ~~2008~~2011 was ~~29.6%~~30.3%, as compared to ~~31.3% in 2007.~~30.0% for 2010.

Results of Operations

Segment Reporting

Washington Trust manages its operations through two business segments, Commercial Banking and Wealth Management Services. The Commercial Banking segment includes commercial, commercial real estate, residential and consumer lending activities; mortgage banking, secondary market and loan servicing activities; deposit generation; merchant credit card services; cash management activities; and direct banking activities, which include the operation of ATMs, telephone and internet banking services and customer support and sales. Wealth Management Services includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services, including services as trustee for pension and profit sharing plans; and other financial planning and advisory services. All other activity, such as the investment securities portfolio, wholesale funding activities and administrative units, areActivity not related to the segments, such as investment securities portfolio activity, wholesale funding activities, income from BOLI, and administrative expenses not allocated to the business lines are considered Corporate. The Corporate unit’s net interest income has increased each year from 2010 to 2012 due to funding costs declining more than asset yields. Net realized gains on securities and debt prepayment penalties associated with balance sheet management transactions are included in 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 17 to the Consolidated Financial Statements for additional disclosure related to business segments.

Comparison of ~~2009~~2012 with ~~2008~~2011

The Commercial Banking segment reported net income of ~~$17.0~~$28.5 million in ~~2009, down by $2.9~~2012, an increase of $5.3 million, or ~~14%~~23%, from ~~2008. Net~~2011. Commercial Banking net interest income for 2012increased by ~~3% over 2008 amounts,~~$3.5 million, or 5%, from 2011, reflecting the benefit of lower funding costs, as well as growth in average loan ~~balances~~balances. The 2012 provision for loan losses was totaled $2.7 million, down by $2.0 million from 2011 based on trends in asset quality and ~~lower deposit costs, offset in part by~~credit quality indicators, as well as the ~~impact~~absolute level of ~~higher levels of nonaccrual loans in 2009.~~loan loss allocation. Noninterest income derived from the Commercial Banking segment totaled $31.7 million for 2012, up by $9.9 million, or 46%, from 2011, primarily due to higher mortgage banking revenues. Commercial Banking noninterest expenses for 2012, increased by ~~33%~~$7.3 million, or 13%, over ~~2008 reported amounts~~2011, reflecting increased salaries and employee benefit expenses largely due to ~~increases~~higher levels of business development based compensation primarily in net gains on loan sales and commissions on loans originated for others. The increases in net interest income and noninterest income were offset by a higher loan loss provision and an increase in Commercial Banking other noninterest expenses in 2009, as compared to 2008. The increase in other noninterest expenses was attributable to increases in staffingmortgage banking and higher ~~FDIC deposit insurance costs, including the second quarter 2009 special FDIC assessment.~~staffing levels to support growth.

The Wealth Management Services segment reported 2012net income of ~~$3.0~~$5.5 million ~~in 2009, a decrease~~, an increase of ~~$1.9 million,~~$528 thousand, or ~~39%~~11%, from ~~net income in 2008.~~2011. Noninterest income derived from the Wealth Management Services segment was ~~$23.8~~$29.6 million in ~~2009, down~~2012, up by ~~$4.5~~$1.3 million, or ~~16%~~5%, ~~from 2008.~~compared to 2011. This ~~revenue is dependent to a large extent on~~includes an increase of $620 thousand, or 42%, in financial planning, commissions and other service fees (fees that are not primarily derived from the value of assets). Asset-based wealth management revenues totaled $27.5 million for 2012, up by $715 thousand, or 3%, over 2011. The average balance of wealth management assets ~~under administration and is closely tied to~~for the ~~performance of~~year 2012 was 2% higher than the ~~financial markets.~~average balance for 2011. Noninterest expenses for the Wealth Management Services segment ~~also declined in 2009, as compared to 2008, reflecting lower incentive-based compensation.~~totaled $20.9 million for 2012, up by $485 thousand, or 2%, from 2011.

Comparison of ~~2008~~2011 with ~~2007~~2010

The Commercial Banking segment reported net income of ~~$19.9~~$23.2 million in ~~2008,~~2011, up by ~~$2.1~~$878 thousand, or 4%, from 2010. Commercial Banking net interest income amounted to $76.0 million in 2011, up by 3% over 2010 amounts, reflecting continued improvement in the net interest margin. The loan loss provision totaled $4.7 million in 2011, down by $1.3 million from 2010, reflecting improvement in asset quality trends. Noninterest income derived from the Commercial Banking segment totaled $21.8 million in 2011, up by $2.0 million, or ~~12%~~10%, from ~~2007, primarily~~2010, largely due to higher ~~net interest income. Net interest income was~~mortgage banking revenues and merchant processing fees. Commercial Banking noninterest expenses amounted to

-36-

$58.1 million for 2011, up by ~~$8.7~~$4.7 million, or ~~16%~~9% , ~~driven by growth in average loan balances and lower deposit costs.~~from 2010. This increase was largely due to increases in ~~net interest income was~~salaries and benefits and merchant processing costs, partially offset by a ~~$2.9 million increase in the loan loss provision and $2.7 million increase in Commercial Banking noninterest expenses in 2008. Higher noninterest expenses reflected increases~~decrease in FDIC ~~deposit~~ insurance ~~costs and operating expenses related to a de novo branch opened in June 2007.~~expense.

The Wealth Management Services segment reported net income of ~~$4.9~~$5.0 million in ~~2008, a decrease~~2011, an increase of ~~$796 thousand,~~$1.1 million, or ~~14%~~30%, from ~~net income in 2007.~~2010. Noninterest income derived from the Wealth Management Services segment was $28.3 million in ~~2008, down~~2011, up by ~~$743 thousand,~~$1.9 million, or 3%7%, from ~~2007. Lower noninterest income resulted from declines in~~2010. For the year 2011, the average balance of wealth management assets under administration ~~due~~was 7% higher than 2010, which contributed to ~~lower valuations~~the increase in ~~the financial markets. In 2008, noninterest~~revenues. Noninterest expenses for the Wealth Management Services segment ~~amounted to $20.1~~totaled $20.4 million in 2011, up by ~~$451~~$159 thousand, or 2%1%, from ~~2007. This increase was attributable to higher outsourced services expenses for wealth management platform and product support costs.~~2010.

Net Interest Income

~~Comparison of 2009 with 2008~~

Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and continues to be the primary source of Washington Trust’s operating income. Net interest

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~~Table of Contents~~

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.

Net interest income for 2009 totaled $65.9 million, up by $379 thousand, or 1%, from 2008. Included in net interest income in the year ended December 31, 2008 was dividend income on the Corporation’s investment in FHLBB stock of $1.3 million. No dividend was received from FHLBB in 2009.

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.

Comparison of 2012 with 2011

FTE net interest income for ~~2009 amounted to $67.7~~2012 increased by $5.8 million, ~~an increase of $370 thousand~~or 7%, from ~~2008.~~2011. The net interest margin ~~(FTE~~increased by nine basis points from the 3.20% in 2011 to 3.29% in 2012. The increase in net interest income ~~as a percentage of average interest–earnings assets) for 2009 amounted to 2.48%, compared to 2.64% for 2008. The 16 basis point decline~~and the improvement in the net interest margin ~~was primarily attributable~~were largely due to ~~the elimination of the FHLBB dividend income, margin compression,~~a reduction in ~~general, on core deposit rates following the Federal Reserve’s actions to reduce short-term interest rates~~funding costs and growth in ~~late 2008 and early 2009, and the impact of higher levels of nonaccrual loans in 2009 compared to 2008.~~average loan balances.

Average interest-earning assets ~~increased~~amounted to $2.8 billion for 2012, up by ~~$186 million, or 7%,~~4% from the average balance in ~~2009. The increase primarily reflects growth in the loan portfolio.~~2011. Total average loans ~~for the year 2009~~ increased ~~$197~~by $165.3 million, ~~from 2008 largely~~or 8%, due to growth in both the commercial and residential real estate loan ~~portfolio.~~portfolios. The yield on total loans for ~~the year 2009~~2012 decreased by 8420 basis points from ~~2008,~~2011, reflecting the impact of a sustained low interest rate environment on loan yields. The contribution of loan prepayment fees and other fees to the yield on total loans was 4 basis points and 2 basis points, respectively, in 2012 and 2011. Total average securities for 2012 decreased by $67.5 million, or 12%, from 2011, due to principal payments received on mortgage-backed securities not being reinvested and the sales of mortgage-backed securities associated with balance sheet management transactions. The rate of return on securities for 2012 decreased by 23 basis points from the prior year. The decrease in total yield on securities reflects maturities, pay-downs and sales of higher yielding securities.

Average interest-bearing liabilities for 2012 increased by $23.2 million, or 1%, from 2011, reflecting growth in lower-cost deposit balances, partially offset by decreases in time deposits and borrowings. The weighted average cost of funds for 2012 declined by 27 basis points from 2011, due to declines in the rate paid on time deposits and FHLBB advances. The average balance of FHLBB advances for 2012 decreased by $26.3 million, or 5%, compared to 2011. The average rate paid on such advances in 2012 decreased by 48 basis points from 2011, reflecting lower market interest rates on new advances and the benefit of balance sheet management transactions. Total average interest-bearing deposits for 2012 increased by $66.3 million, or 4%, compared to 2011, reflecting growth in lower-cost deposit balances, partially offset by a decrease in time deposits. The average rate paid on interest-bearing deposits for 2012 decreased by 14 basis points compared to 2011, primarily due to declines in the rate paid on time deposits. The average balance of noninterest-bearing demand deposits for 2012 increased by $59.9 million, or 22%, compared to 2011.

Comparison of 2011 with 2010

FTE net interest income for 2011 increased by $7.9 million, or 10%, from 2010. The net interest margin for 2011 and 2010 amounted to 3.20% and 2.93%, respectively. The increase in the net interest margin primarily reflected lower funding costs, which declined by 37 basis points from 2010.

Average interest-earning assets amounted to $2.7 billion for 2011, essentially unchanged from 2010, with growth in the loan portfolio offsetting maturities and pay-downs in the investment securities portfolio. Total average loans for 2011 increased by $84.2 million compared to 2010, due to growth in the residential real estate mortgage and the commercial loan portfolios. The yield on total loans for 2011 decreased by 13 basis points from 2010, reflecting declines in short-term interest rates. The contribution of loan prepayment fees and other fees to the yield on total loans was 12 basis ~~point~~ points

-37-

and 34 basis points, respectively, in ~~2009~~2011 and ~~2008, respectively.~~2010. Total average securities for ~~the year 2009~~2011 decreased by ~~$12~~$67.3 million from ~~2008, due to~~2010, as maturities and pay-downs onof mortgage-backed securities and the sales of mortgage-backed securities associated with balance sheet management transactions were offset, in part, by purchases of debt securities. The ~~FTE~~ rate of return on securities for ~~the year 2009~~2011 decreased by 608 basis points from ~~2008. The decrease in the total yield on securities reflects lower yields on variable rate securities tied to short-term interest rates.~~2010.

Average interest-bearing liabilities ~~increased~~for 2011 decreased by ~~$137~~$61.3 million, or ~~6% in 2009 primarily~~3%, from 2010, largely due to growth in deposits, offset in part by declines in FHLBB advances. The increase in deposits includes the successful first quarter 2009 transition of wealth management client money market deposits previously held in outside money market funds to fully insured and collateralized deposits. This resulted in a ~~$45~~$55.3 million increase in average interest-bearing deposits. Average interest-bearing deposits increased by $190 million from 2009 to 2008, while the average rate paid on interest-bearing deposits decreased by 81 basis points. Interest-bearing deposits include out-of-market brokered certificates of deposit, which are utilized by the Corporation as part of its overall funding program along with FHLBB advances and other sources. Average out-of-market brokered certificates of deposit for 2009 decreased by $26 million from 2008, with a 14 basis point decline in the average rate paid. Excluding out-of-market brokered certificates of deposit, average in-market interest-bearing deposits for the year 2009 increased by $216 million from 2008 while the average rate paid on in-market interest-bearing deposits decreased by 81 basis points. See additional discussion on brokered certificates of deposit in the “Financial Condition” section under the caption “Deposits.”

~~The growth in deposits enabled the Corporation to reduce its level of FHLBB advances in 2009. The average~~ balance of FHLBB ~~advances for the year 2009 decreased by $51 million from 2008.~~advances. The average rate paid on such advances for ~~the year 2009~~2011 decreased 9by 47 basis points from 2008. In connection with the Corporation’s ongoing interest rate risk management efforts, in January 2010, the Corporation modified the terms to extend the maturity dates of FHLBB advances totaling $50 million with original maturity dates in 2011 and 2012. As a result, the Corporation expects interest expense savings of approximately $212 thousand in 2010.

~~Comparison of 2008 with 2007~~

Net interest income for 2008 totaled $65.5 million, up $5.6 million, or 9%, from the amount reported for 2007. The increase in net interest income reflected growth in interest-earning assets and lower deposit costs.

~~FTE net interest income for 2008 amounted to $67.4 million, up $5.6 million, or 9%, from 2007. The net interest margin for 2008 amounted to 2.64%,~~ compared to ~~2.76% for 2007. The 12 basis point decline in the net interest margin was primarily attributable to~~2010, reflecting lower ~~yields on variable rate commercial and consumer loans resulting from~~

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~~Table of Contents~~

~~Federal Reserve actions to reduce short-term~~market interest rates ~~with less commensurate reduction in deposit~~on new advances and ~~other funding rates.~~

the benefit of balance sheet management transactions. Average ~~interest-earning assets~~interest-bearing deposits for 2011 declined by $6.6 million, while the average balance of noninterest-bearing demand deposits increased by ~~$308 million, or 14%, in 2008, including the reinvestment of the $46.7 million in net proceeds received from the issuance of Common Stock in October 2008.~~$56.8 million. The increase in average interest-earning assets was largely due to growth in the loan portfolio. Average loan balances grew $198 million, or 13%, primarily due to growth in the commercial loan category. The yield on total loans decreased 63 basis points in 2008, reflecting declines in short-term interest rates. The contribution of loan prepayment and other fees to the yield on total loans was 3 basis points and 4 basis points in 2008 and 2007, respectively. Total average securities increased by $94 million, or 14%, in 2008, largely due to purchases of mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises during a period of substantial spread widening for these and many other classes of investment securities. The FTE rate of return on securities decreased 24 basis points in 2008, reflecting lower yields on variable rate securities tied to short-term interest rates

In 2008, average interest-bearing liabilities increased by $284 million, or 14%, while cost of funds decreased 52 basis points. The increase in average interest-bearing liabilities was largely due to increases in FHLBB advances. The balance of average FHLBB advances increased $249 million in 2008, while the average rate paid on ~~FHLBB advances~~interest-bearing deposits for 2011 decreased 23by 26 basis ~~points. In addition, the increase in average interest-bearing liabilities included a $40 million increase in time deposits. Time deposits include out-of-market brokered certificates~~points from 2010, reflecting declines of ~~deposit, which are utilized by the Corporation as part of its overall funding program along with FHLBB advances~~33 basis points and other sources. Average out-of-market brokered certificates of deposit increased $10 million, or 7%, in 2008. See Note 11 to the Consolidated Financial Statements for additional discussion on junior subordinated debentures issued21 basis points, respectively, in the ~~second quarter of 2008.~~rate paid on time deposits and money market accounts.

~~-31-~~

~~Table of Contents~~-38-

Average Balances / Net Interest Margin - Fully Taxable Equivalent ~~(FTE)~~(“FTE”) Basis

The following table presents 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. Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations. 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.


Years ended December 31,			2009						2008						2007				2012					2011					2010
	Average				Yield/		Average				Yield/		Average				Yield/
(Dollars in thousands)	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate
Assets:
Commercial and other loans	$	941,833	$	50,092		5.32	$	782,825	$	50,589		6.46	$	626,309	$	47,713		7.62
Residential real estate loans, including
mortgage loans held for sale		629,035		33,410		5.31		613,367		33,954		5.54		589,619		31,540		5.35
Commercial loans																				$1,177,268		$58,823	5.00		$1,063,322		$55,592	5.23		$1,019,304		$53,628	5.26
Residential real estate loans, including mortgage loans held for sale																			733,178		31,974		4.36	678,697		31,447		4.63	634,735		31,609		4.98
Consumer loans		323,576		13,494		4.17		301,653		16,584		5.50		283,873		19,634		6.92	320,828		12,428		3.87	324,002		12,649		3.90	327,770		13,062		3.99
Total loans		1,894,444		96,996		5.12		1,697,845		101,127		5.96		1,499,801		98,887		6.59	2,231,274		103,225		4.63	2,066,021		99,688		4.83	1,981,809		98,299		4.96
Cash, federal funds sold and
other short-term investments		20,201		50		0.25		21,515		334		1.55		16,759		831		4.96
Cash, federal funds sold and short-term investments																			41,359		91		0.22	35,625		69		0.19	41,407		85		0.21
FHLBB stock		42,008		–		–		39,282		1,345		3.42		28,905		1,915		6.62	40,713		207		0.51	42,008		124		0.30	42,008		—		—

Taxable debt securities		693,050		29,423		4.25		700,546		34,382		4.91		605,443		31,163		5.15	431,024		15,359		3.56	489,210		18,704		3.82	553,531		21,824		3.94
Nontaxable debt securities		80,629		4,662		5.78		81,046		4,583		5.65		77,601		4,368		5.63	69,838		4,115		5.89	77,634		4,555		5.87	79,491		4,618		5.81
Corporate stocks		5,618		339		6.05		9,426		740		7.85		13,639		1,132		8.29	910		68		7.47	2,456		177		7.21	3,595		274		7.62
Total securities		779,297		34,424		4.42		791,018		39,705		5.02		696,683		36,663		5.26	501,772		19,542		3.89	569,300		23,436		4.12	636,617		26,716		4.20
Total interest-earning assets		2,735,950		131,470		4.81		2,549,660		142,511		5.59		2,242,148		138,296		6.17	2,815,118		123,065		4.37	2,712,954		123,317		4.55	2,701,841		125,100		4.63
Noninterest-earning assets		185,345						163,730						165,561					221,031					214,214					213,644
Total assets	$	2,921,295					$	2,713,390					$	2,407,709						$3,036,149					$2,927,168					$2,915,485
Liabilities and
shareholders’ equity:
Liabilities and Shareholders’ Equity:																			Liabilities and Shareholders’ Equity:
NOW accounts	$	181,171	$	327		0.18	$	165,479	$	306		0.18	$	166,580	$	285		0.17		$259,595		$175	0.07		$232,545		$242	0.10		$220,875		$268	0.12
Money market accounts		375,175		3,960		1.06		310,445		6,730		2.17		303,138		11,846		3.91	430,262		1,078		0.25	392,002		1,051		0.27	403,489		1,918		0.48
Savings accounts		187,862		530		0.28		173,840		1,059		0.61		194,342		2,619		1.35	261,795		276		0.11	229,180		286		0.12	205,767		318		0.15
Time deposits		957,449		27,821		2.91		861,814		33,100		3.84		821,951		37,672		4.58	893,474		12,061		1.35	925,064		14,113		1.53	955,222		17,808		1.86
FHLBB advances		687,210		28,172		4.10		737,830		30,894		4.19		489,229		21,641		4.42	466,424		14,957		3.21	492,714		18,158		3.69	547,974		22,786		4.16
Junior subordinated debentures		32,991		1,947		5.90		30,259		1,879		6.21		22,681		1,352		5.96	32,991		1,570		4.76	32,991		1,568		4.75	32,991		1,989		6.03
Other		21,476		981		4.57		26,678		1,181		4.43		23,990		1,075		4.48	5,093		248		4.87	21,891		973		4.44	21,321		976		4.58
Total interest-bearing liabilities		2,443,334		63,738		2.61		2,306,345		75,149		3.26		2,021,911		76,490		3.78	2,349,634		30,365		1.29	2,326,387		36,391		1.56	2,387,639		46,063		1.93
Demand deposits		187,800						177,032						177,342					338,046					278,120					221,350
Other liabilities		44,712						30,618						31,886					55,382					42,554					41,804
Shareholders’ equity		245,449						199,395						176,570					293,087					280,107					264,692
Total liabilities and
shareholders’ equity	$	2,921,295					$	2,713,390					$	2,407,709
Total liabilities and shareholders’ equity																				$3,036,149					$2,927,168					$2,915,485
Net interest income			$	67,732					$	67,362					$	61,806						$92,700					$86,926					$79,037
Interest rate spread						2.20						2.33						2.39					3.08					2.99					2.70
Net interest margin						2.48						2.64						2.76					3.29					3.20					2.93

-39-

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency for the years indicated:

(Dollars in thousands)

Years ended December 31, 2009 2008 2007
Commercial and other loans $ 200 $ 188 $ 167
Nontaxable debt securities 1,546 1,458 1,385
Corporate stocks 94 203 310
Total $ 1,840 $ 1,849 $ 1,862

~~-32-~~



(Dollars in thousands)
Years ended December 31,	2012		2011		2010
Commercial loans		$569		$369		$0.229
Nontaxable debt securities	1,416		1,553		1.541
Corporate stocks	19		49		0.076
Total		$2,004		$1,971		$1.846

~~Table of Contents~~

Volume/Rate Analysis - Interest Income and Expense ~~(Fully Taxable Equivalent~~(FTE Basis)

The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the periods indicated. The net change attributable to both volume and rate has been allocated proportionately.


				2009/2008									2008/2007						2012/2011									2011/2010
(Dollars in thousands)	Volume			Rate			Net Change			Volume			Rate			Net Change			Volume			Rate			Net Change			Volume			Rate			Net Change
Interest on interest-earning assets:
Commercial and other loans	$	9,285		$	(9,782	)	$	(497	)	$	10,817		$	(7,941	)	$	2,876
Residential real estate loans, including
mortgage loans held for sale		867			(1,411	)		(544	)		1,284			1,130			2,414
Commercial loans																				$5,759			($2,528	)		$3,231			$2,275			($311	)		$1,964
Residential real estate loans, including mortgage loans held for sale																			2,428			(1,901		)	527			2,125			(2,287		)	(162		)
Consumer loans		1,140			(4,230	)		(3,090	)		1,172			(4,222	)		(3,050	)	(124		)	(97		)	(221		)	(139		)	(274		)	(413		)
Cash, federal funds sold and
other short-term investments		(19	)		(265	)		(284	)		189			(686	)		(497	)
Cash, federal funds sold and short-term investments																			11			11			22			(10		)	(6		)	(16		)
FHLBB stock		87			(1,432	)		(1,345	)		546			(1,116	)		(570	)	(4		)	87			83			—			124			124
Taxable debt securities		(366	)		(4,593	)		(4,959	)		4,724			(1,505	)		3,219		(2,127		)	(1,217		)	(3,344		)	(2,472		)	(648		)	(3,120		)
Nontaxable debt securities		(24	)		103			79			198			17			215		(456		)	16			(440		)	(110		)	47			(63		)
Corporate stocks		(255	)		(146	)		(401	)		(335	)		(57	)		(392	)	(115		)	5			(110		)	(83		)	(14		)	(97		)
Total interest income		10,715			(21,756	)		(11,041	)		18,595			(14,380	)		4,215		5,372			(5,624		)	(252		)	1,586			(3,369		)	(1,783		)
Interest on interest-bearing liabilities:																			Interest on interest-bearing liabilities:
NOW accounts		22			(1	)		21			(1	)		22			21		20			(87		)	(67		)	15			(41		)	(26		)
Money market accounts		1,194			(3,964	)		(2,770	)		279			(5,395	)		(5,116	)	104			(77		)	27			(53		)	(814		)	(867		)
Savings accounts		80			(609	)		(529	)		(252	)		(1,308	)		(1,560	)	23			(33		)	(10		)	33			(65		)	(32		)
Time deposits		3,378			(8,657	)		(5,279	)		1,753			(6,325	)		(4,572	)	(462		)	(1,590		)	(2,052		)	(558		)	(3,137		)	(3,695		)
FHLBB advances		(2,073	)		(649	)		(2,722	)		10,435			(1,182	)		9,253		(931		)	(2,270		)	(3,201		)	(2,183		)	(2,445		)	(4,628		)
Junior subordinated debentures		164			(96	)		68			468			59			527		—			2			2			—			(421		)	(421		)
Other		(236	)		36			(200	)		119			(13	)		106		(811		)	86			(725		)	26			(29		)	(3		)
Total interest expense		2,529			(13,940	)		(11,411	)		12,801			(14,142	)		(1,341	)	(2,057		)	(3,969		)	(6,026		)	(2,720		)	(6,952		)	(9,672		)
Net interest income	$	8,186		$	(7,816	)	$	370		$	5,794		$	(238	)	$	5,556			$7,429			($1,655	)		$5,774			$4,306			$3,583			$7,889

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~~Based on our analysis of trends in asset quality and credit quality indicators, as well as the absolute level of loan loss allocation, the provision for loan losses charged to earnings amounted to ~~$8.5~~$2.7 million in ~~2009,~~2012, compared to ~~$4.8~~$4.7 million in ~~2008~~2011 and ~~$1.9~~$6.0 million in 2007. The increase in the provision was based on management’s assessment of various factors affecting the loan portfolio, including, among others, our ongoing evaluation of credit quality, with particular emphasis on the commercial portfolio, general economic conditions and growth in the loan portfolio.2010. Net charge-offs were $1.6 million, or 0.07% of average loans, in 2012. This compares

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to $3.5 million, or 0.17% of average loans, in 2011 and $4.8 million, or 0.24% of average loans, in ~~2009, $1.4 million~~2010. On October 29, 2012, Hurricane Sandy caused damage to some properties in ~~2008~~the Corporation’s market area, primarily along the shoreline of Rhode Island and ~~$517 thousand in 2007. Commercial~~Connecticut. The Corporation has assessed the possible impact of this event on its loan ~~net charge-offs amounted~~portfolio by identifying affected loans and the impact on collateral values. Based on this assessment, the possible loan loss exposure resulting from this incident is considered to $4.2 million, or 88% of total net charge-offs, in 2009. This compares to commercial loan net charge-offs of $1.1 million, or 82% of total net charge-offs, in 2008 and $329 thousand, or 64% in 2007.be relatively insignificant.

The allowance for loan losses was ~~$27.4~~$30.9 million, or ~~1.43%~~1.35% of total loans, at December 31, ~~2009,~~2012, compared to ~~$23.7~~$29.8 million, or ~~1.29%~~1.39% of total loans, at December 31, ~~2008.~~

2011~~The Corporation~~. Management will continue to assess the adequacy of its allowance for loan losses in accordance with its established policies.See additional discussion under the caption “Asset Quality” for further information on the Allowance for Loan Losses.

~~-33-~~

~~Table of Contents~~

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.

									2009/2008					2008/2007
	Years Ended December 31,								Change					Change
	2009			2008			2007			$		%		$			%											2012/2011					2011/2010
																			Years Ended December 31,									Change					Change
(Dollars in thousands)																			2012			2011			2010			$			%		$			%
Noninterest income:
Wealth management services:
Trust and investment advisory fees	$	18,128		$	20,316		$	21,124	$	(2,188	)	(11	)%	$	(808	)	(4	)%		$23,465			$22,532			$20,670			$933		4	%		$1,862		9	%
Mutual fund fees		4,140			5,205			5,430		(1,065	)	(20	)		(225	)	(4	)	4,069			4,287			4,423			(218		)	(5	)	(136		)	(3	)
Financial planning, commissions
and other service fees		1,518			2,752			2,462		(1,234	)	(45	)		290		12
Financial planning, commissions and other service fees																			2,107			1,487			1,299			620			42		188			14
Wealth management services		23,786			28,273			29,016		(4,487	)	(16	)		(743	)	(3	)	29,641			28,306			26,392			1,335			5		1,914			7
Service charges on deposit accounts		4,860			4,781			4,713		79		2			68		1		3,193			3,455			3,587			(262		)	(8	)	(132		)	(4	)
Merchant processing fees		7,844			6,900			6,710		944		14			190		3		10,159			9,905			9,156			254			3		749			8
Card interchange fees																			2,480			2,249			1,975			231			10		274			14
Income from bank-owned life insurance		1,794			1,800			1,593		(6	)	–			207		13		2,448			1,939			1,887			509			26		52			3
Net gains on loan sales and commissions
on loans originated for others		4,352			1,396			1,493		2,956		212			(97	)	(6	)
Net gains on loan sales and commissions on loans originated for others																			14,092			5,074			4,052			9,018			178		1,022			25
Net realized gains on securities		314			2,224			455		(1,910	)	(86	)		1,769		389		1,223			698			729			525			75		(31		)	(4	)
Net gains (losses) on interest rate swap contracts		697			(542	)		27		1,239		(229	)		(569	)	(2,107	)	255			6			(36		)	249			4,150		42			117
Equity in earnings (losses) of unconsolidated subsidiaries																			196			(213		)	(337		)	409			192		124			37
Other income		1,708			1,625			1,502		83		5			123		8		1,748			1,536			1,485			212			14		51			3
Noninterest income, excluding
other-than-temporary impairment losses		45,355			46,457			45,509		(1,102	)	(2	)		948		2
Total other-than-temporary impairment losses
on securities		(6,650	)		(5,937	)		–		(713	)	12			(5,937	)	–
Portion of loss recognized in other comprehensive
income (before taxes)		3,513			–			–		3,513		–			–		–
Noninterest income, excluding other-than-temporary impairment losses																			65,435			52,955			48,890			12,480			24		4,065			8
Total other-than-temporary impairment losses on securities																			(28		)	(54		)	(245		)	26			48		191			78
Portion of loss recognized in other comprehensive income (before taxes)																			(193		)	(137		)	(172		)	(56		)	(41	)	35			20
Net impairment losses recognized in earnings		(3,137	)		(5,937	)		–		2,800		(47	)		(5,937	)	–		(221		)	(191		)	(417		)	(30		)	(16	)	226			54
Total noninterest income	$	42,218		$	40,520		$	45,509	$	1,698		4	%	$	(4,989	)	(11	)%		$65,214			$52,764			$48,473			$12,450		24	%		$4,291		9	%

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Revenue from wealth management services is our largest source of noninterest income. It is largely dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. The following table presents the changes in wealth management assets under administration for the years ended December 31, ~~2009, 2008~~2012, 2011 and ~~2007:~~2010. Amounts prior to 2011 have been revised to reflect current reporting practices. This revision did not result in any change to the reported amounts of wealth management revenues.


(Dollars in thousands)	2009		2008			2007		2012			2011			2010
Wealth Management Assets Under Administration:
Balance at the beginning of period	$	3,147,649	$	4,014,352		$	3,609,180		$3,900,061			$3,967,207			$3,735,646
Net market value appreciation (depreciation) and income		547,091		(980,909	)		272,398
Net investment appreciation (depreciation) & income								315,799			(12,324		)	318,985
Net client cash flows		75,453		114,206			132,774	(16,220		)	(47,412		)	18,345
Other (1)								—			(7,410		)	(105,769		)
Balance at the end of period	$	3,770,193	$	3,147,649		$	4,014,352		$4,199,640			$3,900,061			$3,967,207


(1)	Represents declassifications of largely low-fee paying assets from assets under administration due to a change in the scope and/or frequency of services provided by Washington Trust. The impact of this change on wealth management revenues was minimal.

Noninterest Income Analysis

Comparison of ~~2009~~2012 with ~~2008~~2011

Revenue from wealth management services decreased $4.5 million or 16% in 2009. This included a decline of approximately $3.3 million in revenues primarily derived from the fair value of assets under administration. Assets under administration totaled $3.770 billion at December 31, 2009, up $623 million, or 20 percent, from December 31, 2008, reflecting net market value appreciation and income of $547 million and net client cash inflows of $75 million. While the balance of assets under administration at December 31, 2009 was 20% higher than the balance a year earlier, financial market declines in the latter part of 2008 and early part of 2009 caused the average balance for the year 2009 to be approximately 12% lower than the comparable average balance for 2008. Wealth management ~~related~~revenues for 2012 were $29.6 million, up by $1.3 million, or 5%, from 2011. This includes an increase of $620 thousand, or 42%, in financial planning, commissions and other service fees ~~from sources~~(fees that are not primarily derived from the value of assets). Asset-based wealth management revenues totaled $27.5 million for 2012, up by $715 thousand, or 3%, over 2011. Wealth management assets under administration ~~including financial planning fees, commissions and other services, declined~~amounted to $4.2 billion at December 31, 2012, up by ~~$1.2~~$299.6 million, or ~~45%~~8%, from ~~2008 due~~the balance at December 31, 2011, largely ~~to lower commissions earned on annuity~~reflecting net investment appreciation and ~~insurance contracts.~~income resulting from favorable conditions in the financial markets. The end of period balance of wealth management assets at December 31, 2012 was 8% higher than the end of period balance at December 31, 2011 and the average balance of wealth management assets for the year ended December 31, 2012 was 2% higher than the average balance for 2011.

Service charges on deposit accounts totaled $3.2 million in 2012, compared to $3.5 million in 2011. This decline of $262 thousand, or 8%, reflects the competitive environment and its impact on deposit product pricing.

Merchant processing ~~fees~~fee revenue represents charges to merchants for credit card transactions processed. ~~This revenue source~~Merchant processing fees increased by ~~$944~~$254 thousand, or ~~14%~~3%, ~~in 2009 primarily due to~~over 2011, reflecting increases in the volume of transactions processed for existing and new customers. This increase was partially offset by the impact of fourth quarter 2011 regulatory changes, which reduced fees on all debit cards issued by certain regulated banks, resulting in a modest decline in merchant processing fee revenue and a corresponding decline in merchant processing expenses.

Card interchange fees represent fee income related to debit card transactions. Card interchange fees for 2012 increased by $231 thousand, or 10%, from 2011, reflecting increased transaction volume.

Income from BOLI in 2012 amounted to $2.4 million, an increase of $509 thousand, or 26%, from 2011. This increase was due to a $528 thousand non-taxable gain resulting from the receipt of tax-exempt life insurance proceeds in the third quarter of 2012.

Net gains on loan sales and commissions on loans originated for others is dependent on mortgage origination volume and is sensitive to interest rates and the condition of housing markets. This revenue source totaled $14.1 million in 2012, up by $9.0 million, or 178%, from 2011, reflecting strong refinancing activity in response to sustained low market rates of interest and origination volume growth in our residential mortgage lending offices.

Net realized gains on securities in 2012 and 2011 totaled $1.2 million and $698 thousand, respectively. These amounts were primarily recognized on the sale of mortgage-backed securities associated with balance sheet management transactions executed in both years. Also included in 2011 were gains recognized on a contribution of appreciated equity securities, which is discussed below under the caption “Noninterest Expenses.”

Net gains on interest rate swap contracts for the year ended December 31, 2012, totaled $255 thousand compared to $6 thousand in 2011. The increase was largely due to new customer-related interest rate swap contracts executed in 2012.

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~~Table of Contents~~-42-

For the year ended December 31, 2012, equity in earnings of unconsolidated subsidiaries (primarily generated by two real estate limited partnerships) amounted to $196 thousand compared to losses of $213 thousand in 2011. Washington Trust has investments in two real estate limited partnerships that renovate, own and operate two low-income housing complexes. These investments are accounted for under the equity method of accounting and tax credits generated by the partnerships are recorded as a reduction of income tax expense.

Other noninterest income totaled $1.7 million in 2012, up by $212 thousand, or 14%, from 2011. Included in other noninterest income were gains on the sale of bank property of $348 thousand and $203 thousand, which were recognized during the second quarters of 2012 and 2011, respectively.

For the years ended December 31, 2012 and 2011, net impairment losses recognized in earnings on investment securities totaled $221 thousand and $191 thousand, respectively. See additional discussion in the “Financial Condition” section under the caption “Securities” below.

Comparison of 2011 with 2010

Noninterest income totaled $52.8 million in 2011, up by $4.3 million, or 9%, compared to 2010, largely due to higher wealth management revenues and increases in net gains on loan sales and commissions on loans originated for others and merchant processing fees.

Wealth management revenues for 2011 increased by $1.9 million, or 7%, from 2010. Wealth management assets under administration totaled $3.9 billion at December 31, 2011 compared to $4.0 billion at December 31, 2010. The average balance of wealth management assets for 2011 was 7% higher than the average balance for 2010.

Service charges on deposit accounts totaled $3.5 million and $3.6 million, respectively for 2011 and 2010. The largest component of this revenue source is overdraft and non-sufficient funds fees, which is largely driven by customer activity. Overdraft and non-sufficient funds fees for 2011 amounted to $2.0 million, down by $393 thousand compared to 2010. This decline, primarily due to regulatory changes which became effective in the third quarter of 2010, was mostly offset by increases in other deposit service charges.

Merchant processing fees increased by $749 thousand, or 8%, over 2010 reflecting increases in the volume of transactions processed for existing and new customers. See discussion on the corresponding increase in merchant processing costs under the caption “Noninterest ~~Expense.”~~

~~We originate residential mortgage loans for sale in~~Expense” below. In the ~~secondary market and also originate loans for various investors~~fourth quarter of 2011, new regulatory changes became effective, which reduced fees on all debit cards issued by regulated banks, resulting in a ~~broker capacity, including conventional mortgages and reverse mortgages. This~~modest decline in our merchant processing fee revenue, ~~source is subject to market volatility and dependent on mortgage origination volume,~~ which is sensitive to rates and the condition of housing markets. In addition, from time to time we sell the guaranteed portion of SBA loans to investors. Due to strong residential mortgage refinancing and sales activity, net gains on loan sales and commissions on loans originatedwas offset by a corresponding decline in merchant processing expenses.

Card interchange fees for ~~others~~2011 increased by ~~$3.0 million from 2008.~~

Net realized gains on securities amounted to $314 thousand in 2009, compared to $2.2 million in 2008. See discussion below under the caption “Comparison of 2008 with 2007”, for additional information on 2008 net realized gains on securities.

Included in noninterest income in 2009 were net gains on interest rate swap contracts of $697 thousand. This amount includes $580 thousand of gains attributable to interest rate swap contracts executed by Washington Trust to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. Gains on another interest rate swap contract executed in April 2008 with Lehman Brothers Special Financing, Inc. amounted to $117 thousand in 2009. See additional discussion regarding this specific interest rate swap transaction below under the caption “Comparison of 2008 with 2007.” See additional discussion on interest rate swap contracts in Note 13 to the Consolidated Financial Statements.

Other-than-temporary impairment losses on investment securities amounted to $3.1 million ($2.0 million after tax, or 13 cents per diluted share) in 2009 and $5.9 million ($3.8 million after tax, or 27 cents per diluted share) in 2008. See additional discussion in the “Financial Condition” section under the caption “Securities.”

~~Comparison of 2008 with 2007~~

~~Revenue from wealth management services decreased $743~~$274 thousand, or ~~3%, in 2008. Assets under administration totaled $3.1 billion at December 31, 2008, down $866.7 million, or 22%~~14%, from ~~December 31, 2007. This decline in assets under administration was~~2010, primarily due to ~~lower valuations~~increases in the ~~financial markets.~~volume of transactions.

Income from ~~bank owned life insurance (“BOLI”) amounted to $1.8~~BOLI totaled $2.0 million in both 2011 and ~~$1.6 million for 2008 and 2007, respectively. BOLI represents life insurance on~~2010. See discussion in the lives of certain employees who have consented to allowing the Bank to be the beneficiary of such policies. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The BOLI investment provides a means to mitigate increasing employee benefit costs. See additional discussionsection entitled “Financial Condition” under the caption ~~“Financial Condition” for further information on the investment~~“Investment in ~~BOLI.~~Bank-Owned Life Insurance.”

In the first quarter of 2008, Washington Trust sold $17.9 million in residential portfolio loans for interest rate risk and balance sheet management purposes, which resulted in a gain on sale of $80 thousand. We do not have a practice of selling loans from portfolio and except for the sale described above we have not sold any packages of loans from our portfolio in many years. Net gains on loan sales and commissions on loans originated for others ~~amounted~~totaled $5.1 million for 2011, up by $1.0 million, or 25%, from 2010 reflecting increased mortgage refinancing and sales activity in response to ~~$1.4 million in 2008, down by 6% from 2007, primarily due to declines in sales~~a low interest rate environment and expansion of ~~SBA loans.~~our mortgage banking business.

~~In 2008 and 2007, net~~Net realized gains on securities ~~totaled $2.2 million and $455 thousand, respectively. These amounts included $315~~amounted to $698 thousand and ~~$397~~$729 thousand, respectively, in 2011 and 2010. Included in these amounts were realized gains of $368 thousand and $800 thousand recognized on the sale of mortgage-backed securities associated with balance sheet management transactions conducted in 2011 and 2010. See discussion below under the caption “Noninterest Expenses” for additional information on realized gains recognized in ~~2008 and 2007, respectively, resulting from the annual charitable~~2011 in conjunction with a contribution of appreciated equity ~~securities~~securities.

For the year ended December 31, 2011, equity in losses of unconsolidated subsidiaries (primarily generated by two real estate limited partnerships) amounted to ~~our charitable foundation. In 2008, Washington Trust recognized net realized gains of $1.7~~$213 thousand, compared to $337 thousand in 2010.

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Other noninterest income totaled $1.5 million in both 2011 and 2010. Included in other noninterest income in 2011 was a gain on the sale of ~~equity securities and $232 thousand on the sale~~bank property of commercial debt securities. In 2007, net realized gains of $314 thousand were recognized from certain debt and equity securities that were called prior to their maturity by the issuers and net realized losses of $256 thousand resulted from sales of debt and equity securities.

Included in noninterest income in 2008 were net losses on interest rate swap contracts of $542 thousand. This amount includes $638 thousand of losses attributable to an interest rate swap contract executed in April 2008 with Lehman Brothers Special Financing, Inc. to hedge the interest rate risk associated with variable rate junior subordinated debentures. Under the terms of this swap, Washington Trust agreed to pay a fixed rate and receive a

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~~Table of Contents~~

variable rate based on LIBOR. At inception, this hedging transaction was deemed to be highly effective and, therefore, changes in the value of this interest rate swap contract were recognized in the accumulated other comprehensive income component of shareholders’ equity. In September 2008, Lehman Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for bankruptcy protection, followed in October 2008 by the swap counterparty itself. Due to the change in the creditworthiness of the swap counterparty, the hedging relationship was deemed to be not highly effective, with the result that subsequent changes in the valuation are recognized in earnings. The valuation decline was attributable to a decline in the swap yield curve during the fourth quarter of 2008, which reduced market fixed rates for terms similar to this swap contract. The bankruptcy filings by the Lehman entities constituted events of default under the interest rate swap contract, entitling Washington Trust to immediately suspend performance and to terminate the transaction. On March 31, 2009, this interest rate swap contract was reassigned to a new creditworthy counterparty, unrelated to the prior counterparty. On May 1, 2009, this interest rate swap contract qualified for cash flow hedge accounting to hedge the interest rate risk associated with the variable rate junior subordinated debentures. Effective May 1, 2009, the effective portion of changes in fair value of the swap was recorded in other comprehensive income and subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the variable rate debentures affect earnings. The ineffective portion of changes in fair value was recognized directly in earnings as interest expense. Gains on other interest rate swap transactions not affected by this matter amounted to $96 thousand in 2008 and $27 thousand in 2007. See additional discussion in Note 13 to the Consolidated Financial Statements.

Other income consists of mortgage servicing fees, non-customers ATM fees, safe deposit rents, wire transfer fees, fees on letters of credit and other fees. Other income increased $123 thousand, or 8%, in 2008 primarily due to nonrecurring income of $114$203 thousand.

Net impairment losses recognized in earnings on investment securities totaled $191 thousand in 2011 compared to $417 thousand in 2010. See additional discussion ~~regarding other-than-temporary impairment losses on investment securities~~ in the “Financial Condition” section under the caption ~~“Securities.”~~“Securities” below.

Noninterest Expense

The following table presents a noninterest expense comparison for the years ended December 31, ~~2009, 2008~~2012, 2011 and ~~2007:~~2010:

							2009/2008					2008/2007
	Years Ended December 31,						Change					Change
	2009		2008		2007			$		%		$			%								2012/2011					2011/2010
Noninterest expense
																	Years Ended December 31,						Change					Change
(Dollars in thousands)																	2012		2011		2010		$			%		$			%
Noninterest expense:
Salaries and employee benefits	$	41,917	$	41,037	$	39,986	$	880		2	%	$	1,051		3	%		$59,786		$51,095		$47,429		$8,691		17	%		$3,666		8	%
Net occupancy		4,790		4,536		4,150		254		6			386		9		6,039		5,295		4,851		744			14		444			9
Equipment		3,917		3,838		3,473		79		2			365		11		4,640		4,344		4,099		296			7		245			6
Merchant processing costs		6,652		5,769		5,686		883		15			83		1		8,593		8,560		7,822		33			—		738			9
Outsourced services																	3,560		3,530		3,304		30			1		226			7
FDIC deposit insurance costs		4,397		1,044		213		3,353		321			831		390		1,730		2,043		3,163		(313		)	(15	)	(1,120		)	(35	)
Outsourced services		2,734		2,859		2,180		(125	)	(4	)		679		31
Legal, audit and professional fees		2,443		2,325		1,761		118		5			564		32		2,240		1,927		1,813		313			16		114			6
Advertising and promotion		1,687		1,729		2,024		(42	)	(2	)		(295	)	(15	)	1,730		1,819		1,633		(89		)	(5	)	186			11
Amortization of intangibles		1,209		1,281		1,383		(72	)	(6	)		(102	)	(7	)	728		951		1,091		(223		)	(23	)	(140		)	(13	)
Foreclosed property costs																	762		878		841		(116		)	(13	)	37			4
Debt prepayment penalties		–		–		1,067		–		–			(1,067	)	(100	)	3,908		694		752		3,214			463		(58		)	(8	)
Other		7,422		7,324		6,983		98		1			341		5		8,622		9,237		8,513		(615		)	(7	)	724			9
Total noninterest expense	$	77,168	$	71,742	$	68,906	$	5,426		8	%	$	2,836		4	%		$102,338		$90,373		$85,311		$11,965		13	%		$5,062		6	%

Noninterest Expense Analysis

Comparison of ~~2009~~2012 with ~~2008~~2011

For the year ended December 31, 2012, salaries and employee benefit expense, the largest component of noninterest expense, totaled $59.8 million, up by $8.7 million, or 17%, from 2011. This increase reflected higher levels of business development based compensation primarily in mortgage banking, higher staffing levels to support growth, higher defined benefit pension costs primarily due to a lower discount rate in 2012 compared to 2011 and, to a lesser extent, an increase in stock-based compensation expense due to current year award grants.

Net occupancy expense for 2012 increased by $744 thousand, or 14%, compared to 2011, reflecting increased rental expense for premises leased by Washington Trust and occupancy costs associated with de novo branches and residential mortgage lending offices that opened in the latter portion of 2011 and in 2012. Also included in net occupancy expense was a charge of $94 thousand for the termination of an operating lease associated with a branch closure in September 2012.

Costs associated with branch expansion and business line growth were also reflected in equipment expenses, which increased by $296 thousand, or 7%, in 2012. The increase is largely related to additional investments in technology and other equipment.

Merchant processing costs represent third-party costs incurred that are directly attributable to handling merchant credit card transactions. See discussion on merchant processing fees under the caption “Noninterest Income” above. Merchant processing costs totaled $8.6 million in both 2012 and 2011, as lower third-party processing rates offset transaction volume-related cost increases.

Outsourced services, or third party processing costs, totaled $3.6 million and $3.5 million in 2012 and 2011, respectively.

-44-

FDIC deposit insurance costs for the year ended December 31, 2012 amounted to $1.7 million, down by $313 thousand, or 15%, from 2011, reflecting lower assessment rates and a statutory change in the calculation method that was effective for the second quarter of 2011.

For the year ended December 31, 2012, legal, audit and professional fees totaled $2.2 million, up by $313 thousand, or 16%, from 2011 largely due to costs incurred in connection with the formation of a mortgage banking subsidiary of the Bank. Effective November 26, 2012, our mortgage origination business conducted in our residential mortgage lending offices located in Sharon and Burlington, Massachusetts, and Glastonbury, Connecticut is now performed by this Bank subsidiary.

Advertising and promotion costs amounted to $1.7 million in 2012, down by $89 thousand, or 5%, from 2011, reflecting management’s discretion over this category.

Amortization of intangibles amounted to $728 thousand in 2012 and $951 thousand in 2011. See Note 8 to the Consolidated Financial Statements for additional information on intangible assets.

Foreclosed property costs amounted to $762 thousand in 2012, down by $116 thousand, or 13%, from 2011, largely due to a deceases in the number of properties held as of December 31, 2012 compared to the prior year.

The prepayment of FHLBB advances associated with the balance sheet management transactions executed in 2012 and 2011, resulted in debt prepayment penalty expense of $3.9 million in 2012 and $694 thousand in 2011.

Other noninterest expenses amounted to $8.6 million in 2012, down by $615 thousand, or 7%, from 2011 largely due to a $588 thousand decrease in charitable contribution expense. In 2012, Washington Trust made a $400 thousand cash contribution to its charitable foundation. In 2011, Washington Trust made a contribution of appreciated equity securities to its charitable foundation. The cost of this contribution was $990 thousand. This contribution also resulted in a realized gain of $331 thousand on the disposition of the equity securities, which was recorded in noninterest income.

Comparison of 2011 with 2010

Salaries and employee benefits expense, the largest component of ~~total~~ noninterest expense, ~~increased~~totaled $51.1 million in 2011, up by ~~$880 thousand,~~$3.7 million, or 2%8%, over 2010. The increase reflected higher staffing levels in ~~2009. This~~mortgage banking, including two new residential mortgage lending offices opened in the first and fourth quarters of 2011, other selected staffing additions, higher amounts of commissions paid to mortgage originators and, to a lesser extent, an increase ~~reflects increases~~ in ~~staffing and higher defined benefit pension costs~~stock-based compensation expense due to ~~the discount rate and asset value changes in effect at the end of 2008 offset in part by lower profitability-based incentive costs.~~current year award grants.

Net occupancy expense increased by ~~$254~~$444 thousand, or 6%9%, ~~in 2009 largely due~~compared to 2010, reflecting increased rental expense for premises leased by Washington Trust and occupancy costs associated with two residential mortgage lending offices and a de novo branch, which were opened in the ~~Bank.~~latter portion 2011.

Costs associated with branch expansion and business line growth were also reflected in equipment expenses, which increased 6%, or $245 thousand, in 2011. The increase is largely related to additional investments in technology and other equipment.

Merchant processing costs ~~increased~~were up by ~~$883~~$738 thousand, or ~~15%~~9%, in ~~2009~~2011, primarily due to increases in the volume of transactions processed for existing and new customers. ~~Merchant processing costs represent third-party costs~~

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~~Table of Contents~~

~~incurred that are directly attributable to handling merchant credit card transactions.~~ See discussion on the corresponding increase in merchant processing fees in 2011 under the caption “Noninterest ~~Income.”~~Income” above.

Outsourced services expense increased by $226 thousand, or 7%, in 2011, reflecting higher third party processing costs primarily due to increases in transaction volume.

FDIC deposit insurance costs ~~were up~~declined by ~~$3.4~~$1.1 million, or 35%, from ~~2008. A special FDIC~~2010, reflecting lower assessment ~~of $1.35 million ($869 thousand after tax)~~rates and a statutory change in the calculation method that was ~~recorded in~~effective for the second quarter of ~~2009. In addition to the special assessment, the year over year increase in FDIC deposit insurance costs also reflects higher assessment rates.~~

Included in other noninterest expenses in 2009 was a $250 thousand charge incurred in the first quarter of 2009 in connection with the repositioning of investment options in the Corporation’s 401(k) Plan. The increase in other noninterest expenses in 2009 also included an increase of $331 thousand in credit and collection costs. These increases were offset for the most part by the results of efforts to control operating costs.

~~Comparison of 2008 with 2007~~

~~Salaries and employee benefits expense increased by $1.1 million, or 3%, in 2008. This increase was largely due to increases in salaries and wages.~~

Net occupancy expense increased by $386 thousand, or 9%, in 2008. The increase reflects higher utility costs, higher rental expense for premises leased by the Bank, and includes occupancy costs associated with the de novo branch opened in June 2007. Equipment expense increased by $365 thousand, or 11%, in 2008, primarily due to additional investments in technology and other equipment.

FDIC deposit insurance costs increased by $831 thousand in 2008, due primarily to new FDIC assessment rules. The new rules became effective on January 1, 2007; however, the utilization of a one-time assessment credit minimized the financial impact of this change to the Bank in 2007.

Outsourced services increased by $679 thousand, or 31%, in 2008 due largely to higher third party vendor costs. Approximately 68% of this increase was attributable to higher outsourced services expenses for our wealth management business and included wealth management platform and product support costs.2011.

Legal, audit and professional fees ~~increased by $564 thousand, or 32%, from 2007, which included higher recruitment costs of $209 thousand primarily associated with executive management positions, $45 thousand~~for 2011 amounted to $1.9 million, comparable to the amount incurred in legal fees associated with the second quarter 2008 issuance of junior subordinated debentures (see Note 11), legal costs associated with product development and maintenance and various consulting matters.2010.

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Advertising and promotion ~~expense decreased~~costs amounted to $1.8 million in 2011, up by ~~$295~~$186 thousand, or ~~15%~~11%, ~~in 2008 reflecting management’s discretion over this category.~~from 2010.

~~Debt prepayment penalties expense, resulting from the first quarter 2007 prepayment~~Amortization of ~~$26.5 million~~intangibles amounted to $951 thousand in ~~higher cost FHLBB advances, amounted to~~2011 and $1.1 million in ~~2007. There were no~~2010. See Note 8 to the Consolidated Financial Statements for additional information on intangible assets.

Foreclosed property costs amounted to $878 thousand in 2011 and $841 thousand in 2010. See additional discussion on foreclosed properties under the section entitled “Asset Quality.”

The prepayment of FHLBB advances associated with the balance sheet management transactions executed in 2011 and 2010, resulted in debt prepayment penalty ~~charges recognized~~expense of $694 thousand 2011 and $752 thousand in ~~2008.~~2010.

Other noninterest ~~expense increased~~expenses amounted to $9.2 million in 2011, up by ~~$341~~$724 thousand ~~or 5%,~~from 2010 largely due to a $338 thousand increase in ~~2008, which included an increase of $108 thousand in credit and collection costs.~~charitable contribution expense.

Income Taxes

Income tax expense for ~~2009, 2008~~2012, 2011 and ~~2007~~2010 totaled ~~$6.3~~$15.8 million ~~$7.3~~, $12.9 million and ~~$10.8~~$10.3 million, respectively. The effective tax rates for the years ended December 31, ~~2009, 2008~~2012, 2011 and ~~2007~~2010 were ~~28.3%~~31.1%, ~~24.8%~~30.3% and ~~31.3%~~30.0%, respectively. ~~In 2008, the Corporation recognized $1.4 million~~The increase in ~~income tax benefits (as described in the following paragraph). Excluding these income tax benefits,~~ the effective tax rate ~~for 2008 was 29.6%.~~reflected a higher portion of taxable income to pretax book income. The effective tax rates differed from the federal rate of 35.0% due ~~primarily~~largely to the benefits of tax-exempt income, ~~the dividends received deduction and~~ income from ~~BOLI.~~BOLI and federal tax credits.

On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rate on net income applicable to financial institutions and requiring combined income tax reporting. The rate will be reduced from the rate of 10.5% to 10.0% for 2010, 9.5% for 2011 and 9.0% for 2012 and thereafter. Previously, certain Washington Trust subsidiaries were subject to Massachusetts income tax on a separate return basis. Under the new legislation, effective January 1, 2009, Washington Trust, as a consolidated tax group, will be subject to income tax in

~~-37-~~

~~Table of Contents~~

the Commonwealth of Massachusetts. Washington Trust analyzed the impact of this law and, as a result of revaluing its net deferred tax asset, recognized an income tax benefit of $841 thousand in the third quarter of 2008. In addition, the Corporation recognized an income tax benefit of $556 thousand in the fourth quarter of 2008 resulting primarily from the resolution of certain state tax positions (see Note 9).

The Corporation’s net deferred tax asset amounted to ~~$12.0~~$19.9 million at December 31, ~~2009,~~2012, compared to ~~$18.8~~$16.4 million at December 31, ~~2008.~~2011. The Corporation has determined that a valuation allowance is not required for any of the deferred tax assets since it is more likely than not that these assets will be realized primarily through future reversals of existing taxable temporary differences, or carryback to taxable income in prior ~~years.~~years or by offsetting projected future taxable income. See Note 9`9 to the Consolidated Financial Statements for additional information regarding income taxes.

Financial Condition

Summary

Total assets amounted to ~~$2.9~~$3.1 billion at December 31, ~~2009, down by $81~~2012, an increase of $7.8 million ~~or 3%,~~ from the end of ~~2008.~~2011, with loan growth being offset, in part, by a decrease in the investment securities portfolio. Total loans ~~increased by $81 million, or 4%, in 2009 and~~ amounted to ~~$1.9~~$2.3 billion, or ~~67%~~75% of total assets, at December 31, ~~2009. During 2009, Washington Trust experienced firm demand for commercial~~2012. Total loans ~~in large part due to decreased lending activity~~grew by larger institutions in its lending area. As a result, we selectively expanded our commercial lending relationships with new and existing customers while at the same time seeking to maintain our traditional commercial lending underwriting standards. Commercial loans increased by $104$146.8 million, or ~~12%~~7%, in ~~2009 and~~2012, led by growth in commercial loan portfolio. The investment securities portfolio amounted to ~~$985~~$415.9 million, or 14% of total assets, at December 31, 2012, Total securities decreased by $177.5 million, or ~~51% of total loans,~~30%, compared to the balance at the end of ~~2009.~~2011, primarily due to principal payments received on mortgage-backed securities not being reinvested, and to a lesser extent, sales of mortgage-backed securities in conjunction with balance sheet management transactions.

~~Total nonaccrual loans increased from $7.8 million~~Overall credit quality continues to be affected by weaknesses in national and regional economic conditions, including relatively high unemployment levels. Nonperforming assets as a percentage of total assets amounted to 0.83% and 0.81%, respectively, at December 31, ~~2008~~2012 and 2011. Our asset quality levels remain manageable and continue to ~~$27.5 million at December 31, 2009. Total 30 day+ delinquencies amounted to $31.6 million, or 1.64% of total loans, at December 31, 2009, up $14.0 million in 2009,~~compare favorably with ~~the largest increases in the commercial categories. Management believes that the declining credit~~both regional and national asset quality ~~trend experienced in 2009 is attributable to weakened economic conditions in general, and not to any specific underwriting characteristic or credit risk category.~~indicators.

The fair value of securities available for sale totaled $691 million at December 31, 2009, or 24% of total assets. During 2009, the investment securities portfolio declined by approximately $175 million largely due to maturities and pay-downs on mortgage-backed securities. Management elected not to increase the portfolio primarily due to a lack of attractive investment opportunities in the current environment.

Total liabilities decreased by ~~$101~~$6.5 million ~~in 2009, with an increase of $132 million in total deposits and a decrease of $222 million in FHLBB advances. Total deposits, which included brokered certificates of deposit, were up by 7%~~ from the balance at December 31, ~~2008. Excluding out-of-market brokered certificates~~2011, with total deposit growth of ~~deposit, in-market deposits grew by $226~~$186.3 million, or 14 percent, in 2009 which included $42 million in wealth management client money market deposits previously held in outside money market funds. At December 31, 2009, Washington Trust had $94 million in out-of-market brokered certificates of deposit and $607 million9%, being offset by reductions in FHLBB advances ~~compared~~and maturities of securities sold under repurchase agreements. In addition to ~~$188 million and $830 million, respectively, at December 31, 2008.~~the balance sheet management transactions described in the Section entitled “Overview”, the decline in FHLBB advances reflects less demand for wholesale funding due to the strong deposit growth.

Shareholders’ equity totaled ~~$255~~$295.7 million at December 31, ~~2009, compared to $235~~2012, up by $14.3 million from the balance at ~~the end of 2008. As of~~ December 31, ~~2009,~~2011. Capital levels continue to exceed the ~~Corporation is categorized as “well-capitalized” under~~ the regulatory ~~framework for prompt corrective action. In April 2008, the Bancorp issued $10.3 million in junior subordinated debentures, which supplemented the~~minimum levels to be considered well-capitalized, with a total risk-based capital ~~position. In October 2008, Washington Trust issued $50.0 million~~ratio of ~~its Common Stock in a private placement with select institutional investors. Net proceeds were $46.9 million after deducting offering-related fees and expenses. See Notes 11 and 12~~13.26% at December 31, 2012, compared to ~~the Consolidated Financial Statements for additional discussion on junior subordinated debentures and capital requirements.~~12.86% at December 31, 2011.

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

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as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not currently maintain ~~portfolios~~a portfolio of ~~held to maturity or~~ 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. The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. The Corporation reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. The Corporation also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual they are re-examined and the value is either confirmed or revised. In addition, the Corporation periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of December 31, 2012 and December 31, 2011, the Corporation did not make any adjustments to the prices provided by the pricing service.

See Note 4 to the Consolidated Financial Statements for additional ~~information.~~

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~~Table of Contents~~

~~Washington Trust may acquire, hold and transact in various types of investment~~information on the securities in accordance with applicable federal regulations, state statutes and guidelines specified in Washington Trust’s internal investment policy. Permissible bank investments include federal funds, banker’s acceptances, commercial paper, reverse repurchase agreements, interest-bearing deposits of federally insured banks, U.S. Treasury and government-sponsored agency debt obligations, including mortgage-backed securities and collateralized mortgage obligations, municipal securities, corporate debt, trust preferred securities, mutual funds, auction rate preferred stock, common and preferred equity securities, and FHLBB stock.portfolio.

Investment activity is monitored by an Investment Committee, the members of which also sit on the Corporation’s Asset/Liability Committee (“ALCO”). Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment portfolio activity. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities.

As disclosed in Note 4 to the Consolidated Financial Statements, Washington Trust elected to early adopt provisions of ASC 320, “Investments – Debt and Equity Securities,” (formerly FSP No. FAS 115-2 and FAS 124-2) and applied this guidance to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted.

As noted in Note 14 to the Consolidated Financial Statements, a majority of our fair value measurements utilize Level 2 inputs, which utilize quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets. Our Level 2 financial instruments consist primarily of available for sale debt securities. These debt securities were initially valued at their transaction price and subsequently valued based on matrix pricing with market data inputs such as reportable trades, benchmark yields, broker/dealer quotes, bids, offers, issuers spreads, credit ratings and other industry and economic events. Such inputs are observable in the market or can be derived principally from or corroborated by observable market data. When necessary, we validate our valuation techniques by reviewing the underlying basis for the models used by pricing sources and obtaining market values from other pricing sources. Level 3 financial instruments utilize valuation techniques in which one or more significant input assumptions are unobservable in the markets and which reflect the Corporation’s market assumptions. As of December 31, ~~2009~~2012 and ~~2008,~~2011, our Level 3 financial instruments ~~consist~~consisted primarily of two available for sale pooled trust preferred securities, which were not actively traded.

As of December 31, ~~2009,~~2012 and 2011, the Corporation concluded that ~~there has been a significant decrease in~~ the ~~volume and~~low level of trading activity for our Level 3 pooled trust preferred securities ~~and~~continued to indicate that quoted market prices were not indicative of fair value. The Corporation obtained valuations including broker quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected ~~highly~~ limited sales evidenced by an inactive market. The cash flow scenarios were prepared using discounted cash flow methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions. Our internal review procedures have confirmed that the fair values provided by the referenced sources and utilized by the Corporation are consistent with GAAP. If Washington Trust was required to sell these securities in an ~~unorderly~~un-orderly fashion, actual proceeds received could potentially be significantly less than their fair values.

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~~Table of Contents~~-47-

The carrying amounts of securities as of the dates indicated are presented in the following tables:


(Dollars in thousands)
December 31,	2009					2008					2007					2012				2011				2010
	Amount		%			Amount		%			Amount		%			Amount		%		Amount		%		Amount		%
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	45,240		7	%	$	64,377		7	%	$	139,599		18	%		$31,670	8	%		$32,833	6	%		$40,994	7	%
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		523,446		75	%		683,619		80	%		469,388		62	%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises																231,233		62		389,658		72		429,771		72
States and political subdivisions		82,062		12	%		81,213		9	%		80,894		11	%	72,620		19		79,493		15		81,055		14
Trust preferred securities:
Individual name issuers		20,586		3	%		16,793		2	%		27,695		4	%	24,751		7		22,396		4		23,275		4
Collateralized debt obligations		1,065		–	%		1,940		–	%		6,759		1	%	843		—		887		—		806		—
Corporate bonds		14,706		2	%		13,576		2	%		14,101		2	%	14,381		4		14,282		3		15,212		3
Common stocks		769		–	%		992		–	%		6,781		1	%	—		—		—		—		809		—
Perpetual preferred stocks		3,610		1	%		3,709		–	%		6,561		1	%	—		—		1,704		—		2,178		—
Total securities available for sale	$	691,484		100	%	$	866,219		100	%	$	751,778		100	%		$375,498	100	%		$541,253	100	%		$594,100	100	%



(Dollars in thousands)
December 31,	2012				2011				2010
	Amount		%		Amount		%		Amount		%
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$40,381	100	%		$52,139	100	%		$—	—	%
Total securities held to maturity		$40,381	100	%		$52,139	100	%		$—	—	%

~~The securities portfolio amounted to $691 million at~~ As of December 31, ~~2009, down by $175~~2012, the investment portfolio totaled $415.9 million, a decrease of $177.8 million from the balance at December 31, ~~2008,~~2011, reflecting ~~$171 million in~~ maturities and ~~pay-downs~~principal payments received on mortgage-backed ~~securities. In 2009, management elected not to increase the portfolio primarily due~~securities and, to a ~~lack~~lesser extent, sales of ~~attractive~~mortgage-backed securities in conjunction with balance sheet management transactions and sales of perpetual preferred stocks. See additional disclosure regarding investment ~~opportunities~~activities in the ~~current environment.~~Corporation’s Consolidated Statements of Cash Flows.

The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. Government agencies or U.S. Government-sponsored enterprises.

At December 31, ~~2009, the securities portfolio included $13.8 million of net pretax unrealized gains, compared to $3.2 million of net pretax unrealized losses at December 31, 2008. At December 31, 2009,~~2012 and 2011, the net unrealized gain position on ~~the~~ securities ~~portfolio~~available for sale and held to maturity amounted to $13.1 million and $17.6 million, respectively, and included gross unrealized losses of ~~$14.7 million. Approximately 94%~~$9.1 million and $12.2 million, respectively, as of ~~the~~December 31, 2012 and 2011. Nearly all of these gross unrealized losses ~~on the securities portfolio~~ were concentrated in variable rate trust preferred securities ~~primarily~~ issued by financial services companies.

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The carrying amount of state and political subdivision holdings included in our securities portfolio at December 31, 2012 totaled $72.6 million. The following table presents state and political subdivision holdings by geographic location:



(Dollars in thousands)
December 31, 2012	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
New Jersey		$30,874		$2,442		$—		$33,316
New York	11,441		726		—		12,167
Pennsylvania	10,118		432		—		10,550
Illinois	9,453		428		—		9,881
Other	6,310		396		—		6,706
Total		$68,196		$4,424		$—		$72,620

The following table presents state and political subdivision holdings by category:



(Dollars in thousands)
December 31, 2012	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
School districts		$25,846		$1,504		$—		$27,350
General obligation	35,263		2,524		—		37,787
Revenue obligations (a)	7,087		396		—		7,483
Total		$68,196		$4,424		$—		$72,620


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

The Bank owns trust preferred security holdings of seven individual name issuers in the financial industry and two pooled trust preferred securities in the form of collateralized debt obligations. The following tables present information concerning the named issuers and pooled trust preferred obligations, including credit ratings. The Corporation’s Investment Policy contains rating standards that specifically reference ratings issued by Moody’s and S&P.

Individual Issuer Trust Preferred Securities

(Dollars in thousands)
December 31, 2009 Credit Ratings
Named Issuer Amortized Fair Unrealized
December 31,
2009

Form 10-K
Filing Date
(parent holding company) (a) Cost (b) Value Loss Moody's S&P Moody's S&P
JPMorgan Chase & Co. 2 $9,714 $6,891 $(2,823) A2 BBB+ A2 BBB+
Bank of America Corporation 3 5,726 4,058 (1,668) Baa3 BB (c) Baa3 BB (c)
Wells Fargo & Company 2 5,099 3,241 (1,858) Baa1/Baa2 A- Baa1/Baa2 A-
SunTrust Banks, Inc. 1 4,163 2,607 (1,556) Baa2 BB+ (c) Baa3 BB (c)
Northern Trust Corporation 1 1,979 1,333 (646) A2 A- A3 A-
State Street Corporation 1 1,967 1,633 (334) A2 BBB+ A3 BBB+
Huntington Bancshares Incorporated 1 1,915 823 (1,092) Baa3 B (c) Ba1 (c) B (c)
Totals $30,563 $20,586 $(9,977)



(Dollars in thousands)	December 31, 2012								Credit Ratings
Named Issuer		Amortized Cost (b)		Fair Value		Unrealized Loss			December 31, 2012		Form 10-K Filing Date
(parent holding company)	(a)	Amortized Cost (b)		Fair Value		Unrealized Loss			Moody’s	S&P	Moody’s	S&P
JPMorgan Chase & Co.	2		$9,746		$7,801		($1,945	)	Baa2	BBB	Baa2	BBB
Bank of America Corporation	3	5,752		4,481		(1,271		)	Ba2	BB+	Ba2	BB+	(c)
Wells Fargo & Company	2	5,126		4,400		(726		)	A3/Baa1	A-/BBB+	A3/Baa1	A-/BBB+
SunTrust Banks, Inc.	1	4,170		3,351		(819		)	Baa3	BB+	Baa3	BB+	(c)
Northern Trust Corporation	1	1,983		1,692		(291		)	A3	A-	A3	A-
State Street Corporation	1	1,973		1,594		(379		)	A3	BBB+	A3	BBB+
Huntington Bancshares Incorporated	1	1,927		1,432		(495		)	Baa3	BB+	Baa3	BB+	(c)
Totals	11		$30,677		$24,751		($5,926	)


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


(b)	Net of other-than-temporary impairment losses recognized in ~~earnings, other than such noncredit-related amounts reversed on January 1, 2009.~~earnings.


(c)	Rating is below investment grade.

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~~Table of Contents~~

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

-49-

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 ~~one~~no additional ~~downgrade~~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 December 31, ~~2009.~~2012.

Pooled Trust Preferred Obligations

(Dollars in thousands) December 31, 2009
Deferrals Credit Ratings
Amortized Fair Unrealized
No. of
Cos. in
and
Defaults
December 31,
2009

Form 10-K
Filing Date
Deal Name Cost Value Loss Issuance (a) Moody's S&P Moody's S&P
Tropic CDO 1,tranche A4L (d) $3,620 $978 $(2,642) 38 36.7% Ca (c) (b) Ca (c) (b)
Preferred Term Securities [PreTSL] XXV,
tranche C1 (e)
1,346 87 $(1,259) 73 31.0% Ca (c) (b) Ca (c) (b)
Totals $4,966 $1,065 $(3,901)

(Dollars in thousands)

December 31, 2012

Deferrals and Defaults (a)

Credit Ratings

Amortized Cost

Fair Value

Unrealized Loss

No. of Cos. in Issuance

December 31,
2012

Form 10-K

Filing Date

Deal Name

Moody’s

S&P

Moody’s

S&P

Tropic CDO 1,

tranche A4L (d)

$2,772

$613

($2,159

)

40%

(c)

(b)

(c)

(b)

Preferred Term Securities

[PreTSL] XXV, tranche C1 (e)

1,264

230

(1,034

)

34%

(c)

(b)

(c)

(b)

Totals

$4,036

$843

($3,193

)


(a)	Percentage of pool collateral in deferral or default status.


(b)	Not rated by S&P.


(c)	Rating is below investment grade.

(d)

~~Based~~

This security was placed on information available as of the filing date of this report, 15 of the 38 pooled institutions have invoked their original contractual right to defer interest payments. A total of $110.2 million of the underlying collateral pool wasnonaccrual status in ~~deferral or default status, or 36.7% of the total original collateral balance of $300 million.~~March 2009. The tranche instrument held by ~~the Corporation~~Washington Trust has been deferring a portion of interest payments since April 2010. The December 31, 2012 amortized cost was ~~current with respect to its quarterly debt service (interest) payments as~~net of $2.1 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the ~~most recent quarterly payment date~~underlying collateral. Included in the $2.1 million were credit-related impairment losses of January 15, 2010. The instrument was downgraded to a below investment grade rating of “Caa3” by Moody’s on March 27, 2009 and further downgraded by Moody’s to a rating of “Ca” on October 30, 2009. During the quarter ended March 31, 2009, an$221 thousand recorded during 2012, reflecting adverse ~~change occurred~~changes in the expected cash flows for this ~~instrument indicating that, based on cash flow forecasts with regard~~security. In the first quarter of 2013, a performing underlying issuer elected to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of the security. The Corporation had concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of March 31, 2009 and recognized an other-than-temporary impairment charge of $3.6 million pursuant to the provisions of ASC 320, which the Corporation early adopted effective January 1, 2009. The credit lossprepay its portion of the ~~impairment charge, representing the amount by which~~collateralized debt obligation. This prepayment is expected to result in a modest reduction in the present value of estimated cash flows ~~expected~~and an immaterial amount of additional impairment loss to be ~~collected is less than~~recognized in the ~~amortized cost basis~~first quarter of 2013. As of December 31, 2012, this security has unrealized losses of $2.2 million and a below investment grade rating of “Ca” by Moody’s Investors Service Inc. (“Moody’s”). Through the filing date of this report, there have been no rating changes on this security. This credit rating status has been considered by management in its assessment of the ~~debt~~impairment status of this security.

(e)

This security was ~~$1.4 million. This investment security was also~~ placed on nonaccrual status asin December 2008. The tranche instrument held by Washington Trust has been deferring interest payments since December 2008. The December 31, 2012 amortized cost was net of ~~March 31, 2009.~~$1.2 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the underlying collateral. The analysis of the expected cash flows for this security as of December 31, ~~2009 and the rating downgrade on October 30, 2009~~2012 did not negatively affect the amount of credit-related impairment ~~loss~~losses previously recognized on this security.

~~(e)~~

~~Based on information available as~~ As ofDecember 31, 2012, the security has unrealized losses of $1.0 million and a below investment grade rating of “C” by Moody’s. Through the filing date of this report, ~~20 of the 73 pooled institutions~~there have invoked their original contractual right to defer interest payments. A total of $271.6 million of the underlying collateral pool was in deferral or default status, or 31.0% of the total original collateral pool of $877.4 million. The tranche instrument held by the Corporation had deferred the quarterly interest payment due in December 2008.

~~-41-~~

~~Table of Contents~~

~~The instrument was downgraded to a below investment grade~~been no rating of “Ca” by Moody’s on March 27, 2009. This security began deferring interest payments until future periods and the Corporation recognized an other-than-temporary impairment charge in the fourth quarter of 2008changes on this ~~security~~security. This credit rating status has been considered by management in the amount of $1.9 million. This investment security was also placed on nonaccrual status as of December 31, 2008. Pursuant to the provisions of ASC 320 adopted effective January 1, 2009 and based on Washington Trust’sits assessment of the ~~facts associated with this instrument, the Corporation has concluded that there was no credit loss portion of the other-than-temporary~~ impairment charge as of December 31, 2008. Washington Trust reclassified this noncredit-related other-than-temporary impairment loss for this security previously recognized in earnings in the fourth quarter of 2008 as a cumulative effect adjustment as of January 1, 2009 in the amount of $1.2 million after taxes ($1.9 million before taxes) with an increase in retained earnings and a decrease in accumulated other comprehensive loss. In addition, the amortized cost basisstatus of this security was increased by the amount of the cumulative effect adjustment before taxes. During the quarter ended September 30, 2009, an adverse change occurred in the expected cash flows for this instrument indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of the security. The Corporation had concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of September 30, 2009 and recognized an other-than-temporary impairment charge of $2.3 million pursuant to the provisions of ASC 320 adopted effective January 1, 2009. The credit loss portion of the impairment charge, representing the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the debt security, was $467 thousand. The analysis of the expected cash flows for this security as of December 31, 2009 resulted in an additional credit-related impairment loss of $679 thousand being recognized in earnings in the fourth quarter of 2009.

~~The following is supplemental information concerning common and perpetual preferred stock investment securities:~~

At December 31, 2009
Amortized Unrealized Fair
(Dollars in thousands) Cost (a) Gains Losses Value
Common and perpetual preferred stocks
Common stocks $ 658 $ 111 $ – $ 769
Perpetual preferred stocks:
Financials 2,354 396 (27 ) 2,723
Utilities 1,000 – (113 ) 887
Total perpetual preferred stocks 3,354 396 (140 ) 3,610
Total common and perpetual preferred stocks $ 4,012 $ 507 $ (140 ) $ 4,379

~~(a)~~

~~Net of other-than-temporary impairment losses recognized in earnings.~~

~~In October 2008, the SEC’s Office~~These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance companies. For both of these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure. Valuations of the ~~Chief Accountant, after consultation~~pooled trust preferred holdings are dependent in part on cash flows from underlying issuers. Unexpected cash flow disruptions could have an adverse

-50-

impact on the fair value and ~~concurrence with~~performance of pooled trust preferred securities. Management believes the ~~FASB, concluded that the assessment of other-than-temporary impairment of perpetual~~unrealized losses on these pooled trust preferred securities primarily reflect investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry and the possibility of further incremental deferrals of or defaults on interest payments on trust preferred debentures by financial institutions participating in these pools. These concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for ~~filings made after October 14, 2008 can be made using an impairment model (including an anticipated recovery period) similar~~securities in this sector. Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to a debt security provided there has been no evidence of a deterioration in credit of the issuer, as evidenced by, among other factors, a downgrade to a below “investment grade” credit rating. Washington Trust complied with this guidance in its evaluation of other-than-temporary impairment of perpetual preferred stocks.

remain at low levels.

~~-42-~~

~~Table of Contents~~

The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:

(Dollars in thousands)

Years ended December 31, 2009 2008 2007
Pooled trust preferred securities
Tropic CDO 1, tranche A4L $ 1,350 $ – $ –
Preferred Term Securities [PreTSL] XXV, tranche C1 1,146 1,859 –
Common and perpetual preferred stocks
Fannie Mae and Freddie Mac perpetual preferred stocks – 1,470 –
Other perpetual preferred stocks (financials) 495 2,173 –
Other common stocks (financials) 146 435 –
Other-than-temporary impairment losses recognized in earnings $ 3,137 $ 5,937 $ –



(Dollars in thousands)
Years ended December 31,	2012		2011		2010
Pooled trust preferred securities
Tropic CDO 1, tranche A4L		$221		$171		$354
Preferred Term Securities [PreTSL] XXV, tranche C1	—		20		63
Other-than-temporary impairment losses recognized in earnings		$221		$191		$417

Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation ~~of the current imbalances in liquidity that exist in the marketplace, a continuation~~ or worsening of the current economic ~~recession,~~downturn, or additional declines in real estate values 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 ~~impairment losses.~~write-downs.

~~See Note 4~~Investment in Bank-Owned Life Insurance (“BOLI”)

BOLI amounted to $54.8 million and $53.8 million at December 31, 2012 and 2011, respectively. BOLI provides a means to mitigate increasing employee benefit costs. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is invested in the “general account” of quality insurance companies. All such general account carriers were rated “A” or better by A.M. Best and “A3” or better by Moody’s at December 31, 2012. BOLI is included in the Consolidated ~~Financial~~Balance Sheets at its cash surrender value. Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements ~~for additional discussion on securities.~~of Income.

~~Federal Home Loan Bank Stock~~Loans

~~As of~~ Total loans amounted to $2.3 billion at December 31, ~~2009 and 2008, the Corporation’s investment in Federal Home Loan Bank~~2012. In 2012, loans grew by $146.8 million, or 7%, with increases of ~~Boston (“FHLBB”) stock totaled $42.0 million. The FHLBB is a cooperative that provides services, including funding~~$127.8 million in the form of advances, to its member banking institutions. The Corporation is required to maintain a level of investment in FHLBB stock based on the level of its FHLBB advances, which is viewed as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. At December 31, 2009, the Corporation’s investment in FHLBB stock exceeded its required investment by $9.6 million. No market exists for shares of the FHLBB. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock is subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends.

~~On February 22, 2010, the FHLBB announced its preliminary fourth quarter and annual financial results for 2009. The FHLBB reported net income of $6.3~~commercial loan portfolio, $17.3 million and a net loss of $187 million for the fourth quarter and year ended December 31, 2009, respectively. This compared to net losses of $274 million and $116 million for the same periods in 2008. Additionally, it reported total capital of $2.8 billion at December 31, 2009, compared to $3.4 billion at December 31, 2008. These results reflected the impact on earnings and accumulated other comprehensive loss of fair value declines associated with securities deemed to be other-than-temporarily impaired. Despite these results, the FHLBB exceeded the regulatory capital requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLBB’s primary source of funding is debt issued by the FHLB system. In 2009, the FHLB system demonstrated the ability to continue to issue additional debt. As of the filing date of this report, debt obligations issued by the FHLB System continue to be rated Aaa by Moody’s and AAA by Standard & Poor’s. If needed, the FHLB system also has the ability to secure funding available to government-sponsored entities through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLBB stock as of December 31, 2009. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If evidence of impairment exists in the ~~future, the FHLBB stock would reflect fair value using either observable or unobservable inputs.~~

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~~Table of Contents~~

~~Loans~~

~~Washington Trust’s loan~~residential real estate portfolio ~~amounted to $1.9 billion at December 31, 2009, up $81 million, or 4%, in 2009. Growth of $104 million in commercial loans~~ and ~~$13~~$1.8 million in consumer ~~loans was offset in part by a $36 million decline in residential real estate~~ loans.

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The following table sets forth the composition of the Corporation’s loan portfolio for each of the past five years:


(Dollars in thousands)																										(Dollars in thousands)
December 31,	2009					2008					2007					2006					2005					2012				2011				2010				2009				2008
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Commercial:
Mortgages	$	496,996		26	%	$	407,904		22	%	$	278,821		18	%	$	282,019		19	%	$	291,292		21	%
Mortgages (1)																											$710,813	31	%		$624,813	29	%		$518,623	26	%		$496,996	26	%		$407,904	22	%
Construction & development		72,293		4	%		49,599		3	%		60,361		4	%		32,233		2	%		37,190		3	%	27,842		1	%	10,955		1	%	47,335		2	%	72,293		4	%	49,599		3	%
Other (1)		415,261		21	%		422,810		23	%		341,084		21	%		273,145		19	%		226,252		16	%
Other (2)																										513,764		23	%	488,860		22	%	461,107		23	%	415,261		21	%	422,810		23	%
Total commercial		984,550		51	%		880,313		48	%		680,266		43	%		587,397		40	%		554,734		40	%	1,252,419		55	%	1,124,628		52	%	1,027,065		51	%	984,550		51	%	880,313		48	%
Residential real estate:																										Residential real estate:
Mortgages		593,981		31	%		626,663		34	%		588,628		37	%		577,522		40	%		565,680		40	%	692,798		30	%	678,582		32	%	634,739		31	%	593,981		31	%	626,663		34	%
Homeowner construction		11,594		1	%		15,389		1	%		11,043		1	%		11,149		–	%		17,028		2	%	24,883		1	%	21,832		1	%	10,281		1	%	11,594		1	%	15,389		1	%
Total residential real estate		605,575		32	%		642,052		35	%		599,671		38	%		588,671		40	%		582,708		42	%	717,681		31	%	700,414		33	%	645,020		32	%	605,575		32	%	642,052		35	%
Consumer:
Home equity lines		209,801		11	%		170,662		9	%		144,429		9	%		145,676		10	%		161,100		11	%	226,861		10	%	223,430		10	%	218,288		11	%	209,801		11	%	170,662		9	%
Home equity loans		62,430		3	%		89,297		5	%		99,827		6	%		93,947		6	%		72,288		5	%	39,329		2	%	43,121		2	%	50,624		3	%	62,430		3	%	89,297		5	%
Other (2)		57,312		3	%		56,830		3	%		49,459		4	%		44,295		4	%		31,078		2	%
Other (3)																										57,713		2	%	55,566		3	%	54,641		3	%	57,312		3	%	56,830		3	%
Total consumer loans		329,543		17	%		316,789		17	%		293,715		19	%		283,918		20	%		264,466		18	%	323,903		14	%	322,117		15	%	323,553		17	%	329,543		17	%	316,789		17	%
Total loans	$	1,919,668		100	%	$	1,839,154		100	%	$	1,573,652		100	%	$	1,459,986		100	%	$	1,401,908		100	%		$2,294,003	100	%		$2,147,159	100	%		$1,995,638	100	%		$1,919,668	100	%		$1,839,154	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property.


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

~~(2)~~
(3)	Other consumer loans include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles.

An analysis of the maturity and interest rate sensitivity of ~~Real Estate Construction and Other Commercial loans~~the Corporation’s loan portfolio as of December 31, ~~2009~~2012 follows:

(Dollars in thousands)
1 Year 1 to 5 After 5
Matures in: or Less Years Years Totals
Construction and development (1)
$ 17,973 $ 17,943 $ 47,971 $ 83,887
Commercial - other 155,307 162,000 97,954 415,261
$ 173,280 $ 179,943 $ 145,925 $ 499,148



(Dollars in thousands)	Commercial						Residential Real Estate
	Mortgages		Construction		Other		Mortgages		Homeowner Construction (1)		Consumer		Total
Amounts due in:
One year or less		$83,018		$2,428		$147,051		$23,979		$472		$8,129		$265,077
After one year to five years	350,315		11,217		206,108		103,939		3,875		36,201		711,655
After five years	277,480		14,197		160,605		564,880		20,536		279,573		1,317,271
Total		$710,813		$27,842		$513,764		$692,798		$24,883		$323,903		$2,294,003

Interest rate terms on amounts due after one year:
Predetermined rates		$334,645		$1,668		$259,968		$360,241		$19,172		$89,040		$1,064,734
Floating or adjustable rates	293,150		23,745		106,745		308,579		5,239		226,734		964,192

~~(1)~~	~~Includes homeowner construction and commercial construction and development.~~
(1)	Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction.

~~Sensitivity to changes in interest rates for Real Estate Construction and Other Commercial loans due after one year is as follows:~~

(Dollars in thousands) Floating or
Predetermined Adjustable
Rates Rates Totals
Principal due after one year $ 226,483 $ 99,385 $ 325,868

Commercial Loans

Commercial loans fall into two major categories, commercial real estate and other commercial loans (commercial and industrial). Commercial real estate loans consist of commercial mortgages and construction and development ~~loans. Commercial mortgages are~~ loans ~~secured by~~made for the purpose of acquiring, developing, constructing, improving or refinancing commercial real estate where the property is the primary collateral securing the loan, and the income ~~producing property.~~generated from the property is the primary repayment

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source. Commercial ~~lending represents a~~and industrial loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion. Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A significant portion of the Bank’s ~~loan portfolio. Beginning in 2007, as deteriorating conditions in the local economy caused a decline in residential and consumer loan demand, the Bank experienced increased demand for~~ commercial ~~mortgage and other commercial loans in large part due to decreased lending activity by larger institutions in its lending area As a result, the Bank sought to selectively expand its commercial~~

~~-44-~~

~~Table of Contents~~

lending relationships with new and existing customers while at the same time maintaining its traditional commercial lending underwriting standards. Total commercial loans increased from 40% of total loans at December 31, 2006 to 43% at December 31, 2007, 48% at December 31, 2008 and 51% at December 31, 2009. During 2009, total commercial loans increased by 12%. The pace of growth slowed in 2009 compared to 2008, which management believes was attributable to reduced demand related to a weakening in economic conditions.

With respect to commercial mortgage lending, management believes that the portfolio growth is in large part attributable to enhanced business cultivation efforts with new and existing borrowers. The growth in the commercial portfolio was achieved while maintaining the Bank’s overall commercial lending underwriting standards, interest rates and levels of interest rate risk. With respect to other commercial loans (commercial and industrial loans ~~to small businesses), management believes that~~are also collateralized by real estate, but are not classified as commercial real restate loans because such loans are not made for the ~~portfolio growth in recent years was in large part attributable to~~purpose of acquiring, developing, constructing, improving or refinancing the ~~Bank’s success in attracting commercial borrowers~~real estate securing the loan, nor is the repayment source income generated directly from larger institutions in its regional market area of southern New England, primarily in Rhode Island. Management believes that continued deterioration in national and regional economic conditions may cause some reduction in demand and loan origination activity for commercial mortgages and other commercial loans.such real property.

Management ~~has continued to refine its~~evaluates the appropriateness of the Corporation’s underwriting standards in ~~light of deteriorating~~response to changes in national and regional economic conditions, including such matters as market interest rates, energy prices, trends in real estate values, and employment levels. Based on management’s assessment of these ~~factors,~~matters, underwriting standards and credit monitoring activities ~~were~~are enhanced from time to time in response to changes in these ~~conditions, beginning~~conditions. These assessments may result in ~~the latter part of 2007 and continuing to the current period. Examples of such revisions and monitoring activities include~~ clarification of debt service ratio calculations, modifications to loan to value standards for real estate collateral, formalized watch list criteria, and enhancements to monitoring of commercial construction loans. ~~Management expects to continue to evaluate underwriting standards in response to continuing changes in national and regional economic conditions.~~

Commercial Real Estate Loans

Commercial real estate loans amounted to $738.7 millionat December 31, ~~2009 amounted to $569~~2012, an increase of $102.9 million, ~~including $72~~or 16%, from the $635.8 million balance at December 31, 2011. Included in these amounts were commercial construction loans ~~up by $112~~of $27.8 million ~~or 24%~~ and $11.0 million, ~~from December 31, 2008. Growth~~respectively. The growth in ~~this category~~commercial real estate loans was in ~~2009 was primarily in our general market area of southern New England. These~~large part due to enhanced business cultivation efforts with new and existing borrowers.

Commercial real estate loans are secured by a variety of property types, with approximately 82% of the total at December 31, 2012composed of retail facilities, office ~~lodging,~~buildings, commercial mixed use, lodging, multi-family dwellings and industrial & warehouse properties.

The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location. There are no loans located in Pennsylvania as of December 31, 2012.


(Dollars in thousands)	December 31, 2009					December 31, 2008					December 31, 2012				December 31, 2011
	Amount		% of Total			Amount		% of Total			Amount		% of Total		Amount		% of Total
Rhode Island, Connecticut, Massachusetts	$	512,748		90	%	$	405,040		89	%		$707,068	96	%		$589,083	93	%
New York, New Jersey, Pennsylvania		40,485		7	%		37,448		8	%
New Hampshire, Maine		14,342		3	%		13,384		3	%
New York, Pennsylvania											22,081		3	%	33,317		5	%
New Hampshire											9,290		1	%	11,668		2	%
Other		1,714		–	%		1,631		–	%	216		—	%	1,700		—	%
Total	$	569,289		100	%	$	457,503		100	%		$738,655	100	%		$635,768	100	%

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~~Table of Contents~~-69-

Management’s Annual Report on Internal Control Over Financial Reporting

The management of Washington Trust Bancorp, Inc. and subsidiaries (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. The Corporation’s internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, ~~2009.~~2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we believe that, as of December 31, ~~2009,~~2012, the Corporation’s internal control over financial reporting is effective based on those criteria.

The Corporation’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting. This report appears on the following page of this Annual Report on Form 10-K.



/s/ ~~John C. Warren~~Joseph J. MarcAurele	/s/ David V. Devault

~~John C. Warren~~Joseph J. MarcAurele

Chairman, President and

Chief Executive Officer

David V. Devault

Senior Executive Vice President,

Secretary and Chief Financial Officer

~~and Secretary~~

~~-61-~~

~~Table of Contents~~-70-

Report of Independent Registered Public Accounting Firm

[Graphic Omitted]

The Board of Directors and Shareholders

Washington Trust Bancorp, Inc:

We have audited Washington Trust Bancorp, Inc. and Subsidiaries’ (the “Corporation’s”) internal control over financial reporting as of December 31, ~~2009,~~2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A ~~company's~~company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A ~~company's~~company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2009,~~2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Corporation as of December 31, ~~2009~~2012 and ~~2008,~~2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2009,~~2012, and our report dated March ~~1, 2010~~8, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Providence, Rhode Island

March ~~1, 2010~~8, 2013

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~~Table of Contents~~-71-

Report of Independent Registered Public Accounting Firm

[Graphic Omitted]

The Board of Directors and Shareholders

Washington Trust Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Washington Trust Bancorp, Inc. and Subsidiaries (the “Corporation”) as of December 31, ~~2009~~2012 and ~~2008,~~2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2009.~~2012. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiaries as of December 31, ~~2009~~2012 and ~~2008,~~2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2009,~~2012, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 4 to the consolidated financial statements, as of January 1, 2009, the Corporation changed its method of evaluating other-than-temporary impairments of debt securities to comply with new accounting requirements issued by the FASB.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, ~~2009,~~2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March ~~1, 2010~~8, 2013 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

/s/ KPMG LLP

Providence, Rhode Island

March ~~1, 2010~~8, 2013

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~~Table of Contents~~-72-



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands,
CONSOLIDATED BALANCE SHEETS	except par value)


December 31,	2009			2008			2012			2011
Assets:
Cash and noninterest-bearing balances due from banks	$	38,167		$	11,644
Interest-bearing balances due from banks		13,686			41,780
Federal funds sold and securities purchased under resale agreements		–			2,942
Other short-term investments		5,407			1,824
Mortgage loans held for sale		9,909			2,543
Securities available for sale, at fair value;
amortized cost $677,676 in 2009 and $869,433 in 2008		691,484			866,219
Cash and due from banks								$73,474			$82,238
Short-term investments							19,176			4,782
Mortgage loans held for sale; amortized cost $48,370 in 2012 and $19,624 in 2011							50,056			20,340
Securities:
Available for sale, at fair value; amortized cost $363,408 in 2012 and $524,036 in 2011							375,498			541,253
Held to maturity, at cost; fair value $41,420 in 2012 and $52,499 in 2011							40,381			52,139
Total securities							415,879			593,392
Federal Home Loan Bank stock, at cost		42,008			42,008		40,418			42,008
Loans:
Commercial and other		984,550			880,313
Commercial							1,252,419			1,124,628
Residential real estate		605,575			642,052		717,681			700,414
Consumer		329,543			316,789		323,903			322,117
Total loans		1,919,668			1,839,154		2,294,003			2,147,159
Less allowance for loan losses		27,400			23,725		30,873			29,802
Net loans		1,892,268			1,815,429		2,263,130			2,117,357
Premises and equipment, net		27,524			25,102		27,232			26,028
Accrued interest receivable		9,137			11,036
Investment in bank-owned life insurance		44,957			43,163		54,823			53,783
Goodwill		58,114			58,114		58,114			58,114
Identifiable intangible assets, net		8,943			10,152		6,173			6,901
Property acquired through foreclosure or repossession, net		1,974			392
Other assets		40,895			33,118		63,409			59,155
Total assets	$	2,884,473		$	2,965,466			$3,071,884			$3,064,098
Liabilities:
Deposits:
Demand deposits	$	194,046		$	172,771			$379,889			$339,809
NOW accounts		202,367			171,306		291,174			257,031
Money market accounts		403,333			305,879		496,402			406,777
Savings accounts		191,580			173,485		274,934			243,904
Time deposits		931,684			967,427		870,232			878,794
Total deposits		1,923,010			1,790,868		2,312,631			2,126,315
Dividends payable		3,369			3,351
Federal Home Loan Bank advances		607,328			829,626		361,172			540,450
Junior subordinated debentures		32,991			32,991		32,991			32,991
Other borrowings		21,501			26,743		1,212			19,758
Accrued expenses and other liabilities		41,328			46,776
Other liabilities							68,226			63,233
Total liabilities		2,629,527			2,730,355		2,776,232			2,782,747
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 16,061,748 shares in 2009 and 16,018,868 shares in 2008		1,004			1,001
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,379,771 shares in 2012 and 16,292,471 shares in 2011							1,024			1,018
Paid-in capital		82,592			82,095		91,453			88,030
Retained earnings		168,514			164,679		213,674			194,198
Accumulated other comprehensive income (loss)		3,337			(10,458	)
Treasury stock, at cost; 19,185 shares in 2009 and 84,191 shares in 2008		(501	)		(2,206	)
Accumulated other comprehensive loss							(10,499		)	(1,895		)
Total shareholders’ equity		254,946			235,111		295,652			281,351
Total liabilities and shareholders’ equity	$	2,884,473		$	2,965,466			$3,071,884			$3,064,098

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

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~~Table of Contents~~



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME	except ~~per share amounts)~~par value)


Years ended December 31,	Years ended December 31,	2009			2008			2007		Years ended December 31,	2012			2011			2010
Interest income:	Interest income:									Interest income:
Interest and fees on loans	Interest and fees on loans	$	96,796		$	100,939		$	98,720	Interest and fees on loans		$102,656			$99,319			$98,070
Interest on securities:	Taxable		29,423			34,382			31,163	Taxable	15,359			18,704			21,824
	Nontaxable		3,116			3,125			2,983	Nontaxable	2,699			3,001			3,077
Dividends on corporate stock and Federal Home Loan Bank stock	Dividends on corporate stock and Federal Home Loan Bank stock		245			1,882			2,737	Dividends on corporate stock and Federal Home Loan Bank stock	256			253			198
Other interest income	Other interest income		50			334			831	Other interest income	91			69			85
Total interest income	Total interest income		129,630			140,662			136,434	Total interest income	121,061			121,346			123,254
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits		32,638			41,195			52,422	Deposits	13,590			15,692			20,312
Federal Home Loan Bank advances	Federal Home Loan Bank advances		28,172			30,894			21,641	Federal Home Loan Bank advances	14,957			18,158			22,786
Junior subordinated debentures	Junior subordinated debentures		1,947			1,879			1,352	Junior subordinated debentures	1,570			1,568			1,989
Other interest expense	Other interest expense		981			1,181			1,075	Other interest expense	248			973			976
Total interest expense	Total interest expense		63,738			75,149			76,490	Total interest expense	30,365			36,391			46,063
Net interest income	Net interest income		65,892			65,513			59,944	Net interest income	90,696			84,955			77,191
Provision for loan losses	Provision for loan losses		8,500			4,800			1,900	Provision for loan losses	2,700			4,700			6,000
Net interest income after provision for loan losses	Net interest income after provision for loan losses		57,392			60,713			58,044	Net interest income after provision for loan losses	87,996			80,255			71,191
Noninterest income:	Noninterest income:									Noninterest income:
Wealth management services:	Wealth management services:									Wealth management services:
Trust and investment advisory fees	Trust and investment advisory fees		18,128			20,316			21,124	Trust and investment advisory fees	23,465			22,532			20,670
Mutual fund fees	Mutual fund fees		4,140			5,205			5,430	Mutual fund fees	4,069			4,287			4,423
Financial planning, commissions and other service fees	Financial planning, commissions and other service fees		1,518			2,752			2,462	Financial planning, commissions and other service fees	2,107			1,487			1,299
Wealth management services	Wealth management services		23,786			28,273			29,016	Wealth management services	29,641			28,306			26,392
Service charges on deposit accounts	Service charges on deposit accounts		4,860			4,781			4,713	Service charges on deposit accounts	3,193			3,455			3,587
Merchant processing fees	Merchant processing fees		7,844			6,900			6,710	Merchant processing fees	10,159			9,905			9,156
Card interchange fees										Card interchange fees	2,480			2,249			1,975
Income from bank-owned life insurance	Income from bank-owned life insurance		1,794			1,800			1,593	Income from bank-owned life insurance	2,448			1,939			1,887
Net gains on loan sales and commissions on loans originated for others	Net gains on loan sales and commissions on loans originated for others		4,352			1,396			1,493	Net gains on loan sales and commissions on loans originated for others	14,092			5,074			4,052
Net realized gains on securities	Net realized gains on securities		314			2,224			455	Net realized gains on securities	1,223			698			729
Net gains (losses) on interest rate swap contracts	Net gains (losses) on interest rate swap contracts		697			(542	)		27	Net gains (losses) on interest rate swap contracts	255			6			(36		)
Equity in earnings (losses) of unconsolidated subsidiaries										Equity in earnings (losses) of unconsolidated subsidiaries	196			(213		)	(337		)
Other income	Other income		1,708			1,625			1,502	Other income	1,748			1,536			1,485
Noninterest income, excluding other-than-temporary impairment losses	Noninterest income, excluding other-than-temporary impairment losses		45,355			46,457			45,509	Noninterest income, excluding other-than-temporary impairment losses	65,435			52,955			48,890
Total other-than-temporary impairment losses on securities	Total other-than-temporary impairment losses on securities		(6,650	)		(5,937	)		–	Total other-than-temporary impairment losses on securities	(28		)	(54		)	(245		)
Portion of loss recognized in other comprehensive income (before tax)	Portion of loss recognized in other comprehensive income (before tax)		3,513			–			–	Portion of loss recognized in other comprehensive income (before tax)	(193		)	(137		)	(172		)
Net impairment losses recognized in earnings	Net impairment losses recognized in earnings		(3,137	)		(5,937	)		–	Net impairment losses recognized in earnings	(221		)	(191		)	(417		)
Total noninterest income	Total noninterest income		42,218			40,520			45,509	Total noninterest income	65,214			52,764			48,473
Noninterest expense:	Noninterest expense:									Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits		41,917			41,037			39,986	Salaries and employee benefits	59,786			51,095			47,429
Net occupancy	Net occupancy		4,790			4,536			4,150	Net occupancy	6,039			5,295			4,851
Equipment	Equipment		3,917			3,838			3,473	Equipment	4,640			4,344			4,099
Merchant processing costs	Merchant processing costs		6,652			5,769			5,686	Merchant processing costs	8,593			8,560			7,822
Outsourced services										Outsourced services	3,560			3,530			3,304
FDIC deposit insurance costs	FDIC deposit insurance costs		4,397			1,044			213	FDIC deposit insurance costs	1,730			2,043			3,163
Outsourced services			2,734			2,859			2,180
Legal, audit and professional fees	Legal, audit and professional fees		2,443			2,325			1,761	Legal, audit and professional fees	2,240			1,927			1,813
Advertising and promotion	Advertising and promotion		1,687			1,729			2,024	Advertising and promotion	1,730			1,819			1,633
Amortization of intangibles	Amortization of intangibles		1,209			1,281			1,383	Amortization of intangibles	728			951			1,091
Foreclosed property costs										Foreclosed property costs	762			878			841
Debt prepayment penalties	Debt prepayment penalties		–			–			1,067	Debt prepayment penalties	3,908			694			752
Other expenses	Other expenses		7,422			7,324			6,983	Other expenses	8,622			9,237			8,513
Total noninterest expense	Total noninterest expense		77,168			71,742			68,906	Total noninterest expense	102,338			90,373			85,311
Income before income taxes	Income before income taxes		22,442			29,491			34,647	Income before income taxes	50,872			42,646			34,353
Income tax expense	Income tax expense		6,346			7,319			10,847	Income tax expense	15,798			12,922			10,302
Net income	Net income	$	16,096		$	22,172		$	23,800	Net income		$35,074			$29,724			$24,051
Weighted average shares outstanding - basic			15,994.9			13,981.9			13,355.5
Weighted average shares outstanding - diluted			16,040.9			14,146.3			13,604.1
Weighted average common shares outstanding - basic										Weighted average common shares outstanding - basic	16,358			16,254			16,114
Weighted average common shares outstanding - diluted										Weighted average common shares outstanding - diluted	16,401			16,284			16,123
Per share information:	Basic earnings per share	$	1.01		$	1.59		$	1.78	Basic earnings per common share		$2.13			$1.82			$1.49
	Diluted earnings per share	$	1.00		$	1.57		$	1.75	Diluted earnings per common share		$2.13			$1.82			$1.49
	Cash dividends declared per share	$	0.84		$	0.83		$	0.80	Cash dividends declared per share		$0.94			$0.88			$0.84

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

~~-65-~~




Years ended December 31,	2012			2011			2010
Net income		$35,074			$29,724			$24,051
Other comprehensive income, net of tax:
Securities available for sale:
Unrealized (losses) gains on securities arising during the period	(2,664		)	1,622			1,099
Less: reclassification adjustment for net gains on securities realized in net income	768			415			311
Net unrealized (losses) gains on securities available for sale	(3,432		)	1,207			788
Reclassification adjustment for change in non-credit portion of OTTI realized losses transferred to net income	124			88			111
Cash flow hedges:
Unrealized losses on cash flow hedges arising during the period	(333		)	(942		)	(915		)
Less: reclassification adjustment for amount of gains on cash flow hedges realized in net income	454			486			252
Net unrealized gains (losses) on cash flow hedges	121			(456		)	(663		)
Defined benefit plan obligation adjustment	(5,417		)	(6,759		)	452
Total other comprehensive (loss) income, net of tax	(8,604		)	(5,920		)	688
Total comprehensive income		$26,470			$23,804			$24,739

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

~~Table of Contents~~-75-



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES		(Dollars and shares in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Accumulated
Common Other
Shares Common Paid-in Retained Comprehensive Treasury
(Dollars and shares in thousands) Outstanding Stock Capital Earnings Income (Loss) Stock Total
Balance at January 1, 2007 13,430 $ 843 $ 35,893 $ 141,548 $ (3,515 ) $ (1,713 ) $ 173,056
Net income for 2007 23,800 23,800
Unrealized gains on securities, net
of $427 income tax expense 793 793
Reclassification adjustments for net
realized gains included in net income,
net of $190 income tax expense (265 ) (265 )
Defined benefit plan obligation adjustment,
net of $1,330 income tax expense 2,469 2,469
Reclassification adjustments for net periodic
pension cost, net of $149 income tax expense 279 279
Comprehensive income 27,076
Cash dividends declared (10,701 ) (10,701 )
Share-based compensation 508 508
Deferred compensation plan (14 ) (4 ) (354 ) (358 )
Exercise of stock options, issuance of other
other compensation-related equity instruments
and related tax benefit 123 (1,523 ) 3,302 1,779
Shares repurchased (185 ) (4,847 ) (4,847 )
Balance at December 31, 2007 13,354 $ 843 $ 34,874 $ 154,647 $ (239 ) $ (3,612 ) $ 186,513
Net income for 2008 22,172 22,172
Unrealized losses on securities, net
of $2,899 income tax benefit (5,222 ) (5,222 )
Reclassification adjustments for net
realized losses included in net income,
net of $1,335 income tax benefit 2,377 2,377
Defined benefit plan obligation adjustment,
net of $4,230 income tax benefit (7,615 ) (7,615 )
Reclassification adjustments for net periodic
pension cost, net of $91 income tax expense 169 169
Unrealized gains on cash flow hedges, net
of $2 income tax expense 4 4
Reclassification adjustments for net realized
gains on cash flow hedges included in net
income, net of $14 income tax expense 26 26
Comprehensive income 10,261
Adjustment to initially apply SFAS No. 158,
net of $229 income tax benefit (468 ) 42 (426 )
Cash dividends declared (11,672 ) (11,672 )
Share-based compensation 630 630
Deferred compensation plan 2 (7 ) 43 36
Exercise of stock options, issuance of other
other compensation-related equity instruments
and related tax benefit 41 (687 ) 1,068 381
Shares issued 2,500 156 46,718 46,874
Shares issued – dividend reinvestment plan 38 2 567 295 864
Balance at December 31, 2008 15,935 $ 1,001 $ 82,095 $ 164,679 $ (10,458 ) $ (2,206 ) $ 235,111

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

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~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~	~~(Dollars and shares in thousands)~~
~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)~~

Accumulated
Common Other
Shares Common Paid-in Retained Comprehensive Treasury
(Dollars and shares in thousands) Outstanding Stock Capital Earnings Income (Loss) Stock Total
Balance at January 1, 2009 15,935 $ 1,001 $ 82,095 $ 164,679 $ (10,458 ) $ (2,206 ) $ 235,111
Cumulative effect adjustment of change in
accounting principle, net of $663 income
tax benefit 1,196 (1,196 ) –
Net income for 2009 16,096 16,096
Unrealized gains on securities, net
of $5,724 income tax expense 10,334 10,334
Noncredit-related losses on securities
not expected to be sold, net of $1,252
income tax benefit (2,261 ) (2,261 )
Reclassification adjustments for net
realized losses included in net income,
net of $2,258 income tax benefit 4,077 4,077
Defined benefit plan obligation adjustment,
net of $1,489 income tax expense 2,669 2,669
Reclassification adjustments for net periodic
pension cost, net of $116 income tax expense 209 209
Unrealized losses on cash flow hedges, net
of $7 income tax expense 13 13
Reclassification adjustments for net realized
gains on cash flow hedges included in net
income, net of $28 income tax benefit (50 ) (50 )
Comprehensive income 31,087
Cash dividends declared (13,457 ) (13,457 )
Share-based compensation 708 708
Deferred compensation plan 3 (40 ) 93 53
Exercise of stock options, issuance of other
other compensation-related equity instruments
and related tax benefit 44 1 (504 ) 841 338
Shares issued – dividend reinvestment plan 61 2 333 771 1,106
Balance at December 31, 2009 16,043 $ 1,004 $ 82,592 $ 168,514 $ 3,337 $ (501 ) $ 254,946



	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at January 1, 2010	16,043		$1,004		$82,592			$168,514			$3,337			($501	)		$254,946
Net income							24,051									24,051
Total other comprehensive income, net of tax										688						688
Cash dividends declared							(13,626		)							(13,626		)
Share-based compensation				909												909
Deferred compensation plan	3			(20		)							64			44
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	69	5		841									4			850
Shares issued – dividend reinvestment plan	57	2		567									433			1,002
Balance at December 31, 2010	16,172		$1,011		$84,889			$178,939			$4,025			$—			$268,864

Net income							29,724									29,724
Total other comprehensive loss, net of tax										(5,920		)				(5,920		)
Cash dividends declared							(14,465		)							(14,465		)
Share-based compensation				1,394												1,394
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	87	5		995									—			1,000
Shares issued – dividend reinvestment plan	33	2		752									—			754
Balance at December 31, 2011	16,292		$1,018		$88,030			$194,198			($1,895	)		$—			$281,351

Net income							35,074									35,074
Total other comprehensive loss, net of tax										(8,604		)				(8,604		)
Cash dividends declared							(15,598		)							(15,598		)
Share-based compensation				1,962												1,962
Deferred compensation plan	10	1		145									—			146
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	78	5		1,316									—			1,321
Balance at December 31, 2012	16,380		$1,024		$91,453			$213,674			($10,499	)		$—			$295,652

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

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~~Table of Contents~~



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended December 31,	Years ended December 31,	2009			2008			2007			Years ended December 31,	2012			2011			2010
Cash flows from operating activities:	Cash flows from operating activities:										Cash flows from operating activities:
Net income	Net income	$	16,096		$	22,172		$	23,800		Net income		$35,074			$29,724			$24,051
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:										Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	Provision for loan losses		8,500			4,800			1,900		Provision for loan losses	2,700			4,700			6,000
Depreciation of premises and equipment	Depreciation of premises and equipment		3,113			3,043			2,951		Depreciation of premises and equipment	3,213			3,174			3,083
Foreclosed and repossessed property valuation adjustments											Foreclosed and repossessed property valuation adjustments	350			642			618
Net gain on sale of premises											Net gain on sale of premises	(358		)	(211		)	—
Net amortization of premium and discount	Net amortization of premium and discount		335			691			631		Net amortization of premium and discount	2,127			1,768			797
Net amortization of intangibles	Net amortization of intangibles		1,209			1,281			1,383		Net amortization of intangibles	728			951			1,091
Non–cash charitable contribution	Non–cash charitable contribution		–			397			520		Non–cash charitable contribution	—			990			—
Share–based compensation	Share–based compensation		708			630			508		Share–based compensation	1,962			1,394			909
Deferred income tax benefit			(1,500	)		(5,308	)		(2,311	)
Deferred income tax expense (benefit)											Deferred income tax expense (benefit)	1,328			(863		)	(688		)
Earnings from bank-owned life insurance	Earnings from bank-owned life insurance		(1,794	)		(1,800	)		(1,593	)	Earnings from bank-owned life insurance	(2,448		)	(1,939		)	(1,887		)
Net gains on loan sales and commissions on loans originated for others	Net gains on loan sales and commissions on loans originated for others		(4,352	)		(1,396	)		(1,493	)	Net gains on loan sales and commissions on loans originated for others	(14,092		)	(5,074		)	(4,052		)
Net realized gains on securities	Net realized gains on securities		(314	)		(2,224	)		(455	)	Net realized gains on securities	(1,223		)	(698		)	(729		)
Net impairment losses recognized in earnings	Net impairment losses recognized in earnings		3,137			5,937			-		Net impairment losses recognized in earnings	221			191			417
Net (gains) losses on interest rate swap contracts	Net (gains) losses on interest rate swap contracts		(697	)		542			(27	)	Net (gains) losses on interest rate swap contracts	(255		)	(6		)	36
Equity in (earnings) losses of unconsolidated subsidiaries											Equity in (earnings) losses of unconsolidated subsidiaries	(196		)	213			337
Proceeds from sales of loans	Proceeds from sales of loans		250,467			56,905			59,013		Proceeds from sales of loans	479,925			208,275			201,450
Loans originated for sale	Loans originated for sale		(253,442	)		(56,588	)		(57,926	)	Loans originated for sale	(495,271		)	(206,242		)	(201,771		)
Decrease in accrued interest receivable, excluding purchased interest			1,918			649			43
(Increase) decrease in other assets	(Increase) decrease in other assets		(13,736	)		(4,477	)		1,472		(Increase) decrease in other assets	(7,987		)	(2,804		)	646
(Decrease) increase in accrued expenses and other liabilities			(3,045	)		3,797			1,502
Other, net			–			20			55
(Decrease) increase in other liabilities											(Decrease) increase in other liabilities	(331		)	3,014			131
Net cash provided by operating activities	Net cash provided by operating activities		6,603			29,071			29,973		Net cash provided by operating activities	5,467			37,199			30,439
Cash flows from investing activities:	Cash flows from investing activities:										Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale		–			(296,187	)		(258,737	)	Mortgage-backed securities available for sale	—			(115,208		)	(122,240		)
	Other investment securities available for sale		(304	)		(13,996	)		(39,290	)	Other investment securities available for sale	—			(5,000		)	(40,886		)
	Mortgage-backed securities held to maturity		–			–			–		Mortgage-backed securities held to maturity	—			(53,720		)	—
	Other investment securities held to maturity		–			–			(12,882	)
Proceeds from sales of:	Mortgage-backed securities available for sale		–			14,000			47,938		Mortgage-backed securities available for sale	40,222			46,889			64,275
	Other investment securities available for sale		1,604			67,321			43,015
	Mortgage-backed securities held to maturity		–			–			38,501
	Other investment securities held to maturity		–			–			21,698		Other investment securities available for sale	6,338			9,572			34,822
Maturities and principal payments of:	Mortgage-backed securities available for sale		171,330			89,500			65,443		Mortgage-backed securities available for sale	111,906			115,500			150,062
	Other investment securities available for sale		17,475			15,680			22,967		Other investment securities available for sale	1,411			855			12,000
	Mortgage-backed securities held to maturity		–			–			3,191		Mortgage-backed securities held to maturity	11,177			1,489			—
	Other investment securities held to maturity		–			–			20,490
Purchase of Federal Home Loan Bank stock			–			(10,283	)		(2,998	)
Remittance of Federal Home Loan Bank stock											Remittance of Federal Home Loan Bank stock	1,590			—			—
Net increase in loans	Net increase in loans		(79,661	)		(229,703	)		(23,054	)	Net increase in loans	(138,084		)	(148,652		)	(77,382		)
Proceeds from sale of loans			–			18,047			–
Purchases of loans, including purchased interest	Purchases of loans, including purchased interest		(5,421	)		(54,931	)		(90,988	)	Purchases of loans, including purchased interest	(10,469		)	(9,677		)	(2,842		)
Proceeds from the sale of property acquired through foreclosure or repossession	Proceeds from the sale of property acquired through foreclosure or repossession		607			–			–		Proceeds from the sale of property acquired through foreclosure or repossession	3,366			2,190			821
Proceeds from sale of premises and equipment, net of selling costs			–			1,433			–
Purchases of premises and equipment	Purchases of premises and equipment		(5,535	)		(4,183	)		(4,122	)	Purchases of premises and equipment	(5,110		)	(3,644		)	(1,683		)
Net proceeds from sale of bank property											Net proceeds from sale of bank property	1,571			1,279			—
Purchases of bank-owned life insurance											Purchases of bank-owned life insurance	—			—			(5,000		)
Proceeds from bank-owned life insurance											Proceeds from bank-owned life insurance	1,419			—			—
Equity investment in real estate limited partnership	Equity investment in real estate limited partnership		(295	)		–			–		Equity investment in real estate limited partnership	—			(449		)	(1,798		)
Equity investment in capital trusts			–			(310	)		–
Payment of deferred acquisition obligation			(2,509	)		(15,159	)		(6,720	)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities		97,291			(418,771	)		(175,548	)	Net cash provided by (used in) investing activities	25,337			(158,576		)	10,149

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(Continued)~~


Years ended December 31,	2009			2008			2007			Years ended December 31,	2012			2011			2010
Cash flows from financing activities:										Cash flows from financing activities:
Net increase (decrease) in deposits		132,142			144,663			(31,792	)
Net increase in deposits										Net increase in deposits	186,316			89,985			113,320
Net (decrease) increase in other borrowings		(2,733	)		1,707			18,675		Net (decrease) increase in other borrowings	(18,546		)	(3,601		)	1,858
Proceeds from Federal Home Loan Bank advances		276,670			1,112,856			803,513		Proceeds from Federal Home Loan Bank advances	627,179			514,475			204,540
Repayment of Federal Home Loan Bank advances		(498,960	)		(899,621	)		(661,617	)	Repayment of Federal Home Loan Bank advances	(806,457		)	(472,747		)	(313,144		)
Issuance (purchase) of treasury stock, including net deferred compensation plan activity		53			36			(5,200	)
Issuance of treasury stock, including net deferred compensation plan activity										Issuance of treasury stock, including net deferred compensation plan activity	—			—			44
Proceeds from the issuance of common stock under dividend reinvestment plan		1,106			864			–		Proceeds from the issuance of common stock under dividend reinvestment plan	—			754			1,002
Proceeds from the issuance of common stock		–			46,874			–
Net proceeds from the exercise of stock options and issuance of other
compensation-related equity instruments		364			182			1,052
Tax (expense) benefit from stock option exercises and issuance of other
compensation-related equity instruments		(26	)		199			727
Proceeds from the issuance of junior subordinated debentures, net of debt issuance costs		–			10,016			–
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments										Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments	1,257			885			785
Tax benefit (expense) from stock option exercises and issuance of other compensation-related equity instruments										Tax benefit (expense) from stock option exercises and issuance of other compensation-related equity instruments	210			115			65
Cash dividends paid		(13,440	)		(10,998	)		(10,580	)	Cash dividends paid	(15,133		)	(14,205		)	(13,582		)
Net cash (used in) provided by financing activities		(104,824	)		406,778			114,778		Net cash (used in) provided by financing activities	(25,174		)	115,661			(5,112		)
Net (decrease) increase in cash and cash equivalents		(930	)		17,078			(30,797	)
Net increase (decrease) in cash and cash equivalents										Net increase (decrease) in cash and cash equivalents	5,630			(5,716		)	35,476
Cash and cash equivalents at beginning of year		58,190			41,112			71,909		Cash and cash equivalents at beginning of year	87,020			92,736			57,260
Cash and cash equivalents at end of year	$	57,260		$	58,190		$	41,112		Cash and cash equivalents at end of year		$92,650			$87,020			$92,736

Noncash Investing and Financing Activities:										Noncash Investing and Financing Activities:
Loans charged off	$	5,162		$	1,593		$	778		Loans charged off		$2,355			$3,834			$5,402
Net transfers from loans to property acquired through foreclosure or repossession		2,210			392			–
Deferred acquisition obligation incurred		–			7,635			5,921
Cumulative effect of change in accounting principle (see Note 4)		1,859			–			–
Held to maturity securities transferred to available for sale		–			–			162,997

Loans transferred to property acquired through foreclosure or repossession										Loans transferred to property acquired through foreclosure or repossession	3,167			2,031			3,255
OREO proceeds due from attorney										OREO proceeds due from attorney	132			—			—
Supplemental Disclosures:										Supplemental Disclosures:
Interest payments		61,561			75,661			76,264		Interest payments		$29,657			$35,594			$44,244
Income tax payments		9,776			13,587			11,440		Income tax payments	14,777			13,390			10,663

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012 and 2011

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~December 31, 2009 and 2008~~

General

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 (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 ~~southeastern~~ Connecticut.

(1) Summary of Significant Accounting Policies

Basis of Presentation

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. Certain prior year amounts have been reclassified to conform to the current year classification.

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 and the review of goodwill, other intangible assets and investments for impairment. The current economic environment has increased the degree of uncertainty inherent in such estimates and assumptions.

Short-term Investments

Short-term investments consist of highly liquid investments with a maturity date of three months or less when purchased and are considered to be cash equivalents. The Corporation’s short-term investments may be comprised of overnight federal funds sold, securities purchased under resale agreements, ~~and~~ money market mutual ~~funds.~~funds and US Treasury bills.

Securities

Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Management determines the appropriate classification of securities at the time of purchase.

Investments not classified as held to maturity are classified as available for sale. Securities available for sale consist of debt and equity securities that are available for sale to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at fair value. Changes in fair value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity. Washington Trust does not have a trading portfolio.

Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the level yield method. The amortization and accretion is included in interest income on securities. Dividend and interest income are recognized when earned. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method.

The fair values of securities are based on either quoted market prices, third party pricing services or third party valuation specialists. When the fair value of an investment security is less than its amortized cost basis, the Corporation assesses whether the decline in value is other-than-temporary. The Corporation considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in the value subsequent to the reporting date, forecasted performance of the issuer, changes in the dividend or interest payment practices of the issuer, changes in the credit rating of the issuer or the specific security, and the general market condition in the geographic area or industry the issuer operates in.

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

In April 2009, the FASB issued FASB Staff Position Nos. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP Nos. FAS 115-2 and FAS 124-2”). FSP Nos. FAS 115-2 and FAS 124-2 is now a sub-topic within ASC 320, “Investments – Debt and Equity Securities.” FSP Nos. FAS 115-2 and FAS 124-2 amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. Whendetermining whether an other-than-temporary impairment has occurred for debt securities, the ~~amount~~Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost of the security. If the

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

present value of expected cash flows is less than the amortized cost of the security, then the entire amortized cost of the security will not be recovered; that is, a credit loss exists, and an other-than-temporary impairment ~~recognized~~shall be considered to have occurred. The credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings ~~depends on whether~~while the ~~Corporation intends to sell~~remaining portion of the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Corporation intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period creditimpairment loss ~~the other-than-temporary impairment~~ is recognized, net of tax, in ~~earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If~~other comprehensive income provided that the Corporation does not intend to sell the underlying debt security and it is more-likely-than not ~~more likely~~that the Corporation would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Corporation intended to sell any securities with an unrealized loss or it is more-likely than not that the Corporation ~~will~~would be required to sell the ~~security~~investment securities, before recovery of ~~its~~their amortized cost basis, ~~less any current-period credit~~then the entire unrealized loss the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognizedwould be recorded in earnings. ~~The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable income taxes.~~

The Corporation elected to early adopt the provisions of FSP Nos. FAS 115-2 and FAS 124-2. These provisions applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted. As a result, the Corporation’s Consolidated Statement of Income reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis. For available for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely-than-not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value loss is recognized in accumulated other comprehensive income, net of applicable income taxes. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using the Corporation’s cash flow projections using its base assumptions.

See Note 4 for further discussion on the Corporation’s investment securities portfolio.

Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 the suspension of its quarterly dividends. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLBB stock as of December 31, ~~2009.~~2012. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Corporation will continue to monitor its investment in FHLBB stock.

Mortgage Banking Activities

Mortgage Loans Held for Sale - Residential mortgage loans originated and intended for sale in the secondary market are classified as held for sale. ~~These~~Prior to July 1, 2011, loans ~~are specifically identified and are~~held for sale were carried at the lower of ~~aggregate~~ cost ~~net of unamortized deferred loan~~

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

~~origination fees and costs,~~ or fair value (“LOCOM”). Effective July, 2011, pursuant to Accounting Standards Codification (”ASC”) 825, “Financial Instruments,” the Corporation elected to carry newly originated closed loans held for sale at fair value. Changes in fair value relating to loans held for sale and forward sale commitments are recorded in earnings and are offset by changes in fair value relating to interest rate lock commitments. Gains orand losses on residential loan sales ofare recorded in noninterest income as net gains on loan sales and commissions on loans originated for others. Commissions received on mortgage loans brokered to various investors are included in ~~noninterest income~~net gains on loan sales and commissions on loans originated for others are and are ~~recognized at the time of sale~~recorded as revenue when received..

Loan Servicing Rights - Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated loans that are sold with servicing rights retained is allocated between the loan servicing rights and the loans without servicing rights based on their relative fair values. Capitalized loan servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance.

Loans

Portfolio Loans - Loans held in the portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans.

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Nonaccrual Loans - Loans, with the exception of certain well-secured residential mortgage 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. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Well-secured residential mortgage 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.~~income when the loan is placed on nonaccrual status. Subsequent ~~cash receipts~~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 a period of time, 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.

Troubled Debt Restructured Loans - ~~Restructured~~Troubled debt restructured loans include those for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower’s financial condition. ~~Restructured~~Troubled debt 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 troubled debt restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured ~~terms.~~terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Troubled debt restructurings are generally 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.

Impaired Loans - Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance ~~homogenous~~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 ~~if the loan~~less costs to sell. Impairment is ~~collateral dependent. Impairment is~~also measured based on the fair value of the collateral less costs to sell if it is determined that foreclosure is probable. Interest income on nonaccrual impaired loans is recognized as described above under the caption “Nonaccrual Loans.” Impaired accruing loans consist of those troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt.

Allowance for Loan Losses

The allowance for loan losses is management’s best estimate of the 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 (or portions thereof) deemed to be

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

uncollectible. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

A methodology is used to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: (1) identification of loss allocations for certain specific loans deemed to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar ~~economic~~credit quality indicators, and (3) general loss allocations for other environmental factors, which is classified as “unallocated”.

The level of the allowance is based on management’s ongoing review of the growth and composition of the loan portfolio, historical loss experience, current economic conditions, analysis of current levels and asset quality and delinquency trends, the performance of individual loans in relation to contract terms and other pertinent factors.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

The adequacy of the allowance for loan losses is regularly evaluated by management. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in assumptions and economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance is an estimate, and ultimate losses may vary from management’s estimate. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. The estimated useful lives of premises and improvements range from three to forty years. For furniture, fixtures and equipment, the estimated useful lives range from two to twenty years.

Goodwill and Other Identifiable Intangible Assets

The Corporation allocates the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Other intangible assets identified in acquisitions generally consist of wealth management advisory contracts, core deposit intangibles, and non-compete agreements. The value attributed to advisory contracts is based on the time period over which they are expected to generate economic benefits. Core deposit intangibles are valued based on the expected longevity of the core deposit accounts and the expected cost savings associated with the use of the existing core deposit base rather than alternative funding sources. ��Non-compete agreements are valued based on the expected receipt of future economic benefits protected by clauses in the non-compete agreements that restrict competitive behavior.

The Corporation tests other intangible assets with definite lives for impairment at least annually or more frequently whenever events or circumstances occur that indicate that their carrying amount may not be fully recoverable. The carrying value of the intangible assets is compared to the sum of undiscounted cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value.

The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is reported as goodwill. Goodwill is not amortized but is tested for impairment at the segment level at least annually or more frequently whenever events or circumstances occur that indicate that it is more likely than not that an impairment loss has occurred. The impairment test includes a review of discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”) for both the commercial banking and the wealth management segments of the Corporation. The income approach measures the value of an

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

interest in a business by discounting expected future cash flows to a present value. The market approach takes into consideration values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The results of the income approach and the market approach are weighted equally. If the fair value is determined to be less than the carrying value, an additional analysis is performed to determine if carrying amount of the goodwill exceeds its estimated fair value. The excess goodwill is recognized as an impairment loss.

Impairment of Long-Lived Assets Other than Goodwill

Long-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

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Property Acquired through Foreclosure or Repossession

Property acquired through foreclosure or repossession is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to this status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure or repossession is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs.

Loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings.

Bank-Owned Life Insurance (“BOLI”)

The investment in BOLI represents the cash surrender value of life insurance policies on the lives of certain Bank employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in ~~other~~ noninterest income, and are not subject to income taxes. The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.

Investment in Real Estate Limited Partnership

~~As of December 31, 2009~~ Washington Trust has a 99.9% ownership interest in atwo real estate limited ~~partnership to~~partnerships that renovate, own and operate atwo low-income housing ~~complex.~~complexes. Washington Trust neither actively participates nor has a controlling interest in ~~this~~these limited ~~partnership~~partnerships and accounts for its investments under the equity method of accounting. The carrying value of ~~this investment~~the investments is recorded in other assets on the Consolidated Balance Sheet. ~~Losses~~Net losses generated by the partnership are recorded as a reduction to Washington ~~Trust’s'~~Trust’s investment and as a reduction of noninterest income in the Consolidated Statements of Income. Tax credits generated by the partnership are recorded as a reduction in the income tax provision in the year they are allowed for tax reporting purposes.

The results of operations of the real estate limited ~~partnership~~partnerships are periodically reviewed to determine if the partnership generates sufficient operating cash flow to fund its current obligations. In addition, the current value of the underlying ~~property~~properties is compared to the outstanding debt obligations. If it is determined that the investment is permanently impaired, the carrying value will be written down to the estimated realizable value. ~~The maximum exposure on these investments is the current carrying amount plus amounts obligated to be funded in the future.~~

Transfers and Servicing of Assets and Extinguishments of Liabilities

The accounting for transfers and servicing of financial assets and extinguishments of liabilities is based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with a pledge of collateral.

Fee Revenue

Trust and investment advisory fees and mutual fund fees are primarily accrued as earned based upon a percentage of asset values under administration. Financial planning commissions and other wealth management service fee revenue is recognized to the extent that services have been completed. Fee revenue from deposit service charges is generally recognized when earned. Fee revenue for merchant processing services is generally accrued as earned.

Pension Costs

Pension benefits are accounted for using the net periodic benefit cost method, which recognizes the compensation cost of an employee’s pension benefit over that employee’s approximate service period. Pension benefit cost calculations incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. Washington Trust reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to so do. The effect of

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

modifications to those assumptions is recorded in other comprehensive income and amortized to net periodic cost over future periods. Washington Trust believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

The funded status of defined benefit pension plans, measured as the difference between the fair value of plan assets and the projected benefit obligation, is recognized in the Consolidated Balance Sheet. The changes in the funded status of the defined benefit plans, including actuarial gains and losses and prior service costs and credits, are recognized in comprehensive income in the year in which the changes occur.

Effective January 1, 2008, Washington Trust adopted the measurement date provisions of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). These provisions required the Corporation to change its measurement date for plan assets and benefit obligations to December 31. Prior to 2008, Washington Trust measured its plan assets and benefit obligations as of September 30 of each year. As a result of the adoption of the measurement date provisions of SFAS No. 158, the Corporation recognized the following adjustments in individual line items of its Consolidated Balance Sheet as of January 1, 2008:

(Dollars in thousands) Prior to Adoption of Measurement Date Provisions of SFAS No. 158 Effect of Adopting Measurement Date Provisions of SFAS No. 158 As of January 1, 2008
Net deferred tax asset $ 7,705 $ 229 $ 7,934
Defined benefit pension liabilities 11,801 655 12,456
Retained earnings 154,647 (468 ) 154,179
Accumulated other comprehensive loss (239 ) 42 (197 )

~~The adoption of the measurement date provisions of SFAS No. 158 had no effect on the Corporation’s Consolidated Statements of Income or Cash Flows for the periods presented.~~

Stock-Based Compensation

Stock-based compensation plans provide for awards of share options and other equity incentives including nonvested share units and share awards and nonvested performance shares.

Compensation expense for share options and nonvested share units and share awards is recognized ~~as an expense in~~over the ~~financial statements and for equity-classified awards such cost is measured~~service period based on the fair value at the ~~grant~~ date ~~fair value~~ of ~~the award.~~grant. The Corporation estimates grant date fair value for share options using the Black-Scholes option-pricing model. Nonvested performance share compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change.

Excess tax benefits (expenses) related to stock option exercises and issuance of other compensation-related equity instruments are reflected on the Consolidated Statements of Cash Flows as financing ~~cash inflows.~~activity.

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

Income Taxes

Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Corporation recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Corporation records interest related to unrecognized tax benefits in income tax expense. ~~To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.~~ Penalties, if incurred, would be recognized as a component of income tax expense.

Earnings Per Share (“EPS”)

~~Diluted EPS~~The Corporation utilizes the two-class method earnings allocation formula to determine earnings per share of each class of stock according to dividends and participation rights in undistributed earnings. Under the two-class method, basic earnings per common share is computed by dividing net ~~income~~earnings allocated to common stock by the ~~average~~weighted-average number of common shares ~~and~~outstanding. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents from the denominator.

ASC 260, “Earnings Per Share,” incorporates former FASB Staff Position No. Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” which required unvested share-based payments that contain nonforfeitable rights and dividends or dividend equivalents to be treated as participating securities and be included in the calculation of Earnings Per Share (“EPS”) pursuant to the two-class method. The January 1, 2009 adoption of these provisions of ASC 260 did not have a material impact on the Corporation’s financial position or results of operations.equivalents.

Comprehensive Income

Comprehensive income is defined as all changes in equity, except for those resulting from ~~investments by and distribution to~~transactions with shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income.

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments. Generally, federal funds are sold on an overnight basis.

Guarantees

Standby letters of credit are considered a guarantee of the Corporation. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing

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letters of credit is essentially the same as that involved in extending loan facilities to customers. Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. The fair value of standby letters of credit is considered immaterial to the Corporation’s Consolidated Financial Statements.

Derivative Instruments and Hedging Activities

~~All derivatives~~Derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Derivatives used to hedge the exposure to changes in fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected cash flows, or other types of forecasted transactions, are considered cash flow hedges.

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

For derivatives designated as fair value hedges, changes in the fair value of the derivative are recognized in earnings together with the changes in the fair value of the related hedged ~~item.~~item (generally fixed-rate financial instruments). The net amount, if any, ~~representing~~represents hedge ineffectiveness, is reflected in earnings.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings.

For derivatives not designated as hedges, changes in fair value of the derivative instruments are recognized in earnings, in noninterest income.

From time to time, interest rate swap contracts are used as part of interest rate risk management strategy. Interest rate swap agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities.

We also utilize interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a mirror swap contract with a third party. The third party exchanges the client’s fixed rate loan payments for floating rate loan payments.

The accrued net settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Changes in fair value of derivatives including accrued net settlements that do not qualify for hedge accounting are reported in noninterest income.

When hedge accounting is discontinued, the future changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions will affect earnings.

By using certain derivative financial instruments, the Corporation exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Corporation, which creates credit risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is minimized by entering into transactions with highly rated counterparties that management believes to be creditworthy.

Effective January 1, 2009, Washington Trust adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is now a sub-topic within ASC 815, “Derivatives and Hedging.” These provisions amended the disclosure requirements for derivative instruments and hedging activities. The amended disclosures require entities to provide information to enable users of financial statements to understand how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under ASC Topic 815 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The adoption of these provisions did not have a material impact on the Corporation’s consolidated financial statement. The Corporation complied with this guidance and has provided the required disclosures in Note 13.

Fair Value Measurements

On January 1, 2008, the Corporation adopted the provisions SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), included in ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, ~~also~~“Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value and expands disclosures

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

about fair value measurements. On January 1, 2009, the Corporation adopted the provisions of ASC Topic 820 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption of these provisions of ASC Topic 820 did not have a material impact on the Corporation’s financial position or results of operations. The required disclosures about fair value measurements have been included in Note 14.

~~On April 9, 2009 the FASB issued FASB Staff Position No. FAS 157-4 “Determining Fair Value When the Volume~~

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. FAS 157-4”). FSP No. FAS 157-4 is now a sub-topic within ASC 820. The Corporation elected to early adopt these provisions of ASC 820 effective January 1, 2009 and complied with this guidance in determining the fair value of its securities during 2009.2011

(2) Recently Issued Accounting Pronouncements

~~In June 2009, the FASB issued SFAS No. 168, “The FASB~~ Fair Value Measurement – Topic 820

Accounting Standards ~~Codification~~TMUpdate No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and ~~the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”~~Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“~~SFAS No. 168”~~ASU 2011-04”)~~. The FASB Accounting Standards Codification~~TM (“Codification” or “ASC”) was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities and replaced all then-existing non-SEC accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative.

~~ASC 855, “Subsequent Events,” (formerly SFAS No. 165, “Subsequent Events”)~~, was issued in May ~~2009~~2011. The amendments in ASU 2011-04 added language to clarify many of the requirements in GAAP for measuring fair value and ~~was~~for disclosing information about fair value measurements, as well as prescribed additional disclosures for Level 3 fair value measurements and financial instruments not carried at fair value. For many of the requirements, the Financial Accounting Standards Board (“FASB”) did not intend for ASU 2011-04 to result in a change in the application of the requirements in GAAP. The amendments required by ASU 2011-04 were to be applied prospectively and were effective for fiscal years and interim ~~and annual financial~~ periods ~~ending~~within those years, beginning after ~~June~~December 15, 2009. ASC 855 established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, ASC 855 set forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure2011. The Corporation adopted ASU 2011-04 in the ~~financial statements, (2)~~first quarter of 2012, provided the ~~circumstances under which an entity should recognize events or transactions occurring after~~additional disclosures required and made the ~~balance sheet date in its financial statements and (3)~~election to use the ~~disclosures that an entity should make about events or transactions that occurred after the balance sheet date.~~exception permitted with respect to measuring counterparty credit risk on our interest rate derivative contracts. The adoption of ~~ASC 855~~ASU 2011-04 did not have a material impact on the Corporation’s consolidated financial position, or results of ~~operations.~~

operations or cash flows.

Comprehensive Income – Topic 220

~~ASC 860, “Transfers and Servicing,” incorporates former SFAS~~Accounting Standards Update No. ~~166, “Accounting for Transfers~~2011-05, “Presentation of ~~Financial Assets – an amendment of FASB Statement No. 140” which~~Comprehensive Income” (“ASU 2011-05”), was issued in June ~~2009~~2011. The FASB issued ASU 2011-05 to improve the comparability and ~~will~~transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), was issued in December 2011. ASU 2011-12 deferred the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. No other requirements in ASU 2011-05 were affected by this amendment. The provisions of ASU 2011-05, exclusive of the provisions pertaining to the reclassification adjustments deferred by ASU 2011-12, were to be applied retrospectively and were effective for fiscal years and interim ~~and annual~~ periods within those years, beginning after ~~January 1, 2010. These pending~~December 15, 2011. The Corporation adopted these provisions of ~~ASC 860 will require more information about transfers~~ASU 2011-05 in the first quarter of 2012 and elected to present comprehensive income in a separate financial ~~assets, including securitization transactions, and where entities have continuing exposure to~~statement, the ~~risks related to the transferred financial assets.~~Consolidated Statements of Comprehensive Income. The concept of a “qualifying special-purpose entity” is eliminated under these pending provisions of ASC 860, which also changes the requirements for derecognizing financial assets and requires additional disclosures. The Corporation expects that the adoption of these provisions of ~~ASC 260 will~~ASU 2011-05 did not have a material impact on ~~its~~the Corporation’s consolidated financial ~~statements.~~

position, results of operations or cash flows.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

Assumptions

The measurement date and weighted-average assumptions used to determine benefit obligations at December 31, 2012 and 2011 were as follows:

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~



	Qualified Pension Plan		Non-Qualified Retirement Plans
	2012	2011	2012	2011
Measurement date	Dec 31, 2012	Dec 31, 2011	Dec 31, 2012	Dec 31, 2011
Discount rate	4.125%	5.000%	3.750%	4.625%
Rate of compensation increase	3.750%	3.750%	3.750%	3.750%

~~swap contract qualified~~The measurement date and weighted-average assumptions used to determine net periodic benefit cost for ~~cash flow hedge accounting to hedge~~ the ~~interest~~years ended December 31, 2012, 2011 and 2010 were as follows:



	Qualified Pension Plan			Non-Qualified Retirement Plans
	2012	2011	2010	2012	2011	2010
Measurement date	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009
Discount rate	5.000%	5.625%	6.000%	4.625%	5.125%	5.625%
Expected long-term return on plan assets	7.750%	8.000%	8.000%	—	—	—
Rate of compensation increase	3.750%	3.750%	4.250%	3.750%	3.750%	4.250%

The expected long-term rate ~~risk associated with $10 million~~ of return on plan assets is based on what the ~~variable rate junior subordinated debentures. Effective May 1, 2009,~~Corporation believes is realistically achievable based on the ~~effective portion~~types of ~~changes in fair value~~assets held by the plan and the plan’s investment practices. The assumption is updated at least annually, taking into account the asset allocation, historical asset return trends on the types of assets held and the ~~swap was recorded in other comprehensive income~~current and ~~subsequently reclassified into interest expense as a yield adjustment~~expected economic conditions. At December 31, 2011, the measurement date used in the ~~same period~~determination of net periodic benefit cost for 2012, the Corporation determined that a reduction to 7.75% in ~~which~~ the ~~related interest on the variable~~expected long-term rate ~~debentures affect earnings. The ineffective portion~~ of ~~changes in fair value~~return was ~~recognized directly in earnings as interest expense.~~necessary, based upon expected market performance.

The ~~Corporation has entered into interest~~discount rate ~~swap contracts~~assumption for defined benefit pension plans is reset annually on the measurement date. A discount rate was selected for each plan by matching expected future benefit payments stream to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a ~~commercial loan borrower, we simultaneously enter into~~yield curve based on a “mirror” swap contract with a third party. The third party exchanges the client’s fixed rate loan payments for floating rate loan payments. We retain the risk that is associated with the potential failureselection of counterparties and inherent in making loans. At December 31, 2009 and 2008, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $53.7 million and $14.0 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings.high-quality fixed-income debt securities.

Plan Assets

The following table presents the fair values of ~~derivative instruments in~~ the ~~Corporation’s Consolidated Balance Sheets as~~qualified pension plan’s assets at December 31, 2012:



(Dollars in thousands)
	Fair Value Measurements Using						Assets at Fair Value
December 31, 2012	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Cash and cash equivalents		$7,274		$—		$—		$7,274
Obligations of U.S. government agencies and U.S. government-sponsored enterprises	—		1,059		—		1,059
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		—		—		—
States and political subdivisions	—		2,218		—		2,218
Corporate bonds	—		10,378		—		10,378
Common stocks	15,892		—		—		15,892
Mutual funds	14,750		—		—		14,750
Total plan assets		$37,916		$13,655		$—		$51,571

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The following table presents the fair values of the ~~dates indicated.~~qualified pension plan’s assets at December 31, 2011:



(Dollars in thousands)
	Fair Value Measurements Using						Assets at Fair Value
December 31, 2011	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Cash and cash equivalents		$1,595		$—		$—		$1,595
Obligations of U.S. government agencies and U.S. government-sponsored enterprises	—		1,786		—		1,786
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		—		—		—
States and political subdivisions	—		1,720		—		1,720
Corporate bonds	—		10,283		—		10,283
Common stocks	15,487		—		—		15,487
Mutual funds	7,459		—		—		7,459
Total plan assets		$24,541		$13,789		$—		$38,330

(Dollars in thousands) Asset Derivatives Liability Derivatives
Fair Value Fair Value
Balance Sheet Location Dec. 31, 2009 Dec. 31, 2008 Balance Sheet Location Dec. 31, 2009 Dec. 31, 2008
Derivatives designated as cash
flow hedging instruments:

Interest rate risk management contract:
Interest rate swap
Accrued expenses
$ – $ – & other liabilities $ 434 $ –
Derivatives not designated
as hedging instruments:

Forward loan commitments:
Commitments to originate fixed rate mortgage
Accrued expenses
loans to be sold Other assets 22 152 & other liabilities 180 18
Commitments to sell fixed rate mortgage
Accrued expenses
loans Other assets 342 18 & other liabilities 31 177
Customer related derivative contracts:
Interest rate swaps with customers Other assets 1,704 1,413 – –
Mirror swaps with counterparties
Accrued expenses
– – & other liabilities 1,691 1,479
Interest rate risk management contract:
Interest rate swap
Accrued expenses
– – & other liabilities – 601
Total $ 2,068 $ 1,583 $ 2,336 $ 2,275

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

The ~~following tables present the effect of derivative instruments in the Corporations’ Consolidated Statements of Income and Changes in Shareholders’ Equity for the periods indicated.~~

(Dollars in thousands) Location of Gain
Gain (Loss) (Loss) Recognized in
Recognized in Other Income on Derivative Gain Recognized
Comprehensive (Ineffective Portion in Income
Income and Amount on Derivative
(Effective Portion) Excluded from (Ineffective Portion)
Years ended Dec. 31, 2009 2008 2007 Effectiveness Testing) 2009 2008 2007
Derivatives in cash flow hedging relationships:
Interest rate risk management contract:
Interest rate swap (1) $(7) $30 $ – Interest Expense $78 $ – $ –
Total $(7) $30 $ – $78 $ – $ –

~~(1)~~

In addition to the amounts reported in the table above, a $30 thousand gain was reclassified from accumulated other comprehensive income into net unrealized gains on interest rate swaps in the first quarter of 2009.

(Dollars in thousands) Location of Gain Amount of Gain (Loss)
(Loss) Recognized in Recognized in Income on Derivative
Years ended December 31, Income on Derivative 2009 2008 2007
Derivatives not designated as hedging instruments:
Forward loan commitments:
Commitments to originate fixed rate
mortgage loans to be sold

Net gains on loan sales & commissions on loans
originated for others
$ (325 ) $ 132 $ (199 )
Commitments to sell fixed rate
mortgage loans

Net gains on loan sales & commissions on loans
originated for others
503 (155 ) 189
Customer related derivative contracts:
Interest rate swaps with customers Net gains (losses) on interest rate swaps 1,130 (603 ) 60
Mirror swaps with counterparties Net gains (losses) on interest rate swaps (550 ) 700 (33 )
Interest rate risk management contract:
Interest rate swap Net gains (losses) on interest rate swaps 117 (639 ) –
Total $ 875 $ (565 ) $ 17

~~(14) Fair Value Measurements~~

~~The Corporation~~qualified pension plan uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as loansthe securities held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.in its investment portfolio.

Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:

·	~~Level 1 – Quoted prices for~~ ~~identical~~ ~~assets or liabilities in active markets.~~

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~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

·	~~Level 2 – 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 inputs and significant value drivers are observable in active markets.

·	~~Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are~~ ~~unobservable~~ ~~in the markets and which reflect the Corporation’s market assumptions~~

~~Determination of Fair Value~~

~~Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.~~ When available, the ~~Corporation~~qualified pension plan uses quoted market prices to determine the fair ~~value. If~~value of securities; such items are classified as Level 1. This category includes cash equivalents, common stock and mutual funds which are exchange-traded.

Level 2 securities in the qualified pension plan include debt securities with quoted prices, which are ~~not available, fair value is based upon valuation techniques such as~~traded less frequently than exchange-traded instruments, whose values are determined using matrix pricing with inputs that are observable in the market or ~~other models that use,~~can be derived principally from or corroborated by observable market data. This category includes corporate bonds, municipal bonds, obligations of U.S. government agencies and U.S. government-sponsored enterprises and mortgage backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

In certain cases where ~~possible, current market-based~~there is limited activity or ~~independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Corporation uses unobservable~~less transparency around inputs to ~~determine appropriate~~the valuation, ~~adjustments using methodologies applied consistently over time.~~securities may be classified as Level 3. As of December 31, 2012 and 2011, the qualified pension plan did not have any securities in the Level 3 category.

The asset allocations of the qualified pension plan at December 31, 2012 and 2011, by asset category were as follows:



December 31,	2012		2011
Asset Category:
Equity securities	55.0	%	56.2	%
Fixed securities	30.9	%	39.7	%
Cash and cash equivalents	14.1	%	4.1	%
Total	100.0	%	100.0	%

The assets of the qualified defined benefit pension plan trust (the “Pension Trust”) are managed to balance the needs of cash flow requirements and long-term rate of return. Cash inflow is typically comprised of invested income from portfolio holdings and Bank contributions, while cash outflow is for the purpose of paying plan benefits. As early as possible each year, the trustee is advised of the projected schedule of employer contributions and estimations of benefit payments. As

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

a general rule, the trustee shall invest the funds so as to produce sufficient income to cover benefit payments and maintain a funded status that exceeds the regulatory requirements for tax-qualified defined benefit plans.

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

The investment objective with respect to the Pension Trust assets is to provide capital appreciation with a current income component. At any time, the portfolio will typically be invested in the following ranges: 50% to 70% in equities; 30% to 50% in fixed income; and 0% to 10% in cash and cash equivalents. The trustee investment manager will have authorization to invest within these ranges, making decisions based upon market conditions.

At December 31, 2012, the holdings in the Other category, primarily cash equivalents (short-term investments), represented 14.1% of total assets, which was outside the 0% to 10% target range, due to an additional $7 million dollar contribution made late in 2012.

Fixed income bond investments should be limited to those in the top four categories used by the major credit rating agencies.High yield bond funds may be used to provide exposure to this asset class as a diversification tool provided they do not exceed 10% of the portfolio. In order to reduce the volatility of the annual rate of return of the bond portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts. The assets of the Pension Trust will typically have a laddered maturity structure, avoiding large concentrations in any single year. Common stock and equity holdings provide opportunities for dividend and capital appreciation returns. Holdings will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities. Concentration in small-cap, mid-cap and international equities is limited to 20%, 20% and 30% of the equity portfolio, respectively. Investment selection and mix of equity holdings should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification. The fair value of equity securities of any one issuer will not be permitted to exceed 10% of the total fair value of equity holdings of the Pension Trust. Investments in publicly traded real estate investment trust securities and low-risk derivatives securities such as callable securities, floating rate notes, mortgage backed securities and treasury inflation protected securities, are permitted.

Cash Flows

Contributions

The Internal Revenue Code permits flexibility in plan contributions so that normally a ~~description~~range of ~~valuation methodologies~~contributions is possible. The Corporation’s current funding policy has been generally to contribute the minimum required contribution and additional amounts up to the maximum deductible contribution. The Corporation expects to contribute $5.0 million to the qualified pension plan in 2013. In addition, the Corporation expects to contribute $731 thousand in benefit payments to the non-qualified retirement plans in 2013.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:



(Dollars in thousands)	Qualified Pension Plan		Non-Qualified Plans
2013		$1,816		$731
2014	1,936		738
2015	2,191		767
2016	2,382		766
2017	2,510		759
Years 2018 - 2021	14,386		3,769

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401(k) Plan

The Corporation’s 401(k) Plan provides a specified match of employee contributions for substantially all employees. In addition, substantially all employees hired after September 30, 2007, who are ineligible for participation in the qualified defined benefit pension plan, will receive a non-elective employer contribution of 4%. Total employer matching contributions under this plan amounted to $1.4 million, $1.2 million and $1.0 million in 2012, 2011 and 2010, respectively.

Other Incentive Plans

The Corporation maintains several non-qualified incentive compensation plans. Substantially all employees participate in one of the incentive compensation plans. Incentive plans provide for annual or more frequent payments based on individual, business line and/or corporate performance targets (measured in terms of the Corporation’s net income, earnings per share and return on equity). Total incentive based compensation amounted to $13.5 million, $10.7 million and $9.6 million in 2012, 2011 and 2010, respectively. In general, the terms of incentive plans are subject to annual renewal and may be terminated at any time by the Board of Directors.

Deferred Compensation Plan

The Amended and Restated Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The assets and liabilities of the Deferred Compensation Plan are recorded at fair value ~~including~~in the Corporation’s Consolidated Balance Sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $6.2 million and $5.4 million at December 31, 2012 and 2011, respectively, and is included in other liabilities on the accompanying Consolidated Balance Sheets. The corresponding invested assets are reported in other assets.

(16) Share-Based Compensation Arrangements

Washington Trust has two share-based compensation plans, which are described below.

The Bancorp’s 2003 Stock Incentive Plan (the “2003 Plan”) was amended and restated and was also approved by shareholders in April 2009. The 2003 Plan amendments included increasing the maximum number of shares of Bancorp’s common stock to be issued under the 2003 Plan from 600,000 shares to 1,200,000 shares and increasing the number of shares that can be issued in the form of awards other than share options or stock appreciation rights from 200,000 to 400,000. The 2003 Plan permits the granting of share options and other equity incentives to officers, employees, directors, and other key persons. The exercise price of each share option may not be less than the fair market value of the Bancorp’s common stock on the date of grant, and options shall have a term of no more than ten years. Share options are designated as either non-qualified or incentive share options. Incentive share option awards may be granted at any time until February 19, 2019.

The 1997 Plan and the 2003 Plan (collectively, the “Plans”) permit options to be granted with stock appreciation rights (”SARs”), however, no share options have been granted with SARs. In general, ~~classification~~the share option price is payable in cash, by the delivery of ~~such assets~~shares of common stock already owned by the grantee, or a combination thereof. The fair value of share options on the date of grant is estimated using the Black-Scholes Option-Pricing Model.

The Plans also permit nonvested share units, nonvested shares and ~~liabilities~~nonvested performance shares to be granted. These awards are valued at the fair market value of the Bancorp’s common stock as of the award date. Performance share awards are granted providing certain officers of the Corporation the opportunity to earn shares of common stock the number of which is determined pursuant to, and subject to the ~~valuation hierarchy.~~attainment of, performance goals during a specified measurement period. The number of shares earned will range from zero to 200% of the target number of shares dependent upon the Corporation’s core return on equity and core earnings per share growth ranking compared to an industry peer group.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

Vesting of share options and share awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death (as defined in the Plans).

Amounts recognized in the consolidated financial statements for share options, nonvested share units, nonvested share awards and nonvested performance shares are as follows:



(Dollars in thousands)

Years ended December 31,	2012		2011		2010
Share-based compensation expense		$1,962		$1,394		$909
Related income tax benefit		$700		$497		$324

Compensation expense for share options, nonvested shares and nonvested share units is recognized over the service period based on the fair value at the date of grant. Nonvested performance share compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. If the goals are not met, no compensation cost will be recognized and any recognized compensation costs will be reversed.

Share Options

During 2012, 2011 and 2010, the Corporation granted to certain key employees 106,775, 57,450 and 83,700 non-qualified share options, respectively, with three-year cliff vesting terms.

The fair value of the share option awards granted in 2012, 2011 and 2010 were estimated on the date of grant using the Black-Scholes Option-Pricing Model based on assumptions noted in the following table. Washington Trust uses historical data to estimate share option exercise and employee departure behavior used in the option-pricing model; groups of employees that have similar historical behavior are considered separately for valuation purposes. The expected term of options granted was derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. Expected volatility was based on historical volatility of Washington Trust shares. The risk-free rate for periods within the contractual life of the share option was based on the U.S. Treasury yield curve in effect at the date of grant.



	2012		2011		2010
Expected term (years)	9		9		9
Expected dividend yield	3.45	%	3.33	%	3.16	%
Weighted average expected volatility	42.97	%	41.90	%	41.95	%
Weighted average risk-free interest rate	1.53	%	3.05	%	3.42	%

The weighted average grant-date fair value of the share options awarded during 2012, 2011 and 2010 was $7.46, $7.46 and $6.29, respectively.

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A summary of the status of Washington Trust’s share options outstanding as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below:



	Number of Share Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (000’s)
Beginning of period	712,061			$22.96
Granted	106,775		23.37
Exercised	(150,039	)	20.06
Forfeited or expired	(23,000	)	26.33
End of period	645,797			$23.58	5.0		$2,043
At end of period;
Options exercisable	390,347			$25.35	2.7		$658
Options expected to vest in future periods	255,450			$20.89	8.4		$1,385

The total intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date.

Additional information concerning options outstanding and options exercisable at December 31, 2012 is summarized as follows:



	Options Outstanding				Options Exercisable
Exercise Price Ranges	Number of Shares	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$14.47 to $17.36	3,582	5.9		$16.58	3,582		$16.58
$17.37 to $20.26	153,785	4.6	18.54		59,985	20.00
$20.27 to $23.15	68,200	7.0	21.52		12,000	20.62
$23.16 to $26.05	185,850	7.7	23.69		80,400	24.12
$26.06 to $28.94	234,380	2.5	27.52		234,380	27.52
	645,797	5.0		$23.58	390,347		$25.35

The total intrinsic value of share options exercised during the years ended December 31, 2012, 2011 and 2010 was $812 thousand, $493 thousand and $349 thousand, respectively.

Nonvested Shares and Share Units

During 2012, the Corporation granted to directors and certain key employees 29,725 nonvested share units with three to five years cliff vesting terms. During 2011, the Corporation granted to directors and certain key employees 31,950 nonvested share units with three to five-year cliff vesting terms. During 2010, the Corporation granted to certain key employees 56,500 nonvested share units with three to five-year cliff vesting terms.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

A summary of the status of Washington Trust’s nonvested shares as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	91,250			$19.84
Granted	29,725		23.62
Vested	(6,752	)	19.37
Forfeited	(5,448	)	21.54
End of period	108,775			$20.82

Nonvested Performance Shares

During 2012, performance share awards were granted to certain executive officers providing the opportunity to earn shares of common stock of the Corporation ranging from zero to 61,600 shares. The performance shares awarded were valued at $23.65, the fair market value at the date of grant, and will be earned over a three year performance period. The current assumption based on the most recent peer group information results in the shares earned at 160% of the target, or 49,340 shares.

During 2011, a performance share award was granted to an executive officer providing the opportunity to earn shares of common stock of the Corporation ranging from zero to 73,502 shares. The performance shares awarded were valued at $21.62, the fair market value at the date of grant, and will be earned over a three year performance period. The current assumption based on the most recent peer group information results in the shares earned at 155% of the target, or 51,180 shares.

During 2010, a performance share award was granted to an executive officer providing the opportunity to earn shares of common stock of the Corporation ranging from zero to 25,000 shares. The performance shares awarded were valued at $15.11, the fair market value at the date of grant, and will be earned over a three year performance period. The current assumption based on the most recent peer group information results in the shares earned at 148% of the target, or 18,500 shares.

A summary of the status of Washington Trust’s performance share awards as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	76,341			$19.97
Granted	47,208		23.86
Vested	(2,666	)	21.62
Forfeited	(1,863	)	21.62
End of period	119,020			$21.45

As of December 31, 2012, there was $3.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share options, nonvested share awards and performance share awards) granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.0 years.

(17) Business Segments

Washington Trust segregates financial information in assessing its results among two operating segments: Commercial Banking and Wealth Management Services. The amounts in the Corporate column include activity not related to the

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segments, such as the investment securities portfolio, wholesale funding activities and administrative units. The Corporate column is not considered to be an operating segment. The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. Any changes in estimates and allocations that may affect the reported results of any business segment will not affect the consolidated financial position or results of operations of Washington Trust as a whole.

Management uses certain methodologies to allocate income and expenses to the business lines. A funds transfer pricing methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. Certain indirect expenses are allocated to segments. These include support unit expenses such as technology and processing operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown.

Commercial Banking

The Commercial Banking segment includes commercial, commercial real estate, residential and consumer lending activities; equity in losses of unconsolidated investments in real estate limited partnerships, mortgage banking, secondary market and loan servicing activities; deposit generation; merchant credit card services; cash management activities; and direct banking activities, which include the operation of ATMs, telephone and Internet banking services and customer support and sales.

Wealth Management Services

Wealth Management Services includes asset management services provided for individuals, institutions and mutual funds; personal trust services, including services as executor, trustee, administrator, custodian and guardian; institutional trust services, including services as trustee for pension and profit sharing plans; and other financial planning and advisory services.

Corporate

Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from BOLI as well as administrative and executive expenses not allocated to the business lines and the residual impact of methodology allocations such as funds transfer pricing offsets.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

The following tables present the statement of operations and total assets for Washington Trust’s reportable segments.



(Dollars in thousands)
Year ended December 31, 2012	Commercial Banking		Wealth Management Services		Corporate			Consolidated Total
Net interest income (expense)		$79,505		$17		$11,174			$90,696
Noninterest income	31,727		29,640		3,847			65,214
Total income	111,232		29,657		15,021			155,910

Provision for loan losses	2,700		—		—			2,700
Depreciation and amortization expense	2,384		1,272		285			3,941
Other noninterest expenses	62,963		19,584		15,850			98,397
Total noninterest expenses	65,347		20,856		16,135			102,338
Income (loss) before income taxes	43,185		8,801		(1,114		)	50,872
Income tax expense (benefit)	14,670		3,296		(2,168		)	15,798
Net income		$28,515		$5,505		$1,054			$35,074

Total assets at period end		$2,436,280		$51,730		$583,874			$3,071,884
Expenditures for long-lived assets		$4,082		$877		$151			$5,110



(Dollars in thousands)
Year ended December 31, 2011	Commercial Banking		Wealth Management Services			Corporate			Consolidated Total
Net interest income (expense)		$75,967		($1	)		$8,989			$84,955
Noninterest income	21,806		28,306			2,652			52,764
Total income	97,773		28,305			11,641			137,719

Provision for loan losses	4,700		—			—			4,700
Depreciation and amortization expense	2,512		1,330			283			4,125
Other noninterest expenses	55,543		19,041			11,664			86,248
Total noninterest expenses	58,055		20,371			11,947			90,373
Income (loss) before income taxes	35,018		7,934			(306		)	42,646
Income tax expense (benefit)	11,781		2,957			(1,816		)	12,922
Net income (loss)		$23,237		$4,977			$1,510			$29,724

Total assets at period end		$2,257,326		$51,104			$755,668			$3,064,098
Expenditures for long-lived assets		$2,982		$493			$169			$3,644

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(Dollars in thousands)
Year ended December 31, 2010	Commercial Banking		Wealth Management Services			Corporate			Consolidated Total
Net interest income (expense)		$73,788		($47	)		$3,450			$77,191
Noninterest income (expense)	19,770		26,392			2,311			48,473
Total income	93,558		26,345			5,761			125,664

Provision for loan losses	6,000		—			—			6,000
Depreciation and amortization expense	2,376		1,461			337			4,174
Other noninterest expenses	51,002		18,751			11,384			81,137
Total noninterest expenses	53,378		20,212			11,721			85,311
Income (loss) before income taxes	34,180		6,133			(5,960		)	34,353
Income tax expense (benefit)	11,821		2,296			(3,815		)	10,302
Net income (loss)		$22,359		$3,837			($2,145	)		$24,051

Total assets at period end		$2,095,515		$51,164			$762,846			$2,909,525
Expenditures for long-lived assets		$994		$176			$513			$1,683

(18) Other Comprehensive Income (Loss)

The following tables present the activity in other comprehensive income (loss).



(Dollars in thousands)
Year ended December 31, 2012	Pre-tax Amounts			Income Taxes			Net of Tax
Securities available for sale:
Unrealized losses on securities arising during the period		($4,123	)		($1,459	)		($2,664	)
Less: reclassification adjustment for net gains on securities realized in net income	1,195			427			768
Net unrealized losses on securities available for sale	(5,318		)	(1,886		)	(3,432		)
Reclassification adjustment for change in non-credit portion of OTTI realized losses transferred to net income	192			68			124
Cash flow hedges:
Unrealized losses on cash flow hedges arising during the period	(521		)	(188		)	(333		)
Less: reclassification adjustment for amount of gains on cash flow hedges realized in net income	706			252			454
Net unrealized gains on cash flow hedges	185			64			121
Defined benefit plan obligation adjustment	(8,446		)	(3,029		)	(5,417		)
Total other comprehensive loss		($13,387	)		($4,783	)		($8,604	)

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(Dollars in thousands)
Year ended December 31, 2011	Pre-tax Amounts			Income Taxes			Net of Tax
Securities available for sale:
Unrealized gains on securities arising during the period		$2,620			$998			$1,622
Less: reclassification adjustment for net gains on securities realized in net income	644			229			415
Net unrealized gains on securities available for sale	1,976			769			1,207
Reclassification adjustment for change in non-credit portion of OTTI realized losses transferred to net income	39			(49		)	88
Cash flow hedges:
Unrealized losses on cash flow hedges arising during the period	(1,464		)	(522		)	(942		)
Less: reclassification adjustment for amount of gains on cash flow hedges realized in net income	755			269			486
Net unrealized losses on cash flow hedges	(709		)	(253		)	(456		)
Defined benefit plan obligation adjustment	(10,502		)	(3,743		)	(6,759		)
Total other comprehensive loss		($9,196	)		($3,276	)		($5,920	)



(Dollars in thousands)
Year ended December 31, 2010	Pre-tax Amounts			Income Taxes			Net of Tax
Securities available for sale:
Unrealized gains on securities arising during the period		$1,828			$729			$1,099
Less: reclassification adjustment for net gains on securities realized in net income	483			172			311
Net unrealized gains on securities available for sale	1,345			557			788
Reclassification adjustment for change in non-credit portion of OTTI realized losses transferred to net income	50			(61		)	111
Cash flow hedges:
Unrealized losses on cash flow hedges arising during the period	(1,422		)	(507		)	(915		)
Less: reclassification adjustment for amount of gains on cash flow hedges realized in net income	391			139			252
Net unrealized gains (losses) on cash flow hedges	(1,031		)	(368		)	(663		)
Defined benefit plan obligation adjustment	692			240			452
Total other comprehensive income		$1,056			$368			$688

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The following table presents the components of accumulated other comprehensive income as of the dates indicated:



(Dollars in thousands)	Net Unrealized Gains on Available For Sale Securities			Noncredit -related Impairment			Net Unrealized Losses on Cash Flow Hedges			Pension Benefit Adjustment			Total
Balance at January 1, 2010		$11,148			($2,261	)		($8	)		($5,542	)		$3,337
Period change, net of tax	788			111			(663		)	452			688
Balance at December 31, 2010		$11,936			($2,150	)		($671	)		($5,090	)		$4,025
Period change, net of tax	1,207			88			(456		)	(6,759		)	(5,920		)
Balance at December 31, 2011		$13,143			($2,062	)		($1,127	)		($11,849	)		($1,895	)
Period change, net of tax	(3,432		)	124			121			(5,417		)	(8,604		)
Balance at December 31, 2012		$9,711			($1,938	)		($1,006	)		($17,266	)		($10,499	)

(19) Earnings per Common Share

Washington Trust utilizes the two-class method earnings allocation formula to determine earnings per share of each class of stock according to dividends and participation rights in undistributed earnings. Share based payments that entitle holders to receive non-forfeitable dividends before vesting are considered participating securities and included in earnings allocation for computing basic earnings per share under this method. Undistributed income is allocated to common shareholders and participating securities under the two-class method based upon the proportion of each to the total weighted average shares available.

The calculation of earnings per common share is presented below.



(Dollars and shares in thousands, except per share amounts)
Years ended December 31,	2012			2011			2010
Net income		$35,074			$29,724			$24,051
Less:
Dividends and undistributed earnings allocated to participating securities	(160		)	(112		)	(65		)
Net income applicable to common shareholders	34,914			29,612			23,986

Weighted average basic common shares	16,358			16,254			16,114
Dilutive effect of:
Common stock equivalents	43			30			9
Weighted average diluted common shares	16,401			16,284			16,123

Earnings per common share:
Basic		$2.13			$1.82			$1.49
Diluted		$2.13			$1.82			$1.49

Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 357 thousand, 371 thousand and 758 thousand for 2012, 2011 and 2010, respectively.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

(20) Commitments and Contingencies

Financial Instruments with Off-Balance Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, equity commitments to an affordable housing partnerships, interest rate swap agreements and commitments to originate and commitments to sell fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and financial guarantees are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.

The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:



(Dollars in thousands)
December 31,	2012		2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans		$223,426		$222,805
Home equity lines	184,941		185,124
Other loans	30,504		35,035
Standby letters of credit	1,039		8,560
Financial instruments whose notional amounts exceed the amount of credit risk:
Forward loan commitments:
Commitments to originate fixed rate mortgage loans to be sold	67,792		56,950
Commitments to sell fixed rate mortgage loans	116,162		76,574
Customer related derivative contracts:
Interest rate swaps with customers	70,493		61,586
Mirror swaps with counterparties	70,493		61,586
Interest rate risk management contract:
Interest rate swap	32,991		32,991

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower.

Standby Letters of Credit

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit extend up to five years. At December 31, 2012 and 2011, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled 1.0 million and 8.6 million, respectively. At December 31, 2012 and 2011, there was no liabilities to beneficiaries

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resulting from standby letters of credit. Fee income on standby letters of credit totaled $94 thousand in 2012, compared to $153 thousand in 2011 and $91 thousand in 2010.

At December 31, 2012 and 2011, a substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

Items Measured at Fair Value on a Recurring Basis

Securities ~~Available for Sale~~

Securities available for sale are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes exchange-traded equity securities.

Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of U.S. government-sponsored enterprises, mortgage-backed securities issued by U.S. government agencies and U.S government-sponsored enterprises, municipal bonds, trust preferred securities, corporate bonds and certain preferred equity securities.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of December 31, ~~2009~~2012 and ~~December 31, 2008,~~2011, level 3 securities were comprised of two pooled trust preferred debt securities, in the form of collateralized debt obligations, which were not actively traded. As of December 31, ~~2009,~~2012 and 2011, the Corporation concluded that ~~there has been a significant decrease in~~ the ~~volume and~~low level of activity for its Level 3 pooled trust preferred debt securities

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and ~~therefore,~~2011

continued to indicate that quoted market prices are not indicative of fair value. The Corporation obtained valuations including broker quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected highly limited sales evidenced by an inactive market. The cash flow scenarios were prepared using discounted cash flow methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions.

As of December 31, 2008, for these two pooled trust preferred collateralized debt obligations, the Corporation utilized valuations provided by broker dealer/investment banking firms, a third party pricing service and also engaged a third party valuation firm to provide additional detailed cash flow and credit analysis of the pooled securities. Management concluded that the valuations provided from each source were based on sound methodologies and were reasonable and, therefore, a simple average of the values provided from these sources was used for financial reporting purposes. The Corporation did not adjust the above prices obtained from these sources. In addition, pricing information from one other source was provided to us on a third hand basis from an outside

~~-104-~~

~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

party. We were unable to verify factors used in determining the prices obtained for both pooled trust preferred holdings and found the pricing indications to be significantly below the range of price indications provided by the other pricing sources described above, and for these reasons we excluded this source from our valuation analysis.

Our internal review procedures have confirmed that the fair values provided by the aforementioned third party valuation sources utilized by the Corporation are consistent with GAAP. Our fair values assumed liquidation in an orderly market and not under distressed circumstances. Due to the continued market illiquidity and credit risk for securities in the financial sector, the fair value of these securities is highly sensitive to assumption changes and market volatility.

Mortgage Loans Held for Sale

Effective July 1, 2011, Washington Trust elected to carry newly originated closed residential real estate mortgage loans held for sale at fair value pursuant to ASC 825. Level 2 mortgage loans held for sale fair values are estimated based on what secondary markets are currently offering for loans with similar characteristics. In certain cases when quoted market prices are not available, fair value is determined by utilizing a discounted cash flow analysis and these assets are classified as Level 3. Any change in the valuation of mortgage loans held for sale is based upon the change in market interest rates between closing the loan and the measurement date and an immaterial portion attributable to changes in instrument-specific credit risk.

Derivatives

~~Substantially all of our derivatives~~Interest rate swap contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates and, accordingly, are classified as Level 2. ~~Examples include interest rate swap contracts.~~ Our internal review procedures have confirmed that the fair values determined with independent pricing models and utilized by the Corporation are consistent with GAAP. Any derivative for which we measure fair value using significant assumptions that are unobservable are classified as Level 3. Level 3 derivatives include commitments to sell fixed rate residential mortgages and interest rate lock commitments written for our residential mortgage loans that we intend to sell. The valuation of these items is determined by management based on internal calculations using external market inputs.

For purposes of potential valuation adjustments to its interest rate swap contracts, the Corporation evaluates the credit risk of its counterparties as well as that of the Corporation. Accordingly, Washington Trust considers factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life, among other factors, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position. Washington Trust met the criteria for and effective January 1, 2012 elected to apply the accounting policy exception with respect to measuring counterparty credit risk for derivative transactions subject to master netting arrangements provided in ASU 2011-04. Electing this policy exception had no impact on financial statement presentation.

Level 2 fair value measurements of forward loan commitments (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) are estimated using the anticipated market price based on pricing indications provided from syndicate banks. In certain cases when quoted market prices are not available, fair value is determined by utilizing a discounted cash flow analysis and these assets are classified as Level 3.

Items Measured at Fair Value on a Nonrecurring Basis

~~Mortgage Loans Held for Sale~~

Mortgage loans held for sale are carried on an aggregate basis at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify loans subjected to nonrecurring fair value adjustments as Level 2.

Collateral Dependent Impaired Loans

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying ~~collateral.~~collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For those collateral dependent loans for which the inputs used in the appraisals of the collateral are observable, such loans are categorized as Level 2. For other collateral dependent loans, managementManagement may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values ~~for unobservable factors~~ resulting from its knowledge of the ~~property, or use internal~~property. Internal valuations ~~for~~are utilized to determine the fair value of other business ~~assets utilizing significant assumptions that are unobservable, and such~~assets. Collateral dependent impaired loans are categorized as Level 3.

Property acquired through foreclosure or repossession

Property acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally

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based upon ~~independent market prices or~~ appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

Loan Servicing Rights

Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of loan servicing rights using a valuation model that calculates the present value of the estimated future net

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~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

servicing income. The model incorporates assumptions used in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service and contractual servicing fee income. Loan servicing rights are subject to fair value measurements on a nonrecurring basis. Fair value measurements of our loan servicing rights use significant unobservable inputs and, accordingly, are classified as Level 3.

Items Recorded at Fair Value on a Recurring Basis

The ~~table~~tables below ~~presents~~present the balances of assets and liabilities reported at fair value on a recurring basis.


(Dollars in thousands)							Assets/								Assets/Liabilities at Fair Value
	Fair Value Measurements Using						Liabilities at		Fair Value Measurements Using
December 31, 2009	Level 1		Level 2		Level 3		Fair Value
December 31, 2012									Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises	$	–	$	45,240	$	–	$	45,240		$—		$31,670		$—		$31,670
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		–		523,446		–		523,446
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises									—		231,233		—		231,233
States and political subdivisions		–		82,062		–		82,062	—		72,620		—		72,620
Trust preferred securities:
Individual name issuers		–		20,586		–		20,586	—		24,751		—		24,751
Collateralized debt obligations		–		–		1,065		1,065	—		—		843		843
Corporate bonds		–		14,706		–		14,706	—		14,381		—		14,381
Common stocks		769		–		–		769
Perpetual preferred stocks		3,183		427		–		3,610
Mortgage loans held for sale									—		40,243		9,813		50,056
Derivative assets (1)		–		1,704		364		2,068
Interest rate swap contracts with customers									—		3,851		—		3,851
Forward loan commitments									—		2,469		44		2,513
Total assets at fair value on a recurring basis	$	3,952	$	688,171	$	1,429	$	693,552		$—		$421,218		$10,700		$431,918
Liabilities:
Derivative liabilities (1)	$	–	$	2,125	$	211	$	2,336
Mirror swap contracts with customers										$—		$3,952		$—		$3,952
Interest rate risk management swap contracts										$—		$1,619		$—		$1,619
Forward loan commitments									—		4,005		186		4,191
Total liabilities at fair value on a recurring basis	$	–	$	2,125	$	211	$	2,336		$—		$9,576		$186		$9,762


(1)	Derivative assets are included in other assets and derivative liabilities are reported in ~~accrued expenses and~~ other liabilities in the Consolidated Balance Sheets.

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~~Table of Contents~~-119-

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011



(Dollars in thousands)							Assets/Liabilities at Fair Value
	Fair Value Measurements Using
December 31, 2011	Level 1		Level 2		Level 3
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises		$—		$32,833		$—		$32,833
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		389,658		—		389,658
States and political subdivisions	—		79,493		—		79,493
Trust preferred securities:
Individual name issuers	—		22,396		—		22,396
Collateralized debt obligations	—		—		887		887
Corporate bonds	—		14,282		—		14,282
Perpetual preferred stocks	1,704		—		—		1,704
Mortgage loans held for sale	—		20,340		—		20,340
Derivative assets (1)
Interest rate swap contracts with customers	—		4,513		—		4,513
Forward loan commitments	—		1,864		—		1,864
Total assets at fair value on a recurring basis		$1,704		$565,379		$887		$567,970
Liabilities:
Derivative liabilities (1)
Mirror swap contracts with customers		$—		$4,669		$—		$4,669
Interest rate risk management swap contracts	—		1,802		—		1,802
Forward loan commitments	—		2,580		—		2,580
Total liabilities at fair value on a recurring basis		$—		$9,051		$—		$9,051

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~
~~December 31, 2009 and 2008~~

(Dollars in thousands) Assets/
Fair Value Measurements Using Liabilities at
December 31, 2008 Level 1 Level 2 Level 3 Fair Value
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises $ – $ 64,377 $ – $ 64,377
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises – 683,619 – 683,619
States and political subdivisions – 81,213 – 81,213
Trust preferred securities:
Individual name issuers – 16,793 – 16,793
Collateralized debt obligations – – 1,940 1,940
Corporate bonds – 13,576 – 13,576
Common stocks 992 – – 992
Perpetual preferred stocks 3,208 501 – 3,709
Derivative assets (1) – 1,413 170 1,583
Total assets at fair value on a recurring basis $ 4,200 $ 861,492 $ 2,110 $ 867,802
Liabilities:
Derivative liabilities (1) $ – $ 2,080 $ 195 $ 2,275
Total liabilities at fair value on a recurring basis $ – $ 2,080 $ 195 $ 2,275

(1)	Derivatives assets are included in other assets and derivative liabilities are reported in ~~accrued expenses and~~ other liabilities in the Consolidated Balance Sheets.

It is the Corporation’s policy to review and reflect transfers ~~either into or out of “Level 3”~~between Levels as of the financial statement reporting date. There were no transfers in and/or out of Level 1 during the years ended December 31, 2012 and 2011. After evaluating forward loan commitments consisting of interest rate lock commitments and commitments to sell fixed-rate residential mortgages during the third quarter of 2011, it was determined that significant inputs and significant value drivers were observable in active markets, and the Corporation therefore reclassified these derivatives from out of Level 3 into Level 2. There were no other transfers between Level 2 and Level 3 during the years ended December 31, 2012 and 2011.

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The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis during the periods indicated.

Years ended December 31,	2009									2008
	Securities			Derivative						Securities			Derivative
	Available			Assets /						Available			Assets /
Years ended December 31,																			2012											2011
(Dollars in thousands)	for Sale (1)			(Liabilities)			Total			for Sale			(Liabilities)			Total			Securities Available for Sale (1)			Mortgage Loans Held for Sale (2)		Derivative Assets / (Liabilities) (3)			Total			Securities Available for Sale (1)			Derivative Assets / (Liabilities) (3)			Total
Balance at beginning of period	$	1,940		$	(25	)	$	1,915		$	–		$	(2	)	$	(2	)		$887			$—		$—			$887			$806			$435			$1,241
Gains and losses (realized and unrealized):
Included in earnings ~~(2)~~(4)		(2,496	)		178			(2,318	)		(1,859	)		(23	)		(1,882	)	(221		)	—		—			(221		)	(191		)	(1,263		)	(1,454		)
Included in other comprehensive income		1,621			–			1,621			(1,949	)		–			(1,949	)	177			—		—			177			272			—			272
Purchases, issuances and settlements (net)		–			–			–			13			–			13
Transfers in and/or out of Level 3		–			–			–			5,735			–			5,735
Issuances																			—			9,813		(142		)	9,671			—			—			—
Transfers out of Level 3																			—			—		—			—			—			828			828
Balance at end of period	$	1,065		$	153		$	1,218		$	1,940		$	(25	)	$	1,915			$843			$9,813		($142	)		$10,514			$887			$—			$887

~~(1)~~
(1)	During the periods indicated, Level 3 securities available for sale were comprised of two pooled trust preferred debt securities, in the form of collateralized debt obligations.

~~(2)~~
(2)	During the periods indicated, Level 3 mortgage loans held for sale consisted of certain mortgage loans whose fair value was determined utilizing a discounted cash flow analysis.

(3)

During the periods indicated, Level 3 derivative assets / liabilities consisted of forward loan commitments (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) whose fair value was determined utilizing a discounted cash flow analysis. During 2011, Level 3 derivative assets / liabilities consisted of certain forward loan commitments that were reclassified out of Level 3 into Level 2 after evaluation during the third quarter of 2011, when it was determined that significant inputs and significant value drivers were observable in active markets.

(4)

Losses included in earnings for Level 3 securities available for sale consisted of credit-related impairment losses on the two Level 3 pooled trust preferred debt securities. Credit-related impairment losses of ~~$2.5 million~~$221 thousand and ~~$1.9 million~~$191 thousand were recognized in ~~2009~~December 31, 2012 and ~~2008,~~2011, respectively. ~~See Note 4 for additional disclosure regarding the reclassification of the 2008 impairment losses.~~ The losses included in earnings for Level 3 derivative assets and liabilities, which were comprised of ~~interest~~forward loan commitments (interest rate lock commitments ~~written for our~~and commitments to sell fixed-rate residential ~~mortgage loans that we intend to sell,~~mortgages), were included in net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.

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~~Table of Contents~~-121-

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

The following table presents additional quantitative information about assets measured at fair value on a recurring basis for which the Corporation has utilized Level 3 inputs to determine fair value.

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~



(Dollars in thousands)	December 31, 2012
	Fair Value			Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
Trust preferred securities:
Collateralized debt obligations		$843		Discounted Cash Flow	Discount Rate	16.75%
					Cumulative Default %	3.3% - 100% (25.7%)
					Loss Given Default %	85% - 100% (90.9%)

Mortgage loans held for sale		$9,813		Discounted Cash Flow	Interest Rate	2.875% - 4.95% (3.71%)
					Credit Risk Adjustment	0.25%

Forward loan commitments - assets		$44		Discounted Cash Flow	Interest Rate	3.25% - 3.875% (3.56%)
					Credit Risk Adjustment	0.25%

Forward loan commitments - liabilities		($186	)	Discounted Cash Flow	Interest Rate	3.25% - 3.875% (3.69%)
					Credit Risk Adjustment	0.25%

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations

Given the low level of market activity for trust preferred securities in the form of collateralized debt obligations, the discount rate utilized in the fair value measurement was derived by analyzing current market yields for trust preferred securities of individual name issuers in the financial services industry. Adjustments were then made for credit and structural differences between these types of securities. There is an inverse correlation between the discount rate and the fair value measurement. When the discount rate increases, the fair value decreases.

Other significant unobservable inputs to the fair value measurement of collateralized debt obligations included prospective defaults and recoveries. The cumulative default percentage represents the lifetime defaults assumed, excluding currently defaulted collateral and including all performing and currently deferring collateral. As a result, the cumulative default percentage also reflects assumptions of the possibility of currently deferring collateral curing and becoming current. The loss given default percentage represents the percentage of current and projected defaults assumed to be lost. There is an inverse correlation between the cumulative default and loss given default percentages and the fair value measurement. When the default percentages increase, the fair value decreases.

Mortgage Loans Held for Sale and Derivative Assets / Liabilities

Significant unobservable inputs to the fair market value measurement for certain mortgage loans held for sale and certain forward loan commitments include interest rate and credit risk. Interest rates approximate the Corporation’s current origination rates for similar loans. Credit risk approximates the Corporation’s current loss exposure factor for similar loans.

Items Recorded at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or ~~fair value~~market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above.

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The following table presents the carrying value of certain assets measured at fair value on a nonrecurring basis during the year ended December 31, ~~2009.~~2012.



(Dollars in thousands)	Carrying Value at December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Collateral dependent impaired loans		$—		$—		$9,550		$9,550
Property acquired through foreclosure or repossession	—		—		1,073		1,073
Total assets at fair value on a nonrecurring basis		$—		$—		$10,623		$10,623

(Dollars in thousands) Carrying Value at December 31, 2009
Level 1 Level 2 Level 3 Total
Assets:
Collateral dependent impaired loans $ – $ 2,026 $ 11,560 $ 13,586
Property acquired through foreclosure or repossession – – 1,974 1,974
Total assets at fair value on a nonrecurring basis $ – $ 2,026 $ 13,534 $ 15,560

~~At December 31, 2009, collateral~~Collateral dependent impaired loans ~~had~~with a carrying value of ~~$13.6~~$9.6 million ~~and related~~ at December 31, 2012 were subject to nonrecurring fair value measurement during the year ended December 31, 2012. As of December 31, 2012, the allowance for loan losses allocation ~~of $2.1 million.~~on these loans amounted to $2.0 million.

For the year ended December 31, ~~2009,~~2012, property acquired through ~~foreclosure~~foreclosures or repossession with a fair value of ~~$2.0~~$3.2 million was transferred from loans. ~~Valuation~~Prior to the transfer, the assets whose fair value less costs to sell was less than the carrying value were written down to fair value through a charge to the allowance for loan losses. For the year ended December 31, 2012, valuation adjustments to reflect property acquired through foreclosure or repossession at ~~the time of transfer from loans~~fair value less cost to sell resulted in a charge to the allowance for loan losses of ~~$173~~$410 thousand. Subsequent to foreclosures, valuations are updated periodically, and assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments resulted in a charge to earnings of $350 thousand for the year ended December 31, ~~2009. There were no subsequent valuation adjustments to property acquired through foreclosure or repossession for the year ended December 31, 2009.~~2012.

The following table presents the carrying value of certain assets measured at fair value on a nonrecurring basis during the year ended December 31, ~~2008.~~2011.



(Dollars in thousands)	Carrying Value at December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Collateral dependent impaired loans		$—		$—		$10,391		$10,391
Loan servicing rights	—		—		765		765
Property acquired through foreclosure or repossession	—		—		1,758		1,758
Total assets at fair value on a nonrecurring basis		$—		$—		$12,914		$12,914

(Dollars in thousands) Carrying Value at December 31, 2008
Level 1 Level 2 Level 3 Total
Assets:
Collateral dependent impaired loans $ – $ 3,396 $ – $ 3,396
Loan servicing rights – – 385 385
Total assets at fair value on a nonrecurring basis $ – $ 3,396 $ 385 $ 3,781

~~At December 31, 2008, collateral~~Collateral dependent impaired loans ~~had~~with a carrying value of ~~$3.4~~$10.4 million ~~and related~~ at December 31, 2011 were subject to nonrecurring fair value measurement during the year ended December 31, 2011. As of December 31, 2011, the allowance for loan losses allocation ~~of $274 thousand.~~on these loans amounted to $1.4 million.

~~In 2008,~~For the year ended December 31, 2011, certain loan servicing rights were written down to their fair value resulting in aan immaterial valuation allowance increase, ~~of $59 thousand,~~ which was recorded as a component of ~~other income~~net gains on loan sales and commissions on loans originated for others in the Corporation’s Consolidated ~~Statements~~Statement of Income.

~~Effective June 30, 2009,~~For the Corporation adopted FASB Staff Position No. 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1 and APB No. 28-1”). FSP No. 107-1 and APB No. 28-1 is nowyear ended December 31, 2011, property acquired through foreclosures or repossession with a ~~sub-topic within ASC 820, “Fair Value Measurements and Disclosures.” These provisions require interim and annual disclosures made by publicly traded companies to include the~~ fair value of ~~its financial instruments, whether recognized~~$2.0 million was transferred from loans. Prior to the transfer, the assets whose fair value less costs to sell was less than the carrying value were written down to fair value through a charge to the allowance for loan losses. For the year ended December 31, 2011, valuation adjustments to reflect property acquired through foreclosure or ~~not recognized~~repossession at fair value less cost to sell resulted in a charge to the ~~statement~~allowance for loan losses of ~~financial position, as required by former SFAS No. 107, “Disclosures~~$328 thousand. Subsequent to foreclosures, valuations are updated periodically, and assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments resulted in a charge to earnings of $642 thousand for the year ended December 31, 2011.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value.



(Dollars in thousands)	December 31, 2012
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
Collateral dependent impaired loans		$9,550	Appraisals of collateral	Discount for costs to sell	0% - 50% (11%)
				Appraisal adjustments (1)	0% - 27% (18%)
Property acquired through foreclosure or repossession		$1,073	Appraisals of collateral	Discount for costs to sell	0% - 10% (5%)
				Appraisal adjustments (1)	15% - 34% (21%)


(1)	Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

Valuation of Other Financial ~~Instruments.”~~ Instruments

The methodologies for estimating the fair value of financial instruments that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial instruments are discussed below.

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~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

~~FHLBB Stock~~

~~No market exists for shares of the FHLBB. Subject to certain limitations, such stock may be redeemed at par upon termination of FHLBB membership and is, therefore, valued at par, which equals cost.~~

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, ~~2009~~2012 and ~~2008~~2011 that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation’s historical repayment experience. For residential mortgages, fair value is estimated by using quoted market prices for sales of similar loans on the secondary ~~market, adjusted for servicing costs.~~market. The fair value of floating rate commercial and consumer loans approximates carrying value. ~~The~~Fair value for impaired loans is estimated using 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 ~~nonaccrual loans is calculated by discounting estimated cash flows, using a rate commensurate with~~ the ~~risk associated with the loan type or by other methods that give consideration~~collateral less costs to ~~the value~~sell. Loans are classified within Level 3 of the ~~underlying collateral.~~fair value hierarchy.

~~Deposit Liabilities~~Time Deposits

~~The fair value of demand deposits, NOW accounts, money market accounts and savings accounts is equal to the amount payable on demand as of December 31, 2009 and 2008.~~ The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of ~~certificates~~time deposits. Time deposits are classified within Level 2 of ~~deposit.~~the fair value hierarchy.

Federal Home Loan Bank Advances

Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances. FHLB advances are categorized as Level 2.

Junior Subordinated Debentures

The fair value of the junior subordinated debentures is estimated using rates currently available to the Corporation for debentures with similar terms and maturities. Junior subordinated debentures are categorized as Level 2.

~~Securities Sold Under Agreements to Repurchase~~

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The following tables present the carrying amount, ~~of securities sold under repurchase agreements is~~ estimated ~~based on bid quotations received from brokers.~~

~~Standby Letters of Credit~~

~~The~~ fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Letters of credit contain provisions for fees, conditions and ~~term periods that are consistent with customary market practices. Accordingly,~~placement in the fair value ~~amounts (considered to be the discounted present value~~hierarchy of the ~~remaining contractual fees over~~Corporation’s financial instruments as of December 31, 2012 and 2011. The tables exclude financial instruments for which the ~~unexpired commitment period) would not be material~~carrying value approximates fair value. Financial assets for which the fair value approximates carrying value include cash and ~~therefore are not disclosed.~~

~~-109-~~

~~Table of Contents~~cash equivalents, FHLBB stock, accrued interest receivable and bank-owned life insurance. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, other borrowings and accrued interest payable.



(Dollars in thousands)					Fair Value Measurements
December 31, 2012	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity		$40,381		$41,420		$—		$41,420		$—
Loans, net of allowance for loan losses	2,263,130		2,350,153		—		—		2,350,153
Loan servicing rights (1)	1,110		1,275		—		—		1,275

Financial Liabilities:
Time deposits		$870,232		$879,705		$—		$879,705		$—
FHLBB advances	361,172		392,805		—		392,805		—
Junior subordinated debentures	32,991		23,371		—		23,371		—

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~
(1)	The carrying value of loan servicing rights is net of ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ $165 thousand~~(Continued)~~ in reserves as of December 31, 2012. The estimated fair value does not include such adjustment.



(Dollars in thousands)					Fair Value Measurements
December 31, 2011	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity		$52,139		$52,499		$—		$52,499		$—
Loans, net of allowance for loan losses	2,117,357		2,198,940		—		—		2,198,940
Loan servicing rights (1)	765		937		—		—		937

Financial Liabilities:
Time deposits		$878,794		$891,378		$—		$891,378		$—
FHLBB advances	540,450		577,315		—		577,315		—
Junior subordinated debentures	32,991		20,391		—		20,391		—


(1)	The carrying value of loan servicing rights is net of $172 thousand in reserves as of December 31, ~~2009 and 2008~~2011. The estimated fair value does not include such adjustment.

~~The following table presents the fair values of financial instruments:~~

December 31, 2009 2008
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
Financial Assets:
Cash and cash equivalents $ 57,260 $ 57,260 $ 58,190 $ 58,190
Mortgage loans held for sale 9,909 10,107 2,543 2,604
Securities available for sale 691,484 691,484 866,219 866,219
FHLBB stock 42,008 42,008 42,008 42,008
Loans, net of allowance for loan losses 1,892,268 1,936,997 1,815,429 1,857,433
Accrued interest receivable 9,137 9,137 10,980 10,980
Bank-owned life insurance 44,957 44,957 43,163 43,163
Customer related interest rate swap contracts 1,704 1,704 1,413 1,413
Forward loan commitments (1)
364 364 170 170

Financial Liabilities:
Noninterest-bearing demand deposits $ 194,046 $ 194,046 $ 172,771 $ 172,771
NOW accounts 202,367 202,367 171,306 171,306
Money market accounts 403,333 403,333 305,879 305,879
Savings accounts 191,580 191,580 173,485 173,485
Time deposits 931,684 941,090 967,427 975,255
FHLBB advances 607,328 638,269 829,626 863,884
Junior subordinated debentures 32,991 20,126 32,991 17,386
Securities sold under repurchase agreements 19,500 21,041 19,500 21,310
Other borrowings 2,001 2,001 7,243 7,243
Accrued interest payable 5,818 5,818 7,995 7,995
Customer related interest rate swap contracts 1,691 1,691 1,479 1,479
Interest rate risk management contract 434 434 601 601
Forward loan commitments (1)
211 211 195 195

~~(1) Interest rate lock commitments written for our residential mortgage loans that we intend to sell.~~

(15) Employee Benefits

Defined Benefit Pension Plans

The Corporation offers a tax-qualified defined benefit pension plan for the benefit of certain eligible employees. ~~During 2007, the Corporation reviewed its retirement program, benefit trends, and best practices, and made a strategic decision to shift retirement benefits from the pension plan to the 401(k) Plan.~~ Effective October 1, 2007, the pension plan was amended to freeze plan entry to new hires and rehires. Existing employees hired prior to October 1, 2007 continue to accrue benefits under the plan. Benefits are based on an employee’s years of service and compensation earned during the years of service. The plan is funded on a current basis, in compliance with the requirements of ERISA.

The Corporation also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The supplemental retirement plans provide eligible participants with an additional retirement benefit.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

The non-qualified retirement plans provide for the designation of assets in rabbi trusts. Securities available for sale and other short-term investments designated for this purpose, with the carrying value of ~~$9.7~~$8.3 million and ~~$9.5~~$8.9 million are included in the Consolidated Balance Sheets at December 31, ~~2009~~2012 and ~~2008,~~2011, respectively.

Pension benefit cost and benefit obligations are developed from actuarial valuations. Two critical assumptions in determining pension expense and obligations are the discount rate and the expected long-term rate of return on plan assets. We evaluate these assumptions at least annually. The discount rate is used to calculate the present value of

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

the expected future cash flows for benefit obligations under our pension plans. Future decreases in discount rates would increase the present value of pension obligations and increase our pension costs. Future decreases in the long-term rate of return assumption on plan assets would increase pension costs and, in general, increase the requirement to make funding contributions to the plans.

The following table sets forth the plans’ projected benefit obligations, fair value of plan assets and funded status as of and for the years ended December 31, ~~2009~~2012 and ~~2008.~~2011.



(Dollars in thousands)	Qualified Pension Plan						Non-Qualified Retirement Plans
At December 31,	2012			2011			2012			2011
Change in Benefit Obligation:
Benefit obligation at beginning of period		$57,257			$46,556			$11,321			$9,953
Service cost	2,574			2,314			150			71
Interest cost	2,823			2,578			503			495
Actuarial loss	9,535			7,298			1,315			1,534
Benefits paid	(1,440		)	(1,371		)	(720		)	(732		)
Administrative expenses	(134		)	(118		)	—			—
Benefit obligation at end of period		$70,615			$57,257			$12,569			$11,321
Change in Plan Assets:
Fair value of plan assets at beginning of period		$38,330			$36,070			$—			$—
Actual return on plan assets	4,322			749			—			—
Employer contribution	10,000			3,000			720			732
Benefits paid	(1,440		)	(1,371		)	(720		)	(732		)
Administrative expenses	(134		)	(118		)	—			—
Fair value of plan assets at end of period		$51,078			$38,330			$—			$—
Unfunded status at end of period		($19,537	)		($18,927	)		($12,569	)		($11,321	)

(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
At December 31, 2009 2008 2009 2008
Change in Benefit Obligation:
Benefit obligation at beginning of period $ 39,529 $ 33,028 $ 9,581 $ 9,223
Service cost 2,371 2,046 106 250
Interest cost 2,292 2,027 564 571
Adjustment for change in measurement date - 771 - 121
Actuarial (gain) loss (679 ) 2,645 (105 ) (249 )
Benefits paid (977 ) (878 ) (341 ) (335 )
Administrative expenses (122 ) (110 ) - -
Curtailment loss - - (309 ) -
Benefit obligation at end of period $ 42,414 $ 39,529 $ 9,496 $ 9,581
Change in Plan Assets:
Fair value of plan assets at beginning of period $ 24,527 $ 30,450 $ - $ -
Actual return (loss) on plan assets 5,418 (5,350 ) - -
Employer contribution 2,100 2,000 91 335
Benefits paid (977 ) (878 ) (91 ) (335 )
Administrative expenses (122 ) (110 ) - -
Adjustment for change in measurement date - (1,585 ) - -
Fair value of plan assets at end of period $ 30,946 $ 24,527 $ - $ -
Funded status at end of period $ (11,468 ) $ (15,002 ) $ (9,496 ) $ (9,581 )

The funded status of the qualified pension plan and non-qualified retirement plans has been recognized in ~~accrued expenses and~~ other liabilities in the Consolidated Balance Sheets at December 31, ~~2009~~2012 and ~~2008.~~2011.

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

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


(Dollars in thousands)	Qualified						Non-Qualified				Qualified Pension Plan						Non-Qualified Retirement Plans
	Pension Plan						Retirement Plans				Qualified Pension Plan						Non-Qualified Retirement Plans
At December 31,	2009			2008			2009		2008		2012			2011			2012			2011
Net actuarial loss	$	8,082		$	12,031		$	838	$	1,280		$23,144			$15,928			$3,938			$2,743
Prior service (credit) cost		(321	)		(353	)		1		125
Total pre-tax amounts recognized in
accumulated other comprehensive income	$	7,761		$	11,678		$	839	$	1,405
Prior service credit											(221		)	(254		)	(5		)	(7		)
Total pre-tax amounts recognized in accumulated other comprehensive income												$22,923			$15,674			$3,933			$2,736

The accumulated benefit obligation for the qualified pension plan was ~~$32.7~~$55.8 million and ~~$30.1~~$45.3 million at December 31, ~~2009~~2012 and ~~2008,~~2011, respectively. The accumulated benefit obligation for the non-qualified retirement plans amounted to ~~$9.1~~$11.3 million and ~~$8.4~~$10.4 million at December 31, ~~2009~~2012 and ~~2008,~~2011, respectively.

~~The following table presents information for pension plans with an accumulated benefit obligation in excess of plan assets:~~

(Dollars in thousands) Non-Qualified
Retirement Plans
December 31, 2009 2008
Projected benefit obligation $ 9,496 $ 9,581
Accumulated benefit obligation 9,090 8,361
Fair value of plan assets - -

The components of net periodic benefit cost and other amounts recognized in other comprehensive income, on a pre-tax basis, were as follows:

(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
Years ended December 31, 2009 2008 2007 2009 2008 2007
Net Periodic Benefit Cost:
Service cost $ 2,371 $ 2,046 $ 2,010 $ 106 $ 250 $ 345
Interest cost 2,292 2,027 1,848 564 571 519
Expected return on plan assets (2,451 ) (2,276 ) (1,984 ) - - -
Amortization of transition asset - (1 ) (6 ) - - -
Amortization of prior service (credit) cost (33 ) (33 ) (33 ) 27 63 63
Recognized net actuarial loss 303 15 187 28 217 218
Curtailment loss - - - 97 - -
Net periodic benefit cost $ 2,482 $ 1,778 $ 2,022 $ 822 $ 1,101 $ 1,144
Other Changes in Plan Assets and
Benefit Obligations Recognized in Other
Comprehensive Income (on a pre-tax basis):
Net (gain) loss $ (3,949 ) $ 12,160 $ (3,735 ) $ (133 ) $ (605 ) $ (468 )
Prior service cost (credit) 33 41 33 (27 ) (78 ) (63 )
Net transition asset – 1 6 – – –
Curtailment loss – (406 )
Recognized in other comprehensive income $ (3,916 ) $ 12,202 $ (3,696 ) $ (566 ) $ (683 ) $ (531 )
Total recognized in net periodic benefit
cost and other comprehensive income $ (1,434 ) $ 13,980 $ (1,674 ) $ 256 $ 418 $ 613

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~



(Dollars in thousands)	Qualified Pension Plan									Non-Qualified Retirement Plans
Years ended December 31,	2012			2011			2010			2012			2011			2010
Net Periodic Benefit Cost:
Service cost		$2,574			$2,314			$2,337			$150			$71			$93
Interest cost	2,823			2,578			2,507			503			495			515
Expected return on plan assets	(2,985		)	(2,794		)	(2,541		)	—			—			—
Amortization of prior service (credit) cost	(33		)	(33		)	(33		)	(1		)	(1		)	8
Recognized net actuarial loss	982			392			340			119			16			19
Net periodic benefit cost		$3,361			$2,457			$2,610			$771			$581			$635
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (on a pre-tax basis):
Net loss (gain)		$7,216			$8,951			($1,104	)		$1,195			$1,517			$388
Prior service cost (credit)	33			33			33			1			1			(8		)
Recognized in other comprehensive income		$7,249			$8,984			($1,071	)		$1,196			$1,518			$380
Total recognized in net periodic benefit cost and other comprehensive income		$10,610			$11,441			$1,539			$1,967			$2,099			$1,015

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

The estimated prior service credit and net loss for the qualified pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during ~~2010~~2013 are ~~$(33)~~$(33) thousand and ~~$320 thousand,~~$1.7 million, respectively. The estimated prior service ~~cost~~credit and net loss for the non-qualified retirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during ~~2010~~2013 are $8$(1) thousand and ~~$19~~$196 thousand, respectively.

~~Assumptions:~~

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

Assumptions

The measurement date and weighted-average assumptions used to determine benefit obligations at December 31, ~~2009~~2012 and ~~2008~~2011 were as follows:



	Qualified Pension Plan		Non-Qualified Retirement Plans
	2012	2011	2012	2011
Measurement date	Dec 31, 2012	Dec 31, 2011	Dec 31, 2012	Dec 31, 2011
Discount rate	4.125%	5.000%	3.750%	4.625%
Rate of compensation increase	3.750%	3.750%	3.750%	3.750%

Qualified Pension Plan Non-Qualified Retirement Plans
2009 2008 2009 2008
Measurement date Dec. 31, 2009 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2008
Discount rate 6.00% 5.875% 5.50% 6.25%
Rate of compensation increase 4.25% 4.25% 4.25% 4.25%

The measurement date and weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, ~~2009, 2008~~2012, 2011 and ~~2007~~2010 were as follows:



	Qualified Pension Plan			Non-Qualified Retirement Plans
	2012	2011	2010	2012	2011	2010
Measurement date	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009
Discount rate	5.000%	5.625%	6.000%	4.625%	5.125%	5.625%
Expected long-term return on plan assets	7.750%	8.000%	8.000%	—	—	—
Rate of compensation increase	3.750%	3.750%	4.250%	3.750%	3.750%	4.250%

Qualified Pension Plan Non-Qualified Retirement Plans
2009 2008 2007 2009 2008 2007
Measurement date Dec. 31, 2008 Sept. 30, 2007 Sept. 30, 2006 Dec. 31, 2008 Sept. 30, 2007 Sept. 30, 2006
Discount rate 5.875% 6.25% 5.90% 6.125% 6.25% 5.90%
Expected long-term
return on plan assets 8.25% 8.25% 8.25% - - -
Rate of compensation
increase 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%

The expected long-term rate of return on plan assets is based on what the Corporation believes is realistically achievable based on the types of assets held by the plan and the ~~plan's~~plan’s investment practices. The assumption is updated at least annually, taking into account the asset allocation, historical asset return trends on the types of assets held and the current and expected economic conditions. At December 31, ~~2008,~~2011, the measurement date used in the determination of net periodic benefit cost for ~~2009,~~2012, the Corporation determined that a ~~revision~~reduction to ~~the assumption was not necessary based upon expected market performance and~~7.75% in the expected long-term rate of return ~~assumption remained at 8.25%.~~was necessary, based upon expected market performance.

The discount rate assumption for defined benefit pension plans is reset ~~annually. For~~annually on the measurement ~~dates prior to December 31, 2008, the Corporation’s~~date. A discount rate was based on the published yield index for “AA” long-term corporate bonds. Beginning with measurement date December 31, 2008, the Corporation utilized the Citigroup Pension Discount Curve and Liability Index to identify the discount rates for defined benefit plan obligations. A discount rate is selected for each plan by matching expected future benefit payments stream to ~~the Citigroup Pension Discount Curve and Liability Index as~~a yield curve based on a selection of ~~the measurement date.~~high-quality fixed-income debt securities.

Plan ~~Assets:~~Assets

Effective December 31, 2009, the Corporation adopted FASB Staff Position No. 132(R)-1, “Employer’ Disclosures Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”). FSP No. 132(R)-1 is now a sub-topic within ASC 715, “Compensation – Retirement Benefits.” FSP No. 132(R)-1 provided guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosures required are included below.

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

The following table presents the fair values of the qualified pension plan’s assets at December 31, ~~2009:~~2012:



(Dollars in thousands)
	Fair Value Measurements Using						Assets at Fair Value
December 31, 2012	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Cash and cash equivalents		$7,274		$—		$—		$7,274
Obligations of U.S. government agencies and U.S. government-sponsored enterprises	—		1,059		—		1,059
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		—		—		—
States and political subdivisions	—		2,218		—		2,218
Corporate bonds	—		10,378		—		10,378
Common stocks	15,892		—		—		15,892
Mutual funds	14,750		—		—		14,750
Total plan assets		$37,916		$13,655		$—		$51,571

(Dollars in thousands)
Fair Value Measurements Using Assets at
December 31, 2009 Level 1 Level 2 Level 3 Fair Value
Assets:
Cash and cash equivalents $ 1,284 $ – $ – $ 1,284
Obligations of U.S. government agencies
and U.S. government-sponsored enterprises – 2,214 – 2,214
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises – 1 – 1
Corporate bonds – 8,937 – 8,937
Common stocks 12,198 – – 12,198
Mutual funds 6,312 – – 6,312
Total plan assets $ 19,794 $ 11,152 $ – $ 30,946
-128-

The following table presents the fair values of the qualified pension plan’s assets at December 31, ~~2008:~~2011:


(Dollars in thousands)
	Fair Value Measurements Using						Assets at		Fair Value Measurements Using						Assets at Fair Value
December 31, 2008	Level 1		Level 2		Level 3		Fair Value								Assets at Fair Value
December 31, 2011									Level 1		Level 2		Level 3		Assets at Fair Value
Assets:															Assets at Fair Value
Cash and cash equivalents	$	2,763	$	–	$	–	$	2,763		$1,595		$—		$—		$1,595
Obligations of U.S. government agencies
and U.S. government-sponsored enterprises		–		1,083		–		1,083
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		–		1		–		1
Obligations of U.S. government agencies and U.S. government-sponsored enterprises									—		1,786		—		1,786
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises									—		—		—		—
States and political subdivisions									—		1,720		—		1,720
Corporate bonds		–		7,891		–		7,891	—		10,283		—		10,283
Common stocks		8,252		–		–		8,252	15,487		—		—		15,487
Mutual funds		4,537		–		–		4,537	7,459		—		—		7,459
Total plan assets	$	15,552	$	8,975	$	–	$	24,527		$24,541		$13,789		$—		$38,330

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

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

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

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~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

The asset allocations of the qualified pension plan at December 31, ~~2009~~2012 and ~~2008,~~2011, by asset category were as follows:


December 31,	2009			2008			2012		2011
Asset Category:
Equity securities		59.8	%		52.1	%	55.0	%	56.2	%
Debt securities		36.0	%		36.6	%
Other		4.2	%		11.3	%
Fixed securities							30.9	%	39.7	%
Cash and cash equivalents							14.1	%	4.1	%
Total		100.0	%		100.0	%	100.0	%	100.0	%

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

At December 31, ~~2008,~~2012, the holdings in the Other category, primarily cash equivalents (short-term investments), represented ~~11.3%~~14.1% of total assets, ~~versus~~which was outside the ~~0-10%~~0% to 10% target range, due to an additional $7 million dollar contribution made late in response to the unprecedented market volatility and illiquid conditions in the fixed income market during the final quarter of 2008. At December 31, 2009, the balance of holdings in the Other category was within the target range.2012.

Fixed income bond investments should be limited to those in the top four categories used by the major credit rating agencies.High yield bond funds may be used to provide exposure to this asset class as a diversification tool provided they do not exceed ~~15%~~10% of the portfolio. In order to reduce the volatility of the annual rate of return of the bond portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts. The assets of the Pension Trust will typically have a laddered maturity structure, avoiding large concentrations in any single year. Common stock and equity holdings provide opportunities for dividend and capital appreciation returns. Holdings will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities. Concentration in small-cap, mid-cap and international equities is limited to 20%, 20% and 30% of the equity portfolio, respectively. Investment selection and mix of equity holdings should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification. The fair value of equity securities of any one issuer will not be permitted to exceed 10% of the total fair value of equity holdings of the Pension Trust. Investments in publicly traded real estate investment trust securities and low-risk derivatives securities such as callable securities, floating rate notes, mortgage backed securities and treasury inflation protected securities, are permitted.

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~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

Cash ~~Flows:~~Flows

Contributions

The Internal Revenue Code permits flexibility in plan contributions so that normally a range of contributions is possible. The Corporation’s current funding policy has been generally to contribute the minimum required contribution and additional amounts up to the maximum deductible contribution. The Corporation expects to contribute ~~$2.0~~$5.0 million to the qualified pension plan in ~~2010.~~2013. In addition, the Corporation expects to contribute ~~$676~~$731 thousand in benefit payments to the non-qualified retirement plans in ~~2010.~~2013.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

(Dollars in thousands)
Qualified
Pension Plan

Non-Qualified
Plans

2010 $ 1,278 $ 667
2011 1,425 727
2012 1,544 727
2013 1,808 734
2014 1,948 735
Years 2015 - 2019 12,209 3,732



(Dollars in thousands)	Qualified Pension Plan		Non-Qualified Plans
2013		$1,816		$731
2014	1,936		738
2015	2,191		767
2016	2,382		766
2017	2,510		759
Years 2018 - 2021	14,386		3,769

-130-

401(k) Plan

The Corporation’s 401(k) Plan provides a specified match of employee contributions for substantially all employees. In addition, substantially all employees hired after September 30, 2007, who are ineligible for participation in the qualified defined benefit pension plan, will receive a non-elective employer contribution of 4%. Total employer matching contributions under this plan amounted to ~~$837 thousand, $749 thousand~~$1.4 million, $1.2 million and ~~$685 thousand~~$1.0 million in ~~2009, 2008~~2012, 2011 and ~~2007,~~2010, respectively.

Other Incentive Plans

The Corporation maintains several non-qualified incentive compensation plans. Substantially all employees participate in one of the incentive compensation plans. Incentive plans provide for annual or more frequent payments based on ~~a combination of~~ individual, business line and/or corporate performance targets ~~and~~(measured in terms of the ~~achievement of target levels of~~Corporation’s net income, earnings per share and return on ~~equity, or for certain employees, solely on the achievement of individual performance targets.~~equity). Total incentive based compensation amounted to ~~$6.3~~$13.5 million ~~$7.1~~, $10.7 million and ~~$7.6~~$9.6 million in ~~2009, 2008~~2012, 2011 and ~~2007,~~2010, respectively. In general, the terms of incentive plans are subject to annual renewal and may be terminated at any time by the Board of Directors.

Deferred Compensation Plan

The Amended and Restated Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The assets and liabilities of the Deferred Compensation Plan are recorded at fair value in the Corporation’s Consolidated Balance Sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to ~~$4.7~~$6.2 million and ~~$3.3~~$5.4 million at December 31, ~~2009~~2012 and ~~2008,~~2011, respectively, and is included in other liabilities on the accompanying Consolidated Balance Sheets. The corresponding invested assets are reported in other assets.

(16) Share-Based Compensation Arrangements

Washington Trust has two share-based compensation plans, which are described below.

~~In 2009, the~~The Bancorp’s 2003 Stock Incentive Plan (the “2003 Plan”) was amended and restated and was also approved by shareholders in April 2009. The 2003 Plan amendments included increasing the maximum number of shares of Bancorp’s common stock to be issued under the 2003 Plan from 600,000 shares to 1,200,000 shares and increasing the number of shares that can be issued in the form of awards other than share options or stock

~~-116-~~

~~Table of Contents~~

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~(Continued)~~

~~December 31, 2009 and 2008~~

appreciation rights from 200,000 to ~~400,000.~~400,000. The 2003 Plan permits the granting of share options and other equity incentives to officers, employees, directors, and other key persons. The exercise price of each share option may not be less than the fair market value of the Bancorp’s common stock on the date of grant, and options shall have a term of no more than ten years. Share options are designated as either non-qualified or incentive share options. Incentive share option awards may be granted at any time until February 19, 2019.

The Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which was shareholder approved, provided for the granting of share options and other equity incentives to key employees, directors, advisors, and consultants. The 1997 Plan permitted share options and other equity incentives to be granted at any time until April 29, 2007. The 1997 Plan provided for shares of the Bancorp’s common stock to be used from authorized but unissued shares, treasury stock, shares reacquired by the Corporation, or shares available from expired or terminated awards. Share options are designated as either non-qualified or incentive share options.

The 1997 Plan and the 2003 Plan (collectively, ~~“the Plans”~~the “Plans”) permit options to be granted with stock appreciation rights ~~("SARs"~~(”SARs”), however, no share options have been granted with SARs. ~~Pursuant to the Plans, the exercise price of each share option may not be less than fair market value of the Bancorp’s common stock on the date of the grant.~~ In general, the share option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof. The fair value of share options on the date of grant is estimated using the Black-Scholes Option-Pricing Model. ~~Nonvested~~

The Plans also permit nonvested share units, nonvested shares and nonvested performance shares to be granted. These awards are valued at the fair market value of the Bancorp’s common stock as of the award date. Performance share awards are granted providing certain officers of the Corporation the opportunity to earn shares of common stock the number of which is determined pursuant to, and subject to the attainment of, performance goals during a specified measurement period. The number of shares earned will range from zero to 200% of the target number of shares dependent upon the Corporation’s core return on equity and core earnings per share growth ranking compared to an industry peer group.

-131-

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012 and 2011

Vesting of share ~~option~~options and share awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death (as defined in the Plans).

Amounts recognized in the consolidated financial statements for share options, nonvested share units, ~~and~~ nonvested share awards and nonvested performance shares are as follows:


(Dollars in thousands)

Years ended December 31,	2009		2008		2007		2012		2011		2010
Share-based compensation expense	$	708	$	630	$	508		$1,962		$1,394		$909
Related income tax benefit	$	252	$	225	$	178		$700		$497		$324



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)



COMMON STOCK, $.0625 PAR VALUE PER SHARE		THE NASDAQ STOCK MARKET LLC
(Title of each class)		(Name of each exchange on which registered)



Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o



Description			Page Number
Part I
Item 1	Business		3
Item 1A	Risk Factors		1317
Item 1B	Unresolved Staff Comments		1623
Item 2	Properties		1623
Item 3	Legal Proceedings		1724
Item 4	Mine Safety Disclosures		24
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		1725
Item 6	Selected Financial Data		1927
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2330
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		6069
Item 8	Financial Statements and Supplementary Data		6069
Item 9	Changes in and Disagreements ~~with~~With Accountants on Accounting and Financial Disclosure		~~124~~145
Item 9A	Controls and Procedures		~~124~~145
Item 9B	Other Information		~~124~~145
Part III
Item 10	Directors, Executive Officers and Corporate Governance		~~124~~145
Item 11	Executive Compensation		~~124~~145
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		~~125~~146
Item 13	Certain Relationships and Related Transactions, and Director Independence		~~125~~147
Item 14	Principal Accounting Fees and Services		~~126~~147
Part IV
Item 15	Exhibits, Financial Statement Schedules	~~126~~
~~Signatures~~		~~130~~147
~~Exhibit 23.1~~Signatures	~~Consent of Independent Accountants~~			152
~~Exhibit 31.1~~	~~Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~Exhibit 31.2~~	~~Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~Exhibit 32.1~~	~~Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~Residential mortgages~~	~~Consumer installment loans~~	~~Merchant credit card services~~
~~Reverse mortgages~~	~~Commercial and consumer demand deposits~~	~~Telephone banking services~~
~~Commercial loans~~	~~Savings, NOW and money market deposits~~	~~Internet banking services~~
~~Construction loans~~	~~Certificates of deposit~~	~~Cash management services~~
~~Home equity lines of credit~~	~~Retirement accounts~~	~~Remote deposit capture~~
~~Home equity loans~~	~~Automated teller machines (ATMs)~~	~~Safe deposit boxes~~



x	Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, ~~2009~~2012 or



o	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________



Description		Page
I.	Distribution of Assets, Liabilities and Stockholder Equity; Interest Rates and Interest Differentials	39-40
II.	Investment Portfolio	46-51, 88
III.	Loan Portfolio	51-59, 93
IV.	Summary of Loan Loss Experience	59-63, 103
V.	Deposits	39, 108
VI.	Return on Equity and Assets	27
VII.	Short-Term Borrowings	109

·
	~~Regional credit concentration - We are exposed to real estate~~
Description		Page
I.	Distribution of Assets, Liabilities and ~~economic factors in southern New England, because a significant portion~~Stockholder Equity; Interest Rates and Interest Differentials	39-40
II.	Investment Portfolio	46-51, 88
III.	Loan Portfolio	51-59, 93
IV.	Summary of our loan portfolio is concentrated among borrowers in this market. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including residential mortgages, most consumer loans, commercial mortgagesLoan Loss Experience	59-63, 103
V.	Deposits	39, 108
VI.	Return on Equity and ~~other commercial loans, the value of our collateral is also subject to regional real estate market conditions and other factors that might affect the value of real estate, including natural disasters.~~Assets	27
VII.	Short-Term Borrowings	109

~~ITEM 5.~~	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of~~
	~~Equity Securities.~~

2009 Quarters		1		2		3		4

									Quarters
2012									1	2	3	4
Stock prices:
High	$	20.62	$	20.75	$	19.61	$	17.95	$26.76	$24.74	$27.75	$27.46
Low		11.50		15.67		16.16		13.97	23.01	22.53	23.85	23.50

Cash dividend declared per share	$	0.21	$	0.21	$	0.21	$	0.21	$0.23	$0.23	$0.24	$0.24

2008 Quarters		1		2		3		4
Stock prices:
High	$	26.50	$	26.49	$	33.34	$	27.30
Low		21.84		19.70		18.43		16.33

Cash dividend declared per share	$	0.20	$	0.21	$	0.21	$	0.21

For the period ending December 31	2004		2005		2006		2007		2008		2009
Washington Trust Bancorp, Inc.	$	100.00	$	91.72	$	100.51	$	93.73	$	76.08	$	63.00
NASDAQ Bank Stocks	$	100.00	$	95.67	$	106.20	$	82.76	$	62.96	$	51.31
NASDAQ Stock Market (U.S.)	$	100.00	$	101.37	$	111.03	$	121.92	$	72.49	$	104.31



For the period ending December 31,	2007		2008		2009		2010		2011		2012
Washington Trust Bancorp, Inc.		$100.00		$81.17		$67.21		$98.52		$111.73		$127.88
NASDAQ Bank Stocks		$100.00		$78.46		$65.67		$74.97		$67.10		$79.64
NASDAQ Stock Market (U.S.)		$100.00		$60.02		$87.24		$103.08		$102.26		$120.42

	At December 31, 2009
	Amortized		Unrealized					Fair
(Dollars in thousands)	Cost (a)		Gains		Losses			Value
Common and perpetual preferred stocks
Common stocks	$	658	$	111	$	–		$	769
Perpetual preferred stocks:
Financials		2,354		396		(27	)		2,723
Utilities		1,000		–		(113	)		887
Total perpetual preferred stocks		3,354		396		(140	)		3,610
Total common and perpetual preferred stocks	$	4,012	$	507	$	(140	)	$	4,379

(Dollars in thousands)
	1 Year		1 to 5		After 5
Matures in:	or Less		Years		Years		Totals
Construction and development (1)	$	17,973	$	17,943	$	47,971	$	83,887
Commercial - other		155,307		162,000		97,954		415,261
	$	173,280	$	179,943	$	145,925	$	499,148

(Dollars in thousands)			Floating or
	Predetermined		Adjustable
	Rates		Rates		Totals
Principal due after one year	$	226,483	$	99,385	$	325,868


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


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


(1)	Net of partial charge-offs of $2.3 million and $2.3 million, respectively, at December 31, 2012 and 2011.


(2)	Net of partial charge-offs of $92 thousand and $328 thousand, respectively, at December 31, 2012 and 2011.


(Dollars in thousands)	Payments Due by Period										Payments Due by Period
	Total		Less Than 1 Year (1)		1-3 Years		4-5 Years		After 5 Years		Total		Less Than 1 Year (1)		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations:
FHLBB advances (2)	$	607,328	$	121,104	$	237,405	$	162,096	$	86,723		$361,172		$48,630		$81,588		$165,401		$65,553
Junior subordinated debentures		32,991		–		–		–		32,991	32,991		—		—		—		32,991
Operating lease obligations		6,444		1,384		1,979		1,200		1,881	19,588		2,275		3,989		2,758		10,566
Software licensing arrangements		1,358		1,217		141		–		–	4,277		2,130		1,817		330		—
Treasury, tax and loan demand note		1,676		1,676		–		–		–
Other borrowings		19,825		33		19,573		86		133	1,212		1,034		93		85		—
Total contractual obligations	$	669,622	$	125,414	$	259,098	$	163,382	$	121,728		$419,240		$54,069		$87,487		$168,574		$109,110


(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. See Note 11 to the Consolidated Financial Statements for additional information.



(Dollars in thousands)	Amount of Commitment Expiration – Per Period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Other Commitments:
Commercial loans		$223,426		$152,301		$23,013		$11,111		$37,001
Home equity lines	184,941		—		—		—		184,941
Other loans	30,504		24,022		994		5,488		—
Standby letters of credit	1,039		939		100		—		—
Forward loan commitments to:
Originate loans	67,792		67,792		—		—		—
Sell loans	116,162		116,162		—		—		—
Customer related derivative contracts:
Interest rate swaps with customers	70,493		9,354		38,570		10,351		12,218
Mirror swaps with counterparties	70,493		9,354		38,570		10,351		12,218
Interest rate risk management contract:
Interest rate swap	32,991		10,310		22,681		—		—
Total commitments		$797,841		$390,234		$123,928		$37,301		$246,378

(Dollars in thousands)	Down 100		Up 200
	Basis		Basis
Security Type	Points		Points
U.S. Treasury and U.S. government-sponsored enterprise securities (noncallable)	$	1,401	$	(2,619	)
U.S. government-sponsored enterprise securities (callable)		1		(2	)
States and political subdivisions		3,894		(10,196	)
Mortgage-backed securities issued by U.S. government-sponsored agencies
and U.S. government-sponsored enterprises		6,521		(21,992	)
Trust preferred debt and other corporate securities		434		1,007
Total change in market value as of December 31, 2009	$	12,251	$	(33,802	)

Total change in market value as of December 31, 2008	$	14,624	$	(48,014	)

												Accumulated
	Common											Other
	Shares			Common		Paid-in			Retained			Comprehensive			Treasury
(Dollars and shares in thousands)	Outstanding			Stock		Capital			Earnings			Income (Loss)			Stock			Total
Balance at January 1, 2007		13,430		$	843	$	35,893		$	141,548		$	(3,515	)	$	(1,713	)	$	173,056
Net income for 2007										23,800									23,800
Unrealized gains on securities, net
of $427 income tax expense													793						793
Reclassification adjustments for net
realized gains included in net income,
net of $190 income tax expense													(265	)					(265	)
Defined benefit plan obligation adjustment,
net of $1,330 income tax expense													2,469						2,469
Reclassification adjustments for net periodic
pension cost, net of $149 income tax expense													279						279
Comprehensive income																			27,076
Cash dividends declared										(10,701	)								(10,701	)
Share-based compensation							508												508
Deferred compensation plan		(14	)				(4	)								(354	)		(358	)
Exercise of stock options, issuance of other
other compensation-related equity instruments
and related tax benefit		123					(1,523	)								3,302			1,779
Shares repurchased		(185	)													(4,847	)		(4,847	)
Balance at December 31, 2007		13,354		$	843	$	34,874		$	154,647		$	(239	)	$	(3,612	)	$	186,513
Net income for 2008										22,172									22,172
Unrealized losses on securities, net
of $2,899 income tax benefit													(5,222	)					(5,222	)
Reclassification adjustments for net
realized losses included in net income,
net of $1,335 income tax benefit													2,377						2,377
Defined benefit plan obligation adjustment,
net of $4,230 income tax benefit													(7,615	)					(7,615	)
Reclassification adjustments for net periodic
pension cost, net of $91 income tax expense													169						169
Unrealized gains on cash flow hedges, net
of $2 income tax expense													4						4
Reclassification adjustments for net realized
gains on cash flow hedges included in net
income, net of $14 income tax expense													26						26
Comprehensive income																			10,261
Adjustment to initially apply SFAS No. 158,
net of $229 income tax benefit										(468	)		42						(426	)
Cash dividends declared										(11,672	)								(11,672	)
Share-based compensation							630												630
Deferred compensation plan		2					(7	)								43			36
Exercise of stock options, issuance of other
other compensation-related equity instruments
and related tax benefit		41					(687	)								1,068			381
Shares issued		2,500			156		46,718												46,874
Shares issued – dividend reinvestment plan		38			2		567									295			864
Balance at December 31, 2008		15,935		$	1,001	$	82,095		$	164,679		$	(10,458	)	$	(2,206	)	$	235,111

(Dollars in thousands)	Prior to Adoption of Measurement Date Provisions of SFAS No. 158			Effect of Adopting Measurement Date Provisions of SFAS No. 158			As of January 1, 2008
Net deferred tax asset	$	7,705		$	229		$	7,934
Defined benefit pension liabilities		11,801			655			12,456
Retained earnings		154,647			(468	)		154,179
Accumulated other comprehensive loss		(239	)		42			(197	)



(Dollars in thousands)
December 31, 2011	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$29,429		$3,404		$—			$32,833
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	369,946		19,712		—			389,658
States and political subdivisions	74,040		5,453		—			79,493
Trust preferred securities:
Individual name issuers	30,639		—		(8,243		)	22,396
Collateralized debt obligations	4,256		—		(3,369		)	887
Corporate bonds	13,872		813		(403		)	14,282
Perpetual preferred stocks (2)	1,854		—		(150		)	1,704
Total securities available for sale		$524,036		$29,382		($12,165	)		$541,253
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$52,139		$360		$—			$52,499
Total securities held to maturity		$52,139		$360		$—			$52,499
Total securities		$576,175		$29,742		($12,165	)		$593,752



(Dollars in thousands)	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		$—			$29,458			$—			$—			$29,458
Weighted average yield	—		%	5.40		%	—		%	—		%	5.40		%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost	89,039			108,484			16,165			3,448			217,136
Weighted average yield	4.30		%	3.88		%	2.64		%	2.29		%	3.93		%
State and political subdivisions:
Amortized cost	7,525			60,671			—			—			68,196
Weighted average yield	3.84		%	3.91		%	—		%	—		%	3.90		%
Trust preferred securities:
Amortized cost (1)	—			—			—			34,713			34,713
Weighted average yield	—		%	—		%	—		%	1.66		%	1.66		%
Corporate bonds:
Amortized cost	3,202			10,703			—			—			13,905
Weighted average yield	6.30		%	4.65		%	—		%	—		%	5.03		%
Total debt securities available for sale:
Amortized cost		$99,766			$209,316			$16,165			$38,161			$363,408
Weighted average yield	4.33		%	4.14		%	2.64		%	1.72		%	3.87		%
Fair value		$104,044			$215,855			$17,214			$38,385			$375,498
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost		$13,449			$21,574			$4,745			$613			$40,381
Weighted average yield	1.99		%	1.83		%	1.74		%	0.52		%	1.85		%
Fair value		$13,795			$22,129			$4,867			$629			$41,420

~~WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES~~
(1)	Includes a contribution of appreciated equity securities to the Corporation’s charitable foundation in 2011. The cost of the contribution, included in noninterest expenses, amounted to ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ $990 thousand~~(Continued)~~ in 2011. This transaction resulted in a realized security gain of $331 thousand for the same period.
~~December 31, 2009 and 2008~~

(Dollars in thousands)

For the year ended December 31,	2009
Balance at beginning of period	$	–
Credit-related impairment loss on debt securities for which an other-than-temporary impairment
was not previously recognized		1,817
Additional increases to the amount of credit-related impairment loss on debt securities for which
an other-than-temporary impairment was previously recognized		679
Balance at end of period	$	2,496



(Dollars in thousands)	Less than 12 Months					12 Months or Longer						Total
December 31, 2012	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Trust preferred securities:
Individual name issuers	—		$—		$—	11		$24,751		($5,926	)	11		$24,751		($5,926	)
Collateralized debt obligations	—	—		—		2	843		(3,193		)	2	843		(3,193		)
Total temporarily impaired securities	—		$—		$—	13		$25,594		($9,119	)	13		$25,594		($9,119	)

(Dollars in thousands)	Due in			After 1 Year			After 5 Years
	1 Year			but within			but within			After
	or Less			5 Years			10 Years			10 Years			Totals
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored enterprises:
Amortized cost	$	12,161		$	29,404		$	–		$	–		$	41,565
Weighted average yield		4.69	%		5.42	%		–	%		–	%		5.21	%
Mortgage-backed securities issued by U.S.
government agencies & U.S.
government-sponsored enterprises:
Amortized cost		125,350			250,860			91,215			35,690			503,115
Weighted average yield		4.66	%		4.35	%		3.72	%		2.47	%		4.18	%
State and political subdivisions:
Amortized cost		–			22,961			50,110			7,112			80,183
Weighted average yield		–	%		3.87	%		3.90	%		3.83	%		3.89	%
Trust preferred securities:
Amortized cost (1)		–			–			–			35,529			35,529
Weighted average yield		–	%		–	%		–	%		1.75	%		1.75	%
Corporate bonds:
Amortized cost		–			13,172			100			–			13,272
Weighted average yield		–	%		6.53	%		3.29	%		–	%		6.50	%
Total debt securities:
Amortized cost	$	137,511		$	316,397		$	141,425		$	78,331		$	673,664
Weighted average yield		4.66	%		4.50	%		3.78	%		1.47	%		4.03	%
Fair value	$	143,653		$	317,321		$	146,191		$	79,940		$	687,105


(2)	Loans for construction of residential and commercial properties and for land development.


(4)	~~A substantial portion~~ As of December 31, 2012 and 2011, $627.4 million and $611.8 million, respectively, of these loans ~~is used~~were pledged as ~~qualified~~ collateral for FHLBB borrowings (see Note ~~11 for additional discussion of FHLBB borrowings)~~11).