WASHINGTON TRUST BANCORP INC (Form: 10-Q, Received: 05/08/2014 16:11:19)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended MARCH 31, 2014 or



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

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



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



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

(401) 348-1200

(Registrant’s telephone number, including area code)

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

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

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares of common stock of the registrant outstanding as of April 30, 2014 was 16,675,272 .



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2014

TABLE OF CONTENTS
		Page Number
		Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2014 and December 31, 201 3		3
Consolidated Statements of Income for the three months ended March 31, 2014 and 201 3		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013		5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2014 and 201 3		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 201 3		7
Condensed Notes to Unaudited Consolidated Financial Statements		9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3. Quantitative and Qualitative Disclosures About Market Risk		64
Item 4. Controls and Procedures		64
PART II. Other Information
Item 1. Legal Proceedings		65
Item 1A. Risk Factors		65
Item 6. Exhibits		66
Signatures		67

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



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



	March 31, 2014			December 31, 2013
Assets:
Cash and due from banks		$104,738			$81,939
Short-term investments	3,419			3,378
Mortgage loans held for sale, at fair value	10,409			11,636
Securities:
Available for sale, at fair value	361,000			392,903
Held to maturity, at amortized cost (fair value $29,180 in 2014 and $29,865 in 2013)	28,889			29,905
Total securities	389,889			422,808
Federal Home Loan Bank stock, at cost	37,730			37,730
Loans:
Commercial	1,337,283			1,363,335
Residential real estate	810,393			772,674
Consumer	330,927			326,875
Total loans	2,478,603			2,462,884
Less allowance for loan losses	27,043			27,886
Net loans	2,451,560			2,434,998
Premises and equipment, net	25,909			25,402
Investment in bank-owned life insurance	57,118			56,673
Goodwill	58,114			58,114
Identifiable intangible assets, net	5,329			5,493
Other assets	49,931			50,696
Total assets		$3,194,146			$3,188,867
Liabilities:
Deposits:
Demand deposits		$445,570			$440,785
NOW accounts	311,461			309,771
Money market accounts	704,434			666,646
Savings accounts	293,322			297,357
Time deposits	836,867			790,762
Total deposits	2,591,654			2,505,321
Federal Home Loan Bank advances	203,429			288,082
Junior subordinated debentures	22,681			22,681
Other liabilities	40,524			43,137
Total liabilities	2,858,288			2,859,221
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,634,985 shares in 2014 and 16,613,561 shares in 2013	1,040			1,038
Paid-in capital	98,596			97,566
Retained earnings	236,999			232,595
Accumulated other comprehensive loss	(777		)	(1,553		)
Total shareholders’ equity	335,858			329,646
Total liabilities and shareholders’ equity		$3,194,146			$3,188,867

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



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



Three months ended March 31,		2014			2013
Interest income:
Interest and fees on loans			$25,589			$25,223
Interest on securities:	Taxable	2,942			2,845
	Nontaxable	582			659
Dividends on Federal Home Loan Bank stock		142			38
Other interest income		35			28
Total interest and dividend income		29,290			28,793
Interest expense:
Deposits		2,969			3,194
Federal Home Loan Bank advances		2,241			2,737
Junior subordinated debentures		241			390
Other interest expense		3			5
Total interest expense		5,454			6,326
Net interest income		23,836			22,467
Provision for loan losses		300			600
Net interest income after provision for loan losses		23,536			21,867
Noninterest income:
Wealth management revenues		8,065			7,474
Merchant processing fees		1,291			1,977
Net gains on loan sales and commissions on loans originated for others		1,239			4,166
Service charges on deposit accounts		754			791
Card interchange fees		681			599
Income from bank-owned life insurance		445			467
Net gains on interest rate swap contracts		260			19
Equity in earnings (losses) of unconsolidated subsidiaries		(43		)	39
Gain on sale of business line		6,265			—
Other income		413			406
Noninterest income, excluding other-than-temporary impairment losses		19,370			15,938
Total other-than-temporary impairment losses on securities		—			(613		)
Portion of loss recognized in other comprehensive income (before tax)		—			(2,159		)
Net impairment losses recognized in earnings		—			(2,772		)
Total noninterest income		19,370			13,166
Noninterest expense:
Salaries and employee benefits		14,558			15,442
Net occupancy		1,640			1,514
Equipment		1,236			1,244
Merchant processing costs		1,050			1,673
Outsourced services		1,044			841
Legal, audit and professional fees		618			608
FDIC deposit insurance costs		440			431
Advertising and promotion		232			355
Amortization of intangibles		164			173
Foreclosed property costs		(22		)	47
Debt prepayment penalties		6,294			—
Other expenses		2,038			1,856
Total noninterest expense		29,292			24,184
Income before income taxes		13,614			10,849
Income tax expense		4,316			3,428
Net income			$9,298			$7,421

Weighted average common shares outstanding - basic		16,626			16,401
Weighted average common shares outstanding - diluted		16,800			16,449
Per share information:	Basic earnings per common share		$0.56			$0.45
	Diluted earnings per common share		$0.55			$0.45
	Cash dividends declared per share		$0.29			$0.25

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



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



Three months ended March 31,	2014			2013
Net income		$9,298			$7,421
Other comprehensive income, net of tax:
Securities available for sale:
Changes in fair value of securities available for sale	612			(1,053		)
Net losses on securities reclassified into earnings	—			393
Net change in fair value of securities available for sale	612			(660		)
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings	—			1,384
Cash flow hedges:
Change in fair value of cash flow hedges	(16		)	(2		)
Net cash flow hedge losses reclassified into earnings	92			122
Net change in fair value of cash flow hedges	76			120
Defined benefit plan obligation adjustment	88			337
Total other comprehensive income, net of tax	776			1,181
Total comprehensive income		$10,074			$8,602

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



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



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance at January 1, 2013	16,380		$1,024		$91,453		$213,674			($10,499	)		$295,652
Net income						7,421						7,421
Total other comprehensive income, net of tax									1,181			1,181
Cash dividends declared						(4,175		)				(4,175		)
Share-based compensation				581								581
Deferred compensation plan	2	—		30								30
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	43	3		598								601
Balance at March 31, 2013	16,425		$1,027		$92,662		$216,920			($9,318	)		$301,291



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance at January 1, 2014	16,614		$1,038		$97,566		$232,595			($1,553	)		$329,646
Net income						9,298						9,298
Total other comprehensive income, net of tax									776			776
Cash dividends declared						(4,894		)				(4,894		)
Share-based compensation				491								491
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	21	2		539								541
Balance at March 31, 2014	16,635		$1,040		$98,596		$236,999			($777	)		$335,858

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



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



Three months ended March 31,		2014			2013
Cash flows from operating activities:
Net income			$9,298			$7,421
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			600
Depreciation of premises and equipment		783			847
Foreclosed and repossessed property valuation adjustments		12			20
Net amortization of premium and discount		219			460
Net amortization of intangibles		164			173
Share-based compensation		491			581
Income from bank-owned life insurance		(445		)	(467		)
Net gain on sale of business line		(6,265		)	—
Net gains on loan sales and commissions on loans originated for others		(1,239		)	(4,166		)
Net impairment losses recognized in earnings		—			2,772
Net gains on interest rate swap contracts		(260		)	(19		)
Equity in losses (earnings) of unconsolidated subsidiaries		43			(39		)
Proceeds from sales of loans		48,296			138,729
Loans originated for sale		(46,159		)	(114,244		)
(Increase) decrease in other assets		(93		)	2,050
Decrease in other liabilities		(3,723		)	(10,945		)
Net cash provided by operating activities		1,422			23,773
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	—			(1,036		)
	Other investment securities available for sale	—			(203		)
Proceeds from sale of:	Other investment securities available for sale	547			—
Maturities and principal payments of:	Mortgage-backed securities available for sale	11,313			23,934
	Other investment securities available for sale	20,844			690
	Mortgage-backed securities held to maturity	960			3,328
Remittance of Federal Home Loan Bank stock		—			2,688
Net proceeds from the sale of business line		6,305			—
Proceeds received and deferred in connection with sale of business line		900			—
Net increase in loans		(13,584		)	(26,102		)
Purchases of loans, including purchased interest		(2,934		)	(3,442		)
Proceeds from the sale of property acquired through foreclosure or repossession		659			460
Purchases of premises and equipment		(1,291		)	(427		)
Net cash provided by (used in) investing activities		23,719			(110		)
Cash flows from financing activities:
Net increase in deposits		86,333			7,010
Net decrease in other borrowings		(11		)	(1,003		)
Proceeds from Federal Home Loan Bank advances		54,000			100,000
Repayment of Federal Home Loan Bank advances		(138,653		)	(119,954		)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments		496			555
Tax benefit from stock option exercises and issuance of other compensation-related equity instruments		45			76
Cash dividends paid		(4,511		)	(3,963		)
Net cash used in financing activities		(2,301		)	(17,279		)
Net increase in cash and cash equivalents		22,840			6,384
Cash and cash equivalents at beginning of period		85,317			92,650
Cash and cash equivalents at end of period			$108,157			$99,034

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



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



Three months ended March 31,	2014		2013
Noncash Investing and Financing Activities:
Loans charged off		$1,223		$374
Loans transferred to property acquired through foreclosure or repossession	421		1,050
Supplemental Disclosures:
Interest payments		$5,175		$6,260
Income tax payments	265		103

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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(1)	General Information

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

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

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

The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .


(2)	Recently Issued Accounting Pronouncements

Investments - Equity Method and Joint Ventures - Topic 323

Accounting Standards Update No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” (“ASU 2014-01”), was issued in January 2014 and permits a reporting entity to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments are expected to enable more entities to record the amortization of the investment in income tax expense together with the tax credits and other tax benefits generated from the partnership. ASU 2014-01 is effective retrospectively for public business entities for annual and interim reporting periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of ASU 2014-01 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Receivables - Troubled Debt Restructurings by Creditors - Topic 310

Accounting Standards Update No. 2014-04, “Reclassifications of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), was issued in January 2014 and clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (OREO). ASU 2014-04 is effective for annual periods beginning after December 15, 2014, and interim periods with annual periods beginning after December 15, 2015. An entity can elect either a modified retrospective or prospective transition method, and early adoption is permitted. The adoption of ASU 2014-04 is not expected to have a material impact on the Corporation’s consolidated financial statements.


(3)	Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $6.5 million at March 31, 2014 and $6.7 million at December 31, 2013 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of March 31, 2014 and December 31, 2013 , cash and due from banks included interest-bearing deposits in other banks of $61.2 million and $51.8 million , respectively.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(4)	Securities

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



(Dollars in thousands)
March 31, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$39,487		$391		$—			$39,878
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	218,882		8,753		(89		)	227,546
Obligations of states and political subdivisions	59,826		2,110		—			61,936
Individual name issuer trust preferred debt securities	30,724		—		(5,344		)	25,380
Corporate bonds	6,124		144		(8		)	6,260
Total securities available for sale		$355,043		$11,398		($5,441	)		$361,000
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$28,889		$291		$—			$29,180
Total securities held to maturity		$28,889		$291		$—			$29,180
Total securities		$383,932		$11,689		($5,441	)		$390,180



(Dollars in thousands)
December 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$54,474		$720		($79	)		$55,115
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	230,387		8,369		(401		)	238,355
Obligations of states and political subdivisions	60,659		2,200		—			62,859
Trust preferred securities:
Individual name issuers	30,715		—		(6,031		)	24,684
Collateralized debt obligations	547		—		—			547
Corporate bonds	11,128		231		(16		)	11,343
Total securities available for sale		$387,910		$11,520		($6,527	)		$392,903
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$29,905		$14		($54	)		$29,865
Total securities held to maturity		$29,905		$14		($54	)		$29,865
Total securities		$417,815		$11,534		($6,581	)		$422,768

At March 31, 2014 and December 31, 2013 , securities available for sale and held to maturity with a fair value of $375.6 million and $397.5 million , respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings and letters of credit, potential borrowings with the FRB, certain public deposits and for other purposes.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	March 31, 2014
(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		$39,487			$—			$—			$—			$39,487
Weighted average yield	4.79		%	—		%	—		%	—		%	4.79		%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost	39,783			102,288			52,054			24,757			218,882
Weighted average yield	4.00		%	3.68		%	2.90		%	2.34		%	3.40		%
Obligations of state and political subdivisions:
Amortized cost	20,769			39,057			—			—			59,826
Weighted average yield	3.85		%	3.93		%	—		%	—		%	3.90		%
Individual name issuer trust preferred debt securities:
Amortized cost	—			—			—			30,724			30,724
Weighted average yield	—		%	—		%	—		%	1.04		%	1.04		%
Corporate bonds:
Amortized cost	—			5,715			409			—			6,124
Weighted average yield	—		%	2.80		%	2.41		%	—		%	2.78		%
Total debt securities available for sale:
Amortized cost		$100,039			$147,060			$52,463			$55,481			$355,043
Weighted average yield	4.28		%	3.71		%	2.90		%	1.62		%	3.42		%
Fair value		$102,737			$147,626			$54,176			$56,461			$361,000
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost		$4,226			$12,127			$8,238			$4,298			$28,889
Weighted average yield	3.00		%	2.92		%	2.72		%	1.11		%	2.60		%
Fair value		$4,269			$12,249			$8,321			$4,341			$29,180

Included in the above table were debt securities with an amortized cost balance of $88.5 million and a fair value of $85.1 million at March 31, 2014 that are callable at the discretion of the issuers. Final maturities of the callable securities range from eighteen months to twenty-two years, with call features ranging from one month to three years.

Other-Than-Temporary Impairment Assessment

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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
March 31, 2014	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	3		$19,796		($55	)	1		$933		($34	)	4		$20,729		($89	)
Individual name issuer trust preferred debt securities	—	—		—			11	25,380		(5,344		)	11	25,380		(5,344		)
Corporate bonds	2	413		(8		)	—	—		—			2	413		(8		)
Total temporarily impaired securities	5	20,209			($63	)	12		$26,313		($5,378	)	17		$46,522		($5,441	)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2013	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	1		$9,909		($79	)	—		$—		$—		1		$9,909		($79	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	7	76,748		(455		)	—	—		—			7	76,748		(455		)
Individual name issuer trust preferred debt securities	—	—		—			11	24,684		(6,031		)	11	24,684		(6,031		)
Corporate bonds	2	407		(16		)	—	—		—			2	407		(16		)
Total temporarily impaired securities	10		$87,064		($550	)	11		$24,684		($6,031	)	21		$111,748		($6,581	)

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

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at March 31, 2014 were eleven trust preferred security holdings issued by seven individual companies in the financial services industry, specifically, the banking sector. Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect potential future losses in the financial services industry. These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of March 31, 2014 , individual name issuer trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $2.1 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information. We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2014 .

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit-Related Impairment Losses Recognized on Debt Securities

The following table presents a rollforward of the cumulative credit-related impairment losses on debt securities held by the Corporation:



(Dollars in thousands)
Three months ended March 31,	2014		2013
Balance at beginning of period		$—		$3,325
Credit-related impairment loss on debt securities for which an other-than-temporary impairment was not previously recognized	—		—
Additional increases to the amount of credit-related impairment loss on debt securities for which an other-than-temporary impairment was previously recognized	—		2,772
Reductions for securities for which a liquidation notice was received during the period	—		(4,868		)
Balance at end of period		$—		$1,229

The January 1, 2014 beginning balance of the cumulative credit-related impairment losses was corrected from the $6.8 million reported in our Form 10-K for the fiscal year ended December 31, 2013 to reflect the impact of the notice of liquidation of a pooled trust preferred security that occurred during the first quarter of 2013 and management’s change in intent to no longer hold its other pooled trust preferred security, which was made in December 2013.


(5)	Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$788,836	32	%		$796,249	32	%
Construction and development (2)	24,696		1		36,289		1
Other (3)	523,751		21		530,797		22
Total commercial	1,337,283		54		1,363,335		55
Residential real estate:
Mortgages (4)	784,623		32		749,163		30
Homeowner construction	25,770		1		23,511		1
Total residential real estate	810,393		33		772,674		31
Consumer:
Home equity lines	233,728		9		231,362		9
Home equity loans	41,991		2		40,212		2
Other (4)	55,208		2		55,301		3
Total consumer	330,927		13		326,875		14
Total loans (5)		$2,478,603	100	%		$2,462,884	100	%


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


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


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


(4)	Fixed-rate consumer installment loans.


(5)	Includes net unamortized loan origination costs of $1.1 million and $879 thousand , respectively, and net unamortized premiums on purchased loans of $102 thousand and $99 thousand , respectively, at March 31, 2014 and December 31, 2013 .

At March 31, 2014 and December 31, 2013 , there were $1.16 billion and $1.14 billion , respectively, of loans pledged as collateral for FHLBB borrowings, line of credit and letters of credit and were collateralized for the discount window at the FRB.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability 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.

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



(Dollars in thousands)	Mar 31, 2014		Dec 31, 2013
Commercial:
Mortgages		$2,293		$7,492
Construction and development	—		—
Other	1,198		1,291
Residential real estate:
Mortgages	8,975		8,315
Homeowner construction	—		—
Consumer:
Home equity lines	568		469
Home equity loans	474		687
Other	66		48
Total nonaccrual loans		$13,574		$18,302
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2014 and December 31, 2013 , nonaccrual loans of $2.1 million and $2.7 million , respectively, were current as to the payment of principal and interest.

At March 31, 2014 , there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Past Due Loans

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



(Dollars in thousands)	Days Past Due
March 31, 2014	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$15		$2,238		$2,253		$786,583		$788,836
Construction and development	—		—		—		—		24,696		24,696
Other	3,351		127		428		3,906		519,845		523,751
Residential real estate:
Mortgages	2,232		1,265		5,634		9,131		775,492		784,623
Homeowner construction	—		—		—		—		25,770		25,770
Consumer:
Home equity lines	1,004		492		269		1,765		231,963		233,728
Home equity loans	351		116		366		833		41,158		41,991
Other	10		50		66		126		55,082		55,208
Total loans		$6,948		$2,065		$9,001		$18,014		$2,460,589		$2,478,603



(Dollars in thousands)	Days Past Due
December 31, 2013	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$7,492		$7,492		$788,757		$796,249
Construction and development	—		—		—		—		36,289		36,289
Other	276		302		731		1,309		529,488		530,797
Residential real estate:
Mortgages	4,040		1,285		5,633		10,958		738,205		749,163
Homeowner construction	—		—		—		—		23,511		23,511
Consumer:
Home equity lines	831		100		269		1,200		230,162		231,362
Home equity loans	448		66		349		863		39,349		40,212
Other	43		—		38		81		55,220		55,301
Total loans		$5,638		$1,753		$14,512		$21,903		$2,440,981		$2,462,884

Included in past due loans as of March 31, 2014 and December 31, 2013 , were nonaccrual loans of $11.5 million and $15.6 million , respectively. All loans 90 days or more past due at March 31, 2014 and December 31, 2013 were classified as nonaccrual.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2014		Dec 31, 2013		Mar 31, 2014		Dec 31, 2013		Mar 31, 2014		Dec 31, 2013
No Related Allowance Recorded:
Commercial:
Mortgages		$9,084		$998		$9,077		$998		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,052		1,055		1,045		1,050		—		—
Residential real estate:
Mortgages	789		1,167		872		1,259		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$10,925		$3,220		$10,994		$3,307		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$16,045		$29,335		$18,610		$31,731		$292		$552
Construction and development	—		—		—		—		—		—
Other	1,142		1,506		1,457		1,945		297		463
Residential real estate:
Mortgages	2,735		3,122		3,037		3,507		436		463
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	93		173		91		174		1		1
Home equity loans	135		55		135		54		1		—
Other	117		127		118		130		—		2
Subtotal		$20,267		$34,318		$23,448		$37,541		$1,027		$1,481
Total impaired loans		$31,192		$37,538		$34,442		$40,848		$1,027		$1,481
Total:
Commercial		$27,323		$32,894		$30,189		$35,724		$589		$1,015
Residential real estate	3,524		4,289		3,909		4,766		436		463
Consumer	345		355		344		358		2		3
Total impaired loans		$31,192		$37,538		$34,442		$40,848		$1,027		$1,481

(1)

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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class, for the periods indicated:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended March 31,	2014		2013		2014		2013
Commercial:
Mortgages		$28,340		$20,903		$165		$100
Construction and development	—		—		—		—
Other	2,366		10,635		23		64
Residential real estate:
Mortgages	3,744		4,000		14		22
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	134		263		1		3
Home equity loans	95		105		1		3
Other	125		163		2		2
Totals		$34,804		$36,069		$206		$194

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $26.4 million at both March 31, 2014 and December 31, 2013 . These amounts included accrued interest of $50 thousand and $44 thousand , respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $347 thousand and $556 thousand , respectively, at March 31, 2014 and December 31, 2013 .

As of March 31, 2014 , there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents loans modified as a troubled debt restructuring during the periods indicated:



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended March 31,	2014	2013	2014		2013		2014		2013
Commercial:
Mortgages	—	2		$—		$452		$—		$372
Construction and development	—	—	—		—		—		—
Other	—	—	—		—		—		—
Residential real estate:
Mortgages	2	—	479		—		479		—
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	1	—		92		—		92
Home equity loans	—	—	—		—		—		—
Other	—	—	—		—		—		—
Totals	2	3		$479		$544		$479		$464


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

The following table provides information on how loans were modified as a troubled debt restructuring during the periods indicated.



(Dollars in thousands)
Three months ended March 31,	2014		2013
Below market interest rate concession		$—		$314
Payment deferral	479		—
Maturity / amortization concession	—		—
Interest only payments	—		92
Combination (1)	—		138
Total		$479		$544


(1)	Loans included in this classification were modified with a combination of any two of the concessions listed in this table.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default during the periods indicated:



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Three months ended March 31,	2014	2013	2014		2013
Commercial:
Mortgages	—	1		$—		$235
Construction and development	—	—	—		—
Other	6	—	1,191		—
Residential real estate:
Mortgages	—	—	—		—
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	1	—		32
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	6	2		$1,191		$267


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. As of March 31, 2014 and December 31, 2013 , the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.61 and 4.64 , respectively. For non-impaired loans, the Corporation assigns a loss allocation factor to each loan, based on its risk rating for purposes of establishing an appropriate allowance for loan losses. See Note 6 for additional information.

Descriptions of the commercial loan categories are as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard”, “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

non-accrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value but rather it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. The criticized loan portfolio, which consists of commercial and commercial real estate loans that are risk rated special mention or worse, are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:



(Dollars in thousands)	Pass				Special Mention				Classified
	Mar 31, 2014		Dec 31, 2013		Mar 31, 2014		Dec 31, 2013		Mar 31, 2014		Dec 31, 2013
Mortgages		$754,727		$756,838		$23,089		$23,185		$11,020		$16,226
Construction and development	24,696		36,289		—		—		—		—
Other	504,857		507,962		15,923		19,887		2,971		2,948
Total commercial loans		$1,284,280		$1,301,089		$39,012		$43,072		$13,991		$19,174

Residential and Consumer

The residential and consumer portfolios are monitored on an ongoing basis by the Corporation using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed on an aggregate basis in these relatively homogeneous portfolios. For non-impaired loans, the Corporation assigns loss allocation factors to each respective loan type and delinquency status. See Note 6 for additional information.

Various other techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate mortgages and home equity lines and loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an estimated loan to value (“LTV”) ratio. LTV is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits. See Note 6 for additional information.

The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:



(Dollars in thousands)	Under 90 Days Past Due				Over 90 Days Past Due
	Mar 31, 2014		Dec 31, 2013		Mar 31, 2014		Dec 31, 2013
Residential real estate:
Accruing mortgages		$775,648		$740,848		$—		$—
Nonaccrual mortgages	3,341		2,682		5,634		5,633
Homeowner construction	25,770		23,511		—		—
Total residential real estate loans		$804,759		$767,041		$5,634		$5,633
Consumer:
Home equity lines		$233,459		$231,093		$269		$269
Home equity loans	41,625		39,864		366		348
Other	55,142		55,262		66		39
Total consumer loans		$330,226		$326,219		$701		$656

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(6)	Allowance for Loan Losses

The allowance for loan losses is management’s best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. The 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) identification of loss allocations for individual loans deemed to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, historical loss experience, delinquency factors and other similar credit quality indicators, and (3) an unallocated allowance maintained for measurement imprecision and to reflect management’s consideration of other environmental factors.

Periodic assessments and revisions to the loss allocation factors used in the assignment of loss exposure are made to appropriately reflect the analysis of migrational loss experience. The Corporation analyzes historical loss experience in the various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios as of the balance sheet date. The Corporation adjusts the loss allocations for various factors it believes are not adequately presented in historical loss experience, including trends in real estate values, trends in rental rates on commercial real estate, trends in unemployment rates in primary markets, consideration of general economic conditions, and our assessments of credit risk associated with certain industries and an ongoing trend toward larger credit relationships. These factors are also evaluated taking into account the geographic location of the underlying loans. Revisions to loss allocation factors are not retroactively applied.

Loss allocations for loans deemed to be impaired are measured on a discounted cash flow method based upon the loan’s contractual effective i nterest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. For collateral dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is dependent on the operation of the collateral, such as accruing troubled debt restructured loans, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.

Loss allocation factors are used for non-impaired loans based on credit grade, historical loss experience, delinquency factors and other similar credit quality indicators. Individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using the internal rating system described in Note 5 under the caption “Credit Quality Indicators” and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. Portfolios of more homogeneous populations of loans including the various categories of residential mortgages and consumer loans are analyzed as groups, taking into account delinquency status and historical loss experience and other qualitative environmental factors for each type of credit product.

An unallocated allowance is maintained 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, including, but not limited to, conditions that may affect the collateral position such as environmental matters, regulatory changes affecting the foreclosure process, as well as conditions that may affect the ability of borrowers to meet debt service requirements.

Because the methodology is based upon historical experience and trends, current economic data as well as 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 increases in the allowance. 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.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables present the activity in the allowance for loan losses for the periods presented:



For the three months ended March 31, 2014:
(Dollars in thousands)	Commercial
	Mortgages			Construction			Other			Total Commercial			Residential			Consumer			Un-allocated			Total
Beginning Balance		$6,969			$362			$5,433			$12,764			$4,700			$2,511			$7,911			$27,886
Charge-offs	(945		)	—			(196		)	(1,141		)	(42		)	(40		)				(1,223		)
Recoveries	6			—			26			32			35			13						80
Provision	517			(93		)	(62		)	362			394			81			(537		)	300
Ending Balance		$6,547			$269			$5,201			$12,017			$5,087			$2,565			$7,374			$27,043



For the three months ended March 31, 2013:
(Dollars in thousands)	Commercial
	Mortgages			Construction		Other			Total Commercial			Residential			Consumer			Un-allocated		Total
Beginning Balance		$9,407			$224		$5,996			$15,627			$4,269			$2,684			$8,293		$30,873
Charge-offs	(114		)	—		(93		)	(207		)	(9		)	(158		)			(374		)
Recoveries	6			—		22			28			—			12					40
Provision	308			22		41			371			273			(49		)	5		600
Ending Balance		$9,607			$246		$5,966			$15,819			$4,533			$2,489			$8,298		$31,139

The following table presents the Corporation’s loan portfolio and associated allowance for loan loss by portfolio segment and by impairment methodology:



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Loans		Related Allowance		Loans		Related Allowance
Loans Individually Evaluated for Impairment:
Commercial:
Mortgages		$25,089		$292		$30,292		$552
Construction & development	—		—		—		—
Other	2,186		297		2,556		463
Residential real estate	3,506		436		4,290		463
Consumer	344		2		355		3
Subtotal		$31,125		$1,027		$37,493		$1,481
Loans Collectively Evaluated for Impairment:
Commercial:
Mortgages		$763,747		$6,255		$765,957		$6,417
Construction & development	24,696		269		36,289		362
Other	521,565		4,904		528,241		4,970
Residential real estate	806,887		4,651		768,384		4,237
Consumer	330,583		2,563		326,520		2,508
Subtotal		$2,447,478		$18,642		$2,425,391		$18,494
Unallocated	—		7,374		—		7,911
Total		$2,478,603		$27,043		$2,462,884		$27,886

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(7)	Time Certificates of Deposit

Tim e certificates of deposit amounted to $836.9 million and $790.8 million , respectively, at March 31, 2014 and December 31, 2013 . These amounts included wholesale brokered time certificates of deposit of $171.3 million and $98.0 million , respectively, at March 31, 2014 and December 31, 2013 . In the first quarter of 2014, wholesale brokered time deposits of $80.0 million were utilized as replacement funding for the prepayment of certain FHLBB advances. These brokered time deposits had an initial weighted average cost of 0.93% and a weighted average maturity of thirty-five months. See Note 8.

The following table presents scheduled maturities of time certificates of deposit outstanding at March 31, 2014 :



(Dollars in thousands)	Scheduled Maturity		Weighted Average Rate
April 1, 2014 through December 31, 2014		$388,536	0.76	%
2015	185,138		1.50	%
2016	119,632		1.28	%
2017	65,007		1.27	%
2018	52,355		1.37	%
Thereafter	26,199		1.60	%
Balance at March 31, 2014		$836,867	1.10	%

The following table presents the amount of time certificates of deposit in denominations of $100 thousand or more at March 31, 2014 , maturing during the periods indicated:



(Dollars in thousands)	Scheduled Maturity
April 1, 2014 to June 30, 2014		$142,908
July 1, 2014 to September 30, 2014	43,975
October 1, 2014 to March 31, 2015	63,771
April 1, 2015 and beyond	96,302
Balance at March 31, 2014		$346,956


(8)	Borrowings

Federal Home Loan Bank Advances

Advances payable to the FHLBB amounted to $203.4 million and $288.1 million , respectively, at March 31, 2014 and December 31, 2013 .

FHLBB advances totaling $99.3 million were prepaid in early March 2014, resulting in debt prepayment penalty expense of approximately $6.3 million . The weighted average rate of these FHLBB advances was 3.01% with a weighted average remaining term of thirty-six months. Other wholesale funding in the form of brokered time certificates of deposits as well as existing on balance sheet liquidity were utilized as the funding source for the prepayments. See Note 7.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents maturities of FHLBB advances outstanding as of March 31, 2014 :



(Dollars in thousands)
	Scheduled Maturity		Redeemed at Call Date (1)		Weighted Average Rate (2)
2013		$17,131		$17,131	0.61	%
2014	1,569		1,569		4.89	%
2015	43,130		43,130		3.10	%
2016	41,045		41,045		3.16	%
2017	64,803		64,803		3.85	%
2018 and thereafter	35,751		35,751		4.50	%
Balance at March 31, 2014		$203,429		$203,429	3.40	%


(1)	Callable FHLBB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date while all other advances are shown in the periods corresponding to their scheduled maturity date.


(2)	Weighted average rate based on scheduled maturity dates.

As of March 31, 2014 , the Bank also has access to an unused line of credit with the FHLBB amounting to $20.0 million . In addition, the FHLBB has issued standby letters of credit to depositor customers of the Bank to collateralize public deposits. The Bank’s FHLBB borrowings, line of credit and letters of credit are collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities and loans, as well as amounts maintained on deposit at the FHLBB. The Bank’s unused remaining available borrowing capacity at the FHLBB was approximately $654.7 million and $564.1 million , respectively, at March 31, 2014 and December 31, 2013 .


(9)	Shareholders’ Equity

Regulatory Capital Requirements

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios as well as the corresponding minimum and well capitalized regulatory amounts and ratios:



(Dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be “Well Capitalized” Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2014
Total Capital (to Risk-Weighted Assets):
Corporation	$324,198		13.56	%	$191,264		8.00	%	$239,080		10.00	%
Bank	$318,860		13.35	%	$191,000		8.00	%	$238,875		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	$296,827		12.42	%	$95,632		4.00	%	$143,448		6.00	%
Bank	$291,489		12.20	%	$95,550		4.00	%	$143,325		6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation	$296,827		9.56	%	$124,218		4.00	%	$155,273		5.00	%
Bank	$291,489		9.40	%	$124,048		4.00	%	$155,061		5.00	%
December 31, 2013
Total Capital (to Risk-Weighted Assets):
Corporation		$319,486	13.29	%		$192,306	8.00	%		$240,382	10.00	%
Bank		$314,458	13.09	%		$192,147	8.00	%		$240,184	10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation		$291,292	12.12	%		$96,153	4.00	%		$144,229	6.00	%
Bank		$286,264	11.92	%		$96,074	4.00	%		$144,111	6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation		$291,292	9.41	%		$123,785	4.00	%		$154,732	5.00	%
Bank		$286,264	9.26	%		$123,633	4.00	%		$154,541	5.00	%

(1) Leverage ratio

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(10)	Derivative Financial Instruments

The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All 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.

Interest Rate Risk Management Agreements

Interest rate swaps are used from time to time as part of the Corporation’s interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.

Cash Flow Hedging Instruments

As of March 31, 2014 and December 31, 2013 , the Bancorp had two interest rate swap contracts designated as cash flow hedges to hedge the interest rate associated with $22.7 million of variable rate junior subordinated debentures. The effective portion of the changes in fair value of derivatives designated as cash flow hedges is recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized. The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings as interest expense. The Bancorp has pledged collateral to derivative counterparties in the form of cash totaling $1.6 million at March 31, 2014 and December 31, 2013 . The Bancorp may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

Customer Related Derivative Contracts

The Corporation has entered into 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. We retain the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of March 31, 2014 and December 31, 2013 , Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $112.0 million and $ 105.6 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.

Loan Commitments

Interest rate lock commitments are extended to borrowers that relate to the origination of residential real estate mortgage loans held for sale. To mitigate the interest rate risk inherent in these rate locks, as well as closed residential real estate mortgage loans held for sale, best efforts forward commitments are established to sell individual residential real estate mortgage loans. Both interest rate lock commitments and commitments to sell residential real estate mortgage loans are derivative financial instruments, but do not meet criteria for hedge accounting and as such are treated as derivatives not designated as hedging instruments. These derivative financial instruments are recorded at fair value and changes in fair value of these commitments are reflected in earnings in the period of change. The Corporation has elected to carry newly originated closed residential real estate mortgage loans held for sale at fair value, as changes in fair value in these loans held for sale generally offset changes in interest rate lock and forward sale commitments.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the fair values of derivative instruments in the Corporation’s Consolidated Balance Sheets as of the dates indicated:



(Dollars in thousands)	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	Mar 31, 2014		Dec 31, 2013		Balance Sheet Location	Mar 31, 2014		Dec 31, 2013
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate swap contracts	Other assets		$—		$—	Other liabilities		$895		$1,012
Derivatives not Designated as Hedging Instruments:
Forward loan commitments:
Interest rate lock commitments	Other assets	672		392		Other liabilities	3		—
Commitments to sell mortgage loans	Other assets	3		10		Other liabilities	889		583
Customer related derivative contracts:
Interest rate swaps with customers	Other assets	2,755		2,403		Other liabilities	200		297
Mirror swaps with counterparties	Other assets	220		330		Other liabilities	2,777		2,406
Total			$3,650		$3,135			$4,764		$4,298

The following tables present the effect of derivative instruments in the Corporation’s Consolidated Statements of Income and Changes in Shareholders’ Equity for the periods indicated:



(Dollars in thousands)	Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)					Location of Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain (Loss) Recognized in Income (Ineffective Portion)
Three months ended March 31,		2014		2013				2014		2013
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate swap contracts			$76		$120	Interest Expense			$—		$—
Total			$76		$120				$—		$—



(Dollars in thousands)		Amount of Gain (Loss) Recognized in Income
Three months ended March 31,	Statement of Income Location	2014			2013
Derivatives not Designated as Hedging Instruments:
Forward loan commitments:
Interest rate lock commitments	Net gains on loan sales & commissions on loans originated for others		$277			($918	)
Commitments to sell mortgage loans	Net gains on loan sales & commissions on loans originated for others	(313		)	1,971
Customer related derivative contracts:
Interest rate swaps with customers	Net gains (losses) on interest rate swaps	1,030			(4		)
Mirror swaps with counterparties	Net gains (losses) on interest rate swaps	(770		)	23
Total			$224			$1,072

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(11)	Fair Value Measurements

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. As of March 31, 2014 and December 31, 2013 , securities available for sale, residential real estate mortgage loans held for sale and derivatives were 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 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.

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.


•	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.

Fair Value Option Election

GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation elected the fair value option for its portfolio of residential real estate mortgage loans held for sale to reduce certain timing differences and better match changes in fair value of the loans with changes in the fair value of the derivative loan sale contracts use to economically hedge them.

The aggregate principal amount of the residential real estate mortgage loans held for sale portfolio was $10.2 million and $11.5 million , respectively, at March 31, 2014 and December 31, 2013 . The aggregate fair value of this portfolio as of the same dates was $10.4 million and $11.6 million , respectively. As of March 31, 2014 and December 31, 2013 , the aggregate fair value of residential real estate mortgage loans held for sale exceeded the aggregate principal amount by $257 thousand and $181 thousand , respectively.

There were no residential real estate mortgage loans for sale 90 days or more past due at March 31, 2014 and December 31, 2013 .

The following table presents the changes in fair value related to mortgage loans held for sale, interest rate lock commitments and commitments to sell residential real estate mortgage loans for the periods indicated. Changes in fair values are reported as a component of net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.



(Dollars in thousands)
Three months ended March 31,	2014			2013
Mortgage loans held for sale		$76			($1,061	)
Interest rate lock commitments	277			(918		)
Commitments to sell	(313		)	1,971
Total changes in fair value		$40			($8	)

Items Measured at Fair Value on a Recurring Basis

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. There were no Level 1 securities held at March 31, 2014 and December 31, 2013.

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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

enterprises, mortgage-backed securities issued by U.S. government agencies and U.S government-sponsored enterprises, obligations of state and political subdivisions, trust preferred debt securities and corporate bonds.

Securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no such securities held at March 31, 2014 and December 31, 2013.

Mortgage Loans Held for Sale

The fair values of mortgage loans held for sale are generally estimated based on secondary market rates offered for loans with similar characteristics. When secondary market information exists, these loans are classified as Level 2. 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 changes 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

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. Our internal review procedures have confirmed that the fair values determined with independent pricing models and utilized by the Corporation are consistent with GAAP. 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. Additionally, in accordance with fair value measurement guidance in ASU 2011-04, Washington Trust has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Level 2 fair value measurements of forward loan commitments (interest rate lock commitments and commitments to sell residential real estate 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

Collateral Dependent Impaired Loans

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is dependent on the operation of the collateral, such as accruing troubled debt restructured loans, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.

Property Acquired Through Foreclosure or Repossession

Property acquired through foreclosure or repossession included in other assets in the Consolidated Balance Sheets is adjusted to fair value less costs to sell upon transfer out of loans through a charge to allowance for loan losses. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Such subsequent valuation charges are charged through earnings. Fair value is generally based upon 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.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Items Recorded at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities reported at fair value on a recurring basis:



(Dollars in thousands)							Assets/Liabilities at Fair Value
	Fair Value Measurements Using
March 31, 2014	Level 1		Level 2		Level 3
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises		$—		$39,878		$—		$39,878
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		227,546		—		227,546
Obligations of states and political subdivisions	—		61,936		—		61,936
Individual name issuer trust preferred debt securities	—		25,380		—		25,380
Corporate bonds	—		6,260		—		6,260
Mortgage loans held for sale	—		10,409		—		10,409
Derivative assets (1):
Interest rate swap contracts with customers	—		2,975		—		2,975
Forward loan commitments	—		675		—		675
Total assets at fair value on a recurring basis		$—		$375,059		$—		$375,059
Liabilities:
Derivative liabilities (1):
Mirror swap contracts with counterparties		$—		$2,977		$—		$2,977
Interest rate risk management swap contracts	—		895		—		895
Forward loan commitments	—		892		—		892
Total liabilities at fair value on a recurring basis		$—		$4,764		$—		$4,764


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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Dollars in thousands)							Assets/Liabilities at Fair Value
	Fair Value Measurements Using
December 31, 2013	Level 1		Level 2		Level 3
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises		$—		$55,115		$—		$55,115
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—		238,355		—		238,355
Obligations of states and political subdivisions	—		62,859		—		62,859
Individual name issuer trust preferred debt securities	—		24,684		—		24,684
Pooled trust preferred debt securities	—		547		—		547
Corporate bonds	—		11,343		—		11,343
Mortgage loans held for sale	—		11,636		—		11,636
Derivative assets (1) :
Interest rate swap contracts with customers	—		2,733		—		2,733
Forward loan commitments	—		402		—		402
Total assets at fair value on a recurring basis		$—		$407,674		$—		$407,674
Liabilities:
Derivative liabilities (1) :
Mirror swap contracts with counterparties		$—		$2,703		$—		$2,703
Interest rate risk management swap contracts	—		1,012		—		1,012
Forward loan commitments	—		583		—		583
Total liabilities at fair value on a recurring basis		$—		$4,298		$—		$4,298


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

It is the Corporation’s policy to review and reflect transfers between Levels as of the financial statement reporting date. During the three months ended March 31, 2014 and 2013 , there were no transfers in and/or out of Level 1, 2 or 3.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

There were no Level 3 assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2014 .

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2013 .



(Dollars in thousands)
	Securities Available for Sale (1)			Mortgage Loans Held for Sale (2)		Derivative Assets / (Liabilities) (3)			Total
Balance at beginning of period		$843		9,813			($142	)		$10,514
Gains and losses (realized and unrealized):
Included in earnings (4)	(2,772		)	(198	)	190			(2,780		)
Included in other comprehensive income	2,466			—		—			2,466
Purchases	—			—		—			—
Issuances	—			17,868		—			17,868
Sales	—			(19,528	)	—			—
Settlements	(133		)	—		—			(133		)
Transfers into Level 3	—			—		—			—
Transfers out of Level 3	—			—		—			—
Balance at end of period		$404		7,955			$48			$8,407


(1)	Level 3 securities available for sale were comprised of pooled trust preferred debt securities in the form of collateralized debt obligations.


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


(3)	Level 3 derivative assets / liabilities consisted of forward loan commitments (interest rate lock commitments and commitments to sell residential real estate mortgages) whose fair value was determined utilizing a discounted cash flow analysis.

(4)

Losses included in earnings for Level 3 securities available for sale were included in net impairment losses recognized in earnings in the Consolidated Income Statement. Losses included in earnings for Level 3 mortgage loans held for sale and derivative assets and liabilities were included in net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.

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 market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above.

The following table summarizes such assets, which were written down to fair value during the three months ended March 31, 2014 :



(Dollars in thousands)	March 31, 2014
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans		$—		$—		$812		$812
Property acquired through foreclosure or repossession	—		—		302		302
Total assets at fair value on a nonrecurring basis		$—		$—		$1,114		$1,114

The allowance for loan losses on collateral dependent impaired loans amounted to $116 thousand at March 31, 2014 .

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes such assets, which were written down to fair value during the year ended December 31, 2013 :



(Dollars in thousands)	December 31, 2013
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans		$—		$—		$11,177		$11,177
Property acquired through foreclosure or repossession	—		—		435		435
Total assets at fair value on a nonrecurring basis		$—		$—		$11,612		$11,612

The allowance for loan losses allocation on collateral dependent impaired loans amounted to $453 thousand at December 31, 2013 .

The following tables present 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 for the dates indicated.



(Dollars in thousands)	March 31, 2014
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
Collateral dependent impaired loans		$812	Appraisals of collateral	Discount for costs to sell	0% - 10% (8%)
				Appraisal adjustments (1)	0% - 15% (11%)
Property acquired through foreclosure or repossession		$302	Appraisals of collateral	Discount for costs to sell	0% - 10% (6%)
				Appraisal adjustments (1)	15% - 22% (16%)



(Dollars in thousands)	December 31, 2013
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
Collateral dependent impaired loans		$11,177	Appraisals of collateral	Discount for costs to sell	1% - 45% (11%)
				Appraisal adjustments (1)	0% - 50% (2%)
Property acquired through foreclosure or repossession		$435	Appraisals of collateral	Discount for costs to sell	2% - 10% (9%)
				Appraisal adjustments (1)	0% - 22% (13%)


(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

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.

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 March 31, 2014 and December 31, 2013 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 market prices for sales of similar loans on the secondary market. The fair value of floating rate commercial and consumer loans approximates carrying value. 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 the collateral. Loans are classified within Level 3 of the fair value hierarchy.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Time Deposits

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 time deposits. Time deposits are classified within Level 2 of 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. FHLBB 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.

The following tables present the carrying amount, estimated fair value and placement in the fair value hierarchy of the Corporation’s financial instruments. The tables exclude financial instruments for which the carrying value approximates fair value. Financial assets for which the fair value approximates carrying value include cash and 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 and accrued interest payable.



(Dollars in thousands)					Fair Value Measurements
March 31, 2014	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity		$28,889		$29,180		$—		$29,180		$—
Loans, net of allowance for loan losses	2,451,560		2,505,310		—		—		2,505,310
Loan servicing rights	2,751		3,197		—		—		3,197

Financial Liabilities:
Time deposits		$836,867		$842,321		$—		$842,321		$—
FHLBB advances	203,429		217,899		—		217,899		—
Junior subordinated debentures	22,681		17,331		—		17,331		—



(Dollars in thousands)					Fair Value Measurements
December 31, 2013	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Securities held to maturity		$29,905		$29,865		$—		$29,865		$—
Loans, net of allowance for loan losses	2,434,998		2,479,527		—		—		2,479,527
Loan servicing rights	2,698		2,767		—		—		2,767

Financial Liabilities:
Time deposits		$790,762		$797,748		$—		$797,748		$—
FHLBB advances	288,082		308,317		—		308,317		—
Junior subordinated debentures	22,681		16,282		—		16,282		—


(12)	Defined Benefit Pension Plans

The Corporation maintains a tax-qualified defined benefit pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. 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. In September 2013, the Corporation amended its defined benefit pension plans primarily to freeze benefit accruals after a ten -year transition period ending in December 2023.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The composition of net periodic benefit cost was as follows for the periods indicated:



(Dollars in thousands)	Qualified Pension Plan							Non-Qualified Retirement Plans
Three months ended March 31,		2014			2013				2014		2013
Service cost			$538			$730				$12		$50
Interest cost		723			719				120		115
Expected return on plan assets		(1,016		)	(925		)		—		—
Amortization of prior service cost		(6		)	(8		)		—		—
Recognized net actuarial loss		115			414				16		49
Net periodic benefit cost			$354			$930				$148		$214

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


(13)	Share-Based Compensation Arrangements

During the three months ended March 31, 2014 , performance share awards were granted to certain executive officers providing the opportunity to earn shares of common stock of the Corporation. The performance shares awarded were valued at the fair market value as of the award date, or $26.05 and will be earned over a 3 -year performance 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. The current assumption based on the most recent peer group information available results in shares earned at 150% of the target, or 22,650 shares.


(14)	Business Segments

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

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 bank-owned life insurance, net gain on sale of business line as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as funds transfer pricing offsets.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the statement of operations and total assets for Washington Trust’s reportable segments:



(Dollars in thousands)	Commercial Banking				Wealth Management Services					Corporate					Consolidated Total
Three months ended March 31,	2014		2013		2014			2013		2014		2013			2014		2013
Net interest income		$19,739		$19,511		($4	)		$7		$4,101		$2,949			$23,836		$22,467
Noninterest income	4,541		7,946		8,065			7,474		6,764		(2,254		)	19,370		13,166
Total income	24,280		27,457		8,061			7,481		10,865		695			43,206		35,633
Provision for loan losses	300		600		—			—		—		—			300		600
Depreciation and amortization expense	585		638		311			327		51		55			947		1,020
Other noninterest expenses	13,553		15,136		5,387			5,112		9,405		2,916			28,345		23,164
Total noninterest expenses	14,138		15,774		5,698			5,439		9,456		2,971			29,292		24,184
Income before income taxes	9,842		11,083		2,363			2,042		1,409		(2,276		)	13,614		10,849
Income tax expense (benefit)	3,261		3,843		876			763		179		(1,178		)	4,316		3,428
Net income (loss)		$6,581		$7,240		$1,487			$1,279		$1,230		($1,098	)		$9,298		$7,421

Total assets at period end		$2,577,350		$2,439,300		$52,475			$51,737		$564,321		$560,811			$3,194,146		$3,051,848
Expenditures for long-lived assets		$1,075		$370		$171			$26		$45		$31			$1,291		$427


(15)	Other Comprehensive Income

The following table presents the activity in other comprehensive income for the periods indicated:



Three months ended March 31,	2014									2013
(Dollars in thousands)	Pre-tax Amounts			Income Taxes			Net of Tax			Pre-tax Amounts			Income Taxes			Net of Tax
Securities available for sale:
Changes in fair value of securities available for sale		$964			$352			$612			($1,611	)		($558	)		($1,053	)
Net losses on securities reclassified into earnings (1)	—			—			—			613			220			393
Net change in fair value of securities available for sale	964			352			612			(998		)	(338		)	(660		)
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings (2)	—			—			—			2,159			775			1,384
Cash flow hedges:
Change in fair value of cash flow hedges	(43		)	(27		)	(16		)	(7		)	(5		)	(2		)
Net cash flow hedge losses reclassified into earnings (3)	145			53			92			190			68			122
Net change in fair value of cash flow hedges	102			26			76			183			63			120
Defined benefit plan obligation adjustment (4)	88			—			88			455			118			337
Total other comprehensive income		$1,154			$378			$776			$1,799			$618			$1,181


(1)	Reported as total other-than-temporary impairment losses on securities in the Consolidated Statements of Income.


(2)	Reported as the portion of loss recognized in other comprehensive income in the Consolidated Statements of Income.


(3)	Included in interest expense on junior subordinated debentures in the Consolidated Statements of Income.


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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2014 :



(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 December 31, 2013		$3,089		$112		($618	)		($4,136	)		($1,553	)
Other comprehensive income before reclassifications	612		—		(16		)	—			596
Amounts reclassified from accumulated other comprehensive income	—		—		92			88			180
Net other comprehensive income (loss)	612		—		76			88			776
Balance at March 31, 2014		$3,701		$112		($542	)		($4,048	)		($777	)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2013 :



(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 December 31, 2012		$9,709			($1,937	)		($1,006	)		($17,265	)		($10,499	)
Other comprehensive income before reclassifications	(1,053		)	—			(2		)	—			(1,055		)
Amounts reclassified from accumulated other comprehensive income	393			1,384			122			337			2,236
Net other comprehensive income (loss)	(660		)	1,384			120			337			1,181
Balance at March 31, 2013		$9,049			($553	)		($886	)		($16,928	)		($9,318	)

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(16)	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)
Three months ended March 31,	2014			2013
Net income		$9,298			$7,421
Less dividends and undistributed earnings allocated to participating securities	(41		)	(39		)
Net income applicable to common shareholders		$9,257			$7,382

Weighted average basic common shares	16,626			16,401
Dilutive effect of common stock equivalents	174			48
Weighted average diluted common shares	16,800			16,449

Earnings per common share:
Basic		$0.56			$0.45
Diluted		$0.55			$0.45

Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, were 55 thousand and 336 thousand , respectively, for the three months ended March 31, 2014 and 2013 .


(17)	Commitments and Contingencies

Financial Instruments with Off-Balance Sheet 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, interest rate swap agreements and interest rate lock commitments and commitments to sell residential real estate 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.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



(Dollars in thousands)	Mar 31, 2014		Dec 31, 2013
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans		$282,716		$259,061
Home equity lines	196,744		198,432
Other loans	36,139		35,175
Standby letters of credit	2,903		1,363
Financial instruments whose notional amounts exceed the amount of credit risk:
Forward loan commitments:
Interest rate lock commitments	26,779		17,910
Commitments to sell residential real estate mortgage loans	36,931		29,364
Customer related derivative contracts:
Interest rate swaps with customers	111,986		105,582
Mirror swaps with counterparties	111,986		105,582
Interest rate risk management contracts:
Interest rate swaps	22,681		22,681

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. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. As of March 31, 2014 and December 31, 2013 , the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $2.9 million and $1.4 million , respectively. At March 31, 2014 and December 31, 2013 , there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit for the three months ended March 31, 2014 and 2013 was immaterial.

Forward Loan Commitments

Leases

As of March 31, 2014 and December 31, 2013 , the Corporation was obligated under various non-cancellable operating leases for properties used as banking offices and other office facilities. Rental expense under the operating leases amounted to $737 thousand for the three months ended March 31, 2014 , compared to $665 thousand for the same period in 2013 . Rental expense is recorded as a component of net occupancy expense in the accompanying Consolidated Statements of Income.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 , the minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows:



(Dollars in thousands)
April 1, 2014 to December 31, 2014		$1,884
2015	2,269
2016	1,957
2017	1,819
2018	1,552
Thereafter	13,833
Total minimum lease payments		$23,314

Lease expiration dates range from four months to 24 years, with renewal options on certain leases of three months to 25 years.

Other Contingencies

Litigation

The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.

Other

When selling a residential real estate mortgage loan or acting as originating agent on behalf of a third party, Washington Trust generally makes various representations and warranties. The specific representations and warranties depend on the nature of the transaction and the requirements of the buyer. Contractual liability may arise when the representations and warranties are breached. In the event of a breach of these representations and warranties, Washington Trust may be required to either repurchase the residential real estate mortgage loan (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify (“make-whole”) the investor for its losses.

In the case of a repurchase, Washington Trust will bear any subsequent credit loss on the residential real estate mortgage loan. Washington Trust has experienced an insignificant number of repurchase demands over a period of many years. As of March 31, 2014 and December 31, 2013 , the carrying value of loans repurchased due to representation and warranty claims was $347 thousand and $682 thousand , respectively. In the three months ended March 31, 2014 and 2013, rebates for loans sold that were paid off within contractually agreed upon periods of time were insignificant. Washington Trust has recorded a reserve for its exposure to losses for premium recapture and the obligation to repurchase previously sold residential real estate mortgage loans. The reserve balance amounted to $275 thousand at March 31, 2014 and December 31, 2013 and is included in other liabilities in the Consolidated Balance Sheets. Any change in the estimate is recorded in net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.

(18) Sale of Business Line

On March 1, 2014, the Corporation sold its merchant processing service business line to a third party. The sale resulted in a net gain of $6.3 million , after-tax $4.0 million , or 24 cents per diluted share. In connection with the sale, Washington Trust incurred divestiture related costs of $355 thousand , after-tax $227 thousand , or 1 cent per diluted share, in the first quarter of 2014. The Corporation will also have the opportunity to earn additional referral revenues during the ten-year period following the transaction.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Corporation’s consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2013 , and in conjunction with the condensed unaudited consolidated financial statements and notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the full-year ended December 31, 2014 or any future period.

Forward-Looking Statements

This report contains statements that are “forward-looking statements.” We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following: continued weakness in national, regional or economies; reductions in net interest income resulting from a sustained low interest rate environment as well as changes in the balance and mix of loans and deposits; reductions in the market value of wealth management assets under administration; changes in the value of securities and other assets; reductions in loan demand; changes in loan collectibility, default and charge-off rates; changes in the size and nature of the Corporation’s competition; changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 , as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Critical Accounting Policies and Estimates

Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies. The Corporation considers the following to be its critical accounting policies: the determination of the allowance for loan losses, the review of goodwill and intangible assets for impairment and the assessment of investment securities for impairment. There have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .

Recently Issued Accounting Pronouncements

See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s consolidated financial position, results of operations or cash flows.

Overview

Washington Trust offers a comprehensive product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut, its ATM networks, and its Internet website at www.washtrust.com.

Our largest source of operating income is net interest income, the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, loan sales and commissions on loans originated for others, deposit services, card interchange fees and bank-owned life insurance (“BOLI”). Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, technology and other administrative expenses.

Our financial results are affected by interest rate fluctuations, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles. While the regional economic climate

has been improving in recent quarters, adverse changes in future economic growth, consumer confidence, credit availability and corporate earnings could impact our financial results. Management believes that overall credit quality continues to be affected by the slow pace of recovery in national and regional economic conditions, including comparatively high unemployment levels in Rhode Island.

We believe the Corporation’s financial strength and stability, capital resources and reputation as the largest independent bank headquartered in Rhode Island were key factors in delivering solid results in the first quarter of 2014 . We continue to leverage our strong, statewide brand to build market share in Rhode Island whenever possible and bring select business lines to new markets with high-growth potential while remaining steadfast in our commitment to provide superior service. In the second quarter of 2014, Washington Trust plans to open a new full-service branch in Johnston, Rhode Island, in Providence County. This branch will be Washington Trust’s nineteenth branch office and its first in Johnston.

Composition of Earnings

Net income for the first quarter of 2014 amounted to $9.3 million , or 55 cents per diluted share, up from $7.4 million , or 45 cents per diluted share, reported for the first quarter of 2013 . The returns on average equity and average assets for the first quarter o f 2014 were 11.10% and 1.17%, respectively, compared to 9.91% and 0.98%, respectively, for the same quarter in 2013.

The comparison of 2014 earnings to 2013 was significantly impacted by a $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013 . The net after-tax impact of this impairment loss was $1.9 million, or 11 cents per diluted share.

In addition, the following transactions in the first quarter of 2014 resulted in a net after-tax charge of 1 cent to diluted earnings per share:


•	On March 1, 2014, the Corporation sold its merchant processing service business line to a third party. The sale resulted in a gain of $6.3 million , after-tax $4.0 million , or 24 cents per diluted share.


•	In connection with this sale, the Corporation incurred divestiture related costs of $355 thousand , after-tax $227 thousand, or 1 cent per diluted share. These costs included $291 thousand in salaries and employee benefit expenses and $64 thousand in legal expenses.

•

Washington Trust also prepaid FHLBB advances totaling $99.3 million , resulting in debt prepayment penalty expense of approximately $6.3 million , after-tax $4.0 million , or 24 cent s per diluted share. The weighted average rate of these FHLBB advances was 3.01% with a weighted average remaining term of thirty-six months. Other wholesale funding in the form of brokered time deposits, as well as existing on-balance sheet liquidity, were utilized as the funding source for the prepayment of these FHLBB advances. The replacement wholesale funding amounted to $80.0 million , with maturities ranging from 2015 through 2019, a weighted average maturity of thirty-five months and an initial weighted average cost of approximately 0.93% .

The combined impact of the divestiture of the merchant processing service business line and the reduction in interest expense due to the above mentioned borrowing transactions is expected to result in future ongoing pre-tax income enhancement of approximately $1.0 million in the remainder of 2014 and $1.3 million in 2015, with continuing benefits in future years.

Net interest income for the three months ended March 31, 2014 amounted to $23.8 million , up by $1.4 million , or 6% , from the same period in 2013 , reflecting growth in average loan balances and continued reduction in funding costs. The net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earnings assets) was 3.34% for the three months ended March 31, 2014 , compared to 3.32% for the same period in 2013 .

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

Noninterest income for the three months ended March 31, 2014 and 2013 totaled $19.4 million and $13.2 million , respectively.

Excluding $6.3 million gain on sale of business line recognized in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized in the first quarter of 2013 , noninterest income decreased by $2.8 million, or 18%. Significant year-over-year changes, on this basis, included:


•	Net gains on loan sales and commissions on loans originated for others (“mortgage banking revenues”) were down by $2.9 million , or 70% , reflecting declines in mortgage loan refinancing and sales activity due to higher market interest rates.


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


•	Merchant processing fee revenue decreased by $686 thousand , or 35% , as the sale of this business line was consummated on March 1, 2014. See discussion below regarding a corresponding decrease in merchant processing costs.

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


•	Salaries and employee benefit costs decreased by $1.2 million, or 8%, reflecting lower defined benefit pension plan expenses and lower levels of business development based compensation primarily in mortgage banking.


•	Corresponding to the decrease in merchant processing fee revenue described above, merchant processing costs decreased by $623 thousand , or 37% .

Income tax expense amounted to $4.3 million and $3.4 million , respectively for the three months ended March 31, 2014 and 2013 . The Corporation’s effective tax rate for the three months ended March 31, 2014 and 2013 was 31.7% and 31.6% , respectively. The effective tax rates differed from the federal rate of 35% due largely to the benefits of tax-exempt income, income from BOLI and federal tax credits.

Results of Operations

Segment Reporting

Washington Trust man ages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, such as the investment securities portfolio, wholesale funding activities, net gain on sale of business line, income from BOLI and administrative expenses not allocated to the operating segments are considered Corporate. The Corporate unit also includes the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.

Net income attributed to the Corporate unit amounted to $1.2 million for the three months ended March 31, 2014 , compared to a net loss of $1.1 million for the same period in 2013 . The Corporate unit’s net interest income for the three months ended March 31, 2014 increased by $1.2 million , largely due to declining funding costs and an increase in dividend income on the Corporation’s investment in FHLBB stock. Noninterest income for the Corporate unit included the $6.3 million gain on sale of business line in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013 . Noninterest expenses for the first quarter of 2014 included $6.3 million in debt prepayment penalty expense. See additional discussion regarding these noninterest income and expense items in the “Overview” section under the caption “Composition of Earnings.”

The Commercial Banking segment reported net income of $6.6 million for the three months ended March 31, 2014 , compared to $7.2 million for the same period in 2013. Net interest income for this operating segment for the three months ended March 31, 2014 increased by $228 thousand , or 1% , from the same period in 2013 , principally due to growth in average loan balances and declining cost of funds on deposits. The provision for loan losses for the three months ended March 31, 2014 decreased by $300 thousand compared to first quarter of 2013, reflecting improvements in asset quality and credit quality indicators. Noninterest income derived from the Commercial Banking segment totaled $4.5 million for the three months ended March 31, 2014 , down by $3.4 million , or 43% , from the comparable 2013 period. This decline in noninterest income was largely due to lower mortgage banking revenues, which are sensitive to market interest rates. Also contributing to the decline in this operating segment’s noninterest income was a decrease in merchant processing fee revenue, as the sale of this business line was consummated on March 1, 2014. The decrease in merchant processing fee revenue corresponded to a decline in merchant processing costs included in this operating segment’s noninterest expenses. Commercial Banking noninterest expenses for the three months ended March 31, 2014 were down by $1.6 million , or 10% , from the same period in 2013 . This decline in noninterest expenses reflected decreases in salaries and employee benefit costs and a decline in merchant processing costs.

The Wealth Management Services segment reported net income of $1.5 million for the three months ended March 31, 2014 , compared to $1.3 million for the same period in 2013 . Noninterest income derived from the Wealth Management Services segment was $8.1 million for the three months ended March 31, 2014 , up by 8% compared to the same period in 2013 , primarily due to an increase in asset-based wealth management revenues. Wealth Management assets under administration stood at $4.81 billion at March 31, 2014 , up by 9% from the balance at March 31, 2013 . Noninterest expenses for this operating segment

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

Net Interest Income

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

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

In the recent interest rate environment, market yields on new loan originations have been below the average yield of the existing loan portfolio. Due to the combined effect of new loan growth and the runoff of higher yielding loan balances, interest rates on total earning assets may continue to decline.

Average interest-earning assets for the three months ended March 31, 2014 were up by $163.7 million , or 6% , from the average balance for the same period in 2013 . Total average loans for the three months ended March 31, 2014 increased by $145.1 million , or 6% , compared to the average balance for the comparable 2013 period, due to growth in the commercial loan portfolio and in residential real estate loans. The yield on total loans for the three months ended March 31, 2014 decreased by 18 basis points from the comparable 2013 period, reflecting the impact of a sustained low interest rate environment on loan yields. The contribution of loan prepayment fees and other fees to the yield on total loans was 5 basis points and 2 basis points, respectively, for the three months ended March 31, 2014 and 2013 . Total average securities for the three months ended March 31, 2014 increased by $12.2 million , or 3% , from the average balance for the same period a year earlier, reflecting purchases of debt securities made in the latter part of 2013 offset, in part, by principal payments received on mortgage-backed securities. The FTE rate of return on securities for the three months ended March 31, 2014 decreased by 14 basis points compared to the same period in 2013 , due to maturities and calls of higher yielding securities combined with purchases of lower yielding securities.

Average interest-bearing liabilities for the three months ended March 31, 2014 increased by $76.2 million , or 3% , from the average balance for the comparable period in 2013 , largely reflecting growth in average money market account balances partially offset by decreases in average FHLBB advance balances and time deposits. See additional discussion under the section “Sources of Funds.” The weighted average cost of funds for the three months ended March 31, 2014 declined by 18 basis points compared to the same period in 2013 , largely due to declines in the rate paid on time deposits. The average balances of FHLBB advances for the three months ended March 31, 2014 were down by $75.3 million , or 22% , compared to the average balance for the same period in 2013 . The average rate paid on such advances for the three months ended March 31, 2014 increased 15 basis points from the first quarter of 2013 . Total average interest-bearing deposits for the three months ended March 31, 2014 increased by $ 162.8 million , or 8% , compared to the average balance for the first quarter of 2013 . This increase reflected growth in average lower-cost deposit balances, partially offset by a decrease in average time deposit balances. The average rate paid on interest-bearing deposits for the three months ended March 31, 2014 decreased by 9 basis points compared to the same period in 2013 , reflecting lower rates on time deposits.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2014 increased by $62.1 million , or 17% , compared to the average balances for the same period in 2013 .

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

The following tables present average balance and interest rate information. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Average balances and yields for securities available for sale are based on amortized cost. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.



Three months ended March 31,	2014						2013
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Assets:
Commercial loans		$1,336,798		$14,601	4.43	%		$1,243,716		$14,421	4.70	%
Residential real estate loans, including mortgage loans held for sale	802,412		8,208		4.15	%	755,528		7,937		4.26	%
Consumer loans	327,793		3,097		3.83	%	322,668		3,053		3.84	%
Total loans	2,467,003		25,906		4.26	%	2,321,912		25,411		4.44	%
Cash, federal funds sold and short-term investments	62,246		35		0.23	%	53,734		28		0.21	%
FHLBB stock	37,730		142		1.53	%	39,790		38		0.39	%

Taxable debt securities	344,009		2,942		3.47	%	323,730		2,845		3.56	%
Nontaxable debt securities	59,958		884		5.98	%	68,064		1,004		5.98	%
Total securities	403,967		3,826		3.84	%	391,794		3,849		3.98	%
Total interest-earning assets	2,970,946		29,909		4.08	%	2,807,230		29,326		4.24	%
Noninterest-earning assets	203,335						210,338
Total assets		$3,174,281						$3,017,568
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits		$10,767		$—	—	%		$—		$—	—	%
NOW accounts	304,201		47		0.06	%	283,004		45		0.06	%
Money market accounts	685,142		609		0.36	%	495,453		351		0.29	%
Savings accounts	292,809		45		0.06	%	279,536		46		0.07	%
Time deposits	797,458		2,268		1.15	%	869,576		2,752		1.28	%
FHLBB advances	269,989		2,241		3.37	%	345,270		2,738		3.22	%
Junior subordinated debentures	22,681		241		4.31	%	32,991		390		4.79	%
Other	173		3		7.03	%	1,146		4		1.42	%
Total interest-bearing liabilities	2,383,220		5,454		0.93	%	2,306,976		6,326		1.11	%
Demand deposits	422,975						360,851
Other liabilities	33,057						50,305
Shareholders’ equity	335,029						299,436
Total liabilities and shareholders’ equity		$3,174,281						$3,017,568
Net interest income				$24,455						$23,000
Interest rate spread					3.15	%					3.13	%
Net interest margin					3.34	%					3.32	%

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



(Dollars in thousands)
Three months ended March 31,	2014		2013
Commercial loans		$317		$188
Nontaxable debt securities	302		345
Total		$619		$533

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

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



(Dollars in thousands)	Three months
	March 31, 2014 vs. 2013
	Increase (Decrease) Due to
	Volume			Rate			Net Change
Interest on Interest-Earning Assets:
Commercial loans		$1,039			($859	)		$180
Residential real estate loans, including mortgage loans held for sale	481			(210		)	271
Consumer loans	51			(7		)	44
Cash, federal funds sold and other short-term investments	4			3			7
FHLBB stock	(2		)	106			104
Taxable debt securities	171			(74		)	97
Nontaxable debt securities	(120		)	—			(120		)
Total interest income	1,624			(1,041		)	583
Interest on Interest-Bearing Liabilities:
Interest-bearing demand deposits	—			—			—
NOW accounts	2			—			2
Money market accounts	158			100			258
Savings accounts	3			(4		)	(1		)
Time deposits	(218		)	(266		)	(484		)
FHLBB advances	(620		)	123			(497		)
Junior subordinated debentures	(113		)	(36		)	(149		)
Other	(6		)	5			(1		)
Total interest expense	(794		)	(78		)	(872		)
Net interest income		$2,418			($963	)		$1,455

Provision and Allowance for Loan Losses

The provision for loan losses is based on management’s periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the level of nonperforming loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

The provision for loan losses charged to earnings for the three months ended March 31, 2014 and 2013 amounted to $300 thousand and $600 thousand , respectively. Net charge-offs for the three months ended March 31, 2014 were $1.1 million and included an $853 charge-off recognized on one commercial mortgage relationship. Net charge-offs for the three months ended March 31, 2013 totaled $334 thousand .

The allowance for loan losses was $27.0 million , or 1.09% of total loans, at March 31, 2014 , compared to $27.9 million , or 1.13% of total loans, at December 31, 2013 . The decline in the ratio of the allowance for loan losses to total loans reflects charge-offs and a decrease in specific reserves on impaired loans. See additional discussion under the caption “Asset Quality” below for further information on the Allowance for Loan Losses.

Noninterest Income

Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table:



(Dollars in thousands)
							Change
Three months ended March 31,	2014			2013			$			%
Noninterest income:
Wealth management revenues		$8,065			$7,474			$591		8	%
Merchant processing fees	1,291			1,977			(686		)	(35	)%
Net gains on loan sales and commissions on loans originated for others	1,239			4,166			(2,927		)	(70	)%
Service charges on deposit accounts	754			791			(37		)	(5	)%
Card interchange fees	681			599			82			14	%
Income from bank-owned life insurance	445			467			(22		)	(5	)%
Net realized gains on securities	—			—			—			—	%
Net gains on interest rate swap contracts	260			19			241			1,268	%
Equity in earnings (losses) of unconsolidated subsidiaries	(43		)	39			(82		)	(210	)%
Gain on sale of business line	6,265			—			6,265			—	%
Other income	413			406			7			2	%
Noninterest income, excluding other-than-temporary impairment losses	19,370			15,938			3,432			22	%
Total other-than-temporary impairment losses on securities	—			(613		)	613			100	%
Portion of loss recognized in other comprehensive income (before tax)	—			(2,159		)	2,159			100	%
Net impairment losses recognized in earnings	—			(2,772		)	2,772			100	%
Total noninterest income		$19,370			$13,166			$6,204		47	%

Noninterest Income Analysis

Revenue from wealth management services is our largest source of noninterest income. A substantial portion of wealth management revenues is largely dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees and mutual fund fees. Wealth management revenues also include “transaction-based” revenues, such as financial planning, commissions and other service fees that are not primarily derived from the value of assets.

The categories of wealth management revenues are shown in the following table:



(Dollars in thousands)
					Change
Three months ended March 31,	2014		2013		$			%
Wealth management revenues:
Trust and investment management fees		$6,685		$6,066		$619		10	%
Mutual fund fees	1,081		1,022		59			6
Asset-based revenues	7,766		7,088		678			10
Transaction-based revenues	299		386		(87		)	(23	)
Total wealth management revenues		$8,065		$7,474		$591		8	%

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



(Dollars in thousands)

Three months ended March 31,	2014			2013
Wealth management assets under administration:
Balance at the beginning of period		$4,781,958			$4,199,640
Net investment appreciation & income	44,335			213,979
Net client cash flows	(19,912		)	6,457
Balance at the end of period		$4,806,381			$4,420,076

Wealth management revenues for the three months ended March 31, 2014 and 2013 were $8.1 million and $7.5 million , respectively, up by $591 thousand , or 8% , reflecting an increase in asset-based wealth management revenues. Wealth management assets under administration totaled $4.81 billion at March 31, 2014 , up by $24.4 million , or 1% , from December 31, 2013 , and up by $386.3 million , or 9% , from a year-ago, due to net investment appreciation and income.

Merchant processing fees are down by $686 thousand , or 35% , due to the sale of this business line, which was consummated on March 1, 2014. This decline corresponds to the decline in merchant processing costs discussed below under the caption “Noninterest Expenses.” See additional disclosure regarding this sale in the “Overview” section under the caption “Composition of Earnings.”

Mortgage banking revenues (net gains on loan sales and commissions on loans originated for others) are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. For the three months ended March 31, 2014 , this revenue source decreased by $2.9 million , or 70% , compared to the three months ended March 31, 2013, largely due to decreased refinancing and sales activity in response to increased market interest rates. Residential real estate loans sold to the secondary market, including brokered loans, totaled $57.0 million and $152.8 million, respectively, for the three months ended March 31, 2014 and 2013 .

Net gains on interest rate swap contracts for the three months ended March 31, 2014 increased by $241 thousand from the same period in 2013 . The increase was largely due to new customer-related interest rate swap contracts executed in 2014.

As previously mentioned, the Corporation sold its merchant processing services business line in the first quarter of 2014 resulting in a net gain on sale of business line of $6.3 million . See additional discussion in the “Overview” section under the caption “Composition of Earnings.”

There were no impairment losses recognized on securities in the quarter ended March 31, 2014 . For the three months ended March 31, 2013 , net impairment losses recognized in earnings on investment securities totaled $2.8 million . See additional discussion in the “Overview” section above under the caption “Composition of Earnings.”

Noninterest Expense

The following table presents noninterest expense comparisons for the periods indicated:



(Dollars in thousands)
						Change
Three months ended March 31,	2014			2013		$			%
Noninterest expenses:
Salaries and employee benefits		$14,558			$15,442		($884	)	(6	)%
Net occupancy	1,640			1,514		126			8	%
Equipment	1,236			1,244		(8		)	(1	)%
Merchant processing costs	1,050			1,673		(623		)	(37	)%
Outsourced services	1,044			841		203			24	%
Legal, audit and professional fees	618			608		10			2	%
FDIC deposit insurance costs	440			431		9			2	%
Advertising and promotion	232			355		(123		)	(35	)%
Amortization of intangibles	164			173		(9		)	(5	)%
Foreclosed property costs (recovery)	(22		)	47		(69		)	(147	)%
Debt prepayment penalties	6,294			—		6,294			—	%
Other	2,038			1,856		182			10	%
Total noninterest expense		$29,292			$24,184		$5,108		21	%

Noninterest Expense Analysis

Salaries and employee benefit costs for the three months ended March 31, 2014 and 2013 were $14.6 million and $15.4 million , respectively, down by $884 thousand , or 6% . Included in salaries and employee benefits in the first quarter of 2014 was $291 thousand of divestiture costs incurred in connection with the March 2014 sale of the merchant processing services business line. Excluding these divestiture costs, salaries and employee benefit costs decreased by $1.2 million, or 6%, reflecting a reduction in defined benefit pension costs and lower levels of business development based compensation primarily in the mortgage banking area.

Corresponding to the decrease in merchant processing fee revenue noted above under the caption “Noninterest Income,” merchant processing costs for the three months ended March 31, 2014 were down by $623 thousand , or 37% , from the same period in 2013 .

Outsourced services for the three months ended March 31, 2014 increased by $203 thousand , or 24% , reflecting an expansion of services utilized in our wealth management area and services utilized in support of deposit products.

The prepayment of FHLBB advances in the first quarter of 2014 resulted in debt prepayment penalty expense of $6.3 million . See additional discussion regarding the prepayments in the “Overview” section above under the caption “Composition of Earnings.” There was no debt prepayment penalty expense in the first quarter of 2013 .

Income Taxes

Income tax expense amounted to $4.3 million for the three months ended March 31, 2014 , compared to $3.4 million for the same period in 2013 . The Corporation’s effective tax rate for the three months ended March 31, 2014 and 2013 were 31.7% , and 31.6% , respectively.

Financial Condition

Summary

Total assets amounted to $3.19 billion at March 31, 2014 , a modest increase of $ 5.3 million , or 0.2% , from the end of 2013 . This included an increase of $22.8 million , or 28% , in cash and due from banks, net loan growth of $15.7 million , or 1% , and a decrease of $32.9 million , or 8% in the securities portfolio.

Nonperforming assets as a percent of total assets amounted to 0.45% at March 31, 2014 , down by 17 basis points from the end of 2013 , largely due to payoffs of commercial loans and charge-offs. While the overall credit quality continues to be affected by relatively weak economic conditions, we have experienced improvements in many of our asset and credit quality indicators.

Total deposits increased by $86.3 million , or 3% , in the first quarter of 2014 , including a net increase of $73.3 million of out-of-market wholesale brokered time certificates of deposit, which were utilized as replacement funding for the prepayment of FHLBB advances in the first quarter of 2014 . FHLBB advances declined by $84.7 million , or 29% , from the end of 2013 . See additional discussion regarding the prepayments of FHLBB advances in the “Overview” section above under the caption “Composition of Earnings.”

Shareholders’ equity totaled $335.9 million at March 31, 2014 , up by $6.2 million from the balance at the end of 2013 . Capital levels continue to exceed the regulatory minimum levels to be considered well-capitalized, with a total risk-based capital ratio of 13.56% at March 31, 2014 , compared to 13.29% at December 31, 2013 .

Securities

Washington Trust’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not currently maintain a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. Securities held to maturity are reported at amortized cost.

Determination of Fair Value

The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. The Corporation reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. The Corporation also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual they are re-examined and the value is either confirmed or revised. In addition, the Corporation periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 2014 and December 31, 2013 , the Corporation did not make any adjustments to the prices provided by the pricing service.

Generally, our fair value measurements utilize Level 2 inputs, which utilize quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets. Our Level 2 financial instruments consist primarily of available for sale debt securities.

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

Securities Portfolio

The carrying amounts of securities held are as follows:



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



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		%		Amount		%
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$28,889	100	%		$29,905	100	%
Total securities held to maturity		$28,889	100	%		$29,905	100	%

As of March 31, 2014 , the investment portfolio totaled $389.9 million , down by $32.9 million from the balance at December 31, 2013 , largely due to a call of a U.S. government agency debt security and principal payments received on mortgage-backed securities, which were not reinvested in the securities portfolio.

At March 31, 2014 and December 31, 2013 , the net unrealized gain position on securities available for sale and held to maturity amounted to $6.2 million and $5.0 million , respectively, and included gross unrealized losses of $5.4 million and $6.6 million , respectively. These gross unrealized losses were temporary in nature and concentrated in variable rate trust preferred securities issued by financial services companies.

State and Political Subdivision Holdings

The carrying amount of state and political subdivision holdings included in our securities portfolio at March 31, 2014 totaled $61.9 million . The following table presents state and political subdivision holdings by geographic location.



(Dollars in thousands)
March 31, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
New Jersey		$30,028		$1,278		$—		$31,306
New York	10,600		371		—		10,971
Pennsylvania	6,521		179		—		6,700
Illinois	7,313		110		—		7,423
Other	5,364		172		—		5,536
Total		$59,826		$2,110		$—		$61,936

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



(Dollars in thousands)
March 31, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
General obligations		$53,683		$1,945		$—		$55,628
Revenue obligations (a)	6,143		165		—		6,308
Total		$59,826		$2,110		$—		$61,936


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

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

Individual Name Issuer Trust Preferred Debt Securities



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


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


(b)	Rating is below investment grade.

The Corporation’s evaluation of the impairment status of individual name trust preferred securities includes various considerations in addition to the degree of impairment and the duration of impairment. We review the reported regulatory capital ratios of the issuer and, in all cases, the regulatory capital ratios were deemed to be in excess of the regulatory minimums. Credit ratings were also taken into consideration, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report. We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report. Where available, credit ratings from multiple rating agencies are obtained and rating downgrades are specifically analyzed. Our review process for these credit-sensitive holdings also includes a periodic review of relevant financial information for each issuer, such as quarterly financial reports, press releases and analyst reports. This information is used to evaluate the current and prospective financial condition of the issuer in order to assess the issuer’s ability to meet its debt obligations. Through the filing date of this report, each of the individual name issuer securities was current with respect to interest payments. Based on our evaluation of the facts and circumstances relating to each issuer, management concluded that all principal and interest payments for these individual issuer trust preferred securities would be collected according to their contractual terms and it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2014

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

Loans

Total loans amounted to $2.48 billion at March 31, 2014 , up by $15.7 million , or 1% , in the first three months of 2014 . Growth in the residential real estate loan portfolio was partially offset by declines in the commercial loan portfolio.

Commercial Loans

Commercial loans fall into two major categories, commercial real estate and other commercial loans (commercial and industrial). A significant portion of the Bank’s commercial and industrial loans are also collateralized by real estate, but are not classified as commercial real restate loans because such loans are not made for the purpose of acquiring, developing, constructing, improving or refinancing the real estate securing the loan, nor is the repayment source income generated directly from such real property.

Commercial Real Estate Loans

Commercial real estate loans amounted to $813.5 million at March 31, 2014 , a decrease of $19.0 million , or 2% , from $832.5 million at December 31, 2013 . Included in these amounts were commercial construction loans of $24.7 million and $36.3 million , respectively. The decline in the commercial real estate portfolio reflected payoffs of several larger loans.

Commercial real estate loans are secured by a variety of property types, with approximately 84% of the total composed of office buildings, retail facilities, commercial mixed use, lodging, multi-family dwellings and industrial and warehouse properties.

The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location.



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		% of Total		Amount		% of Total
Rhode Island, Connecticut, Massachusetts		$768,970	95	%		$791,682	95	%
New York, New Jersey	35,884		4	%	32,126		4	%
New Hampshire	8,678		1	%	8,730		1	%
Total		$813,532	100	%		$832,538	100	%

Other Commercial Loans

Commercial and industrial loans amounted to $523.8 million at March 31, 2014 , a decrease of $7.0 million , or 1% , from the balance at December 31, 2013 . This portfolio includes loans to a variety of business types. Approximately 83% of the total is composed of owner occupied and other real estate, health care/social assistance, retail trade, manufacturing, accommodation and food services, public administration, entertainment, recreation and construction businesses, and wholesale trade.

Residential Real Estate Loans

Washington Trust originates residential real estate mortgages within our general market area of Southern New England for portfolio and for sale in the secondary market. In recent years, the mortgage origination business has been expanded beyond our bank branch network, which is primarily located in Rhode Island, through the addition of residential mortgage lending offices, in Massachusetts and Connecticut. We also originate residential real estate mortgages for various investors in a broker capacity, including convention mortgages and reverse mortgages.

The residential real estate mortgage loan portfolio amounted to $810.4 million at March 31, 2014 , up by $37.7 million , or 5% , from the balance at December 31, 2013 .

Total residential real estate loan originations for retention in portfolio were $122.2 million and $183.7 million for the three months ended March 31, 2014 and 2013 . Total residential real estate loan originations for sale into the secondary market, including loans originated in a broker capacity, were $55.7 million and $132.0 million, respectively, for the three months ended March 31, 2014 and 2013 . Origination volume declined in 2014, reflecting a decline in refinancing activity due to increased market interest rates, as well as seasonal activity declines.

Prior to March 2009, Washington Trust had periodically purchased one- to four-family residential mortgages originated in other states as well as southern New England from other financial institutions. All residential mortgage loans purchased from other

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

The following is a geographic summary of residential mortgages by property location.



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		% of Total		Amount		% of Total
Rhode Island, Connecticut, Massachusetts		$788,659	97.2	%		$751,932	97.3	%
New Hampshire	9,066		1.1	%	7,900		1.0	%
New York, Virginia, New Jersey, Maryland, Pennsylvania, District of Columbia	6,898		0.9	%	6,972		0.9	%
Ohio	2,426		0.3	%	2,509		0.3	%
Washington and Oregon	1,350		0.2	%	1,356		0.2	%
Georgia	1,077		0.1	%	1,083		0.1	%
New Mexico	466		0.1	%	468		0.1	%
Other	451		0.1	%	454		0.1	%
Total residential mortgages		$810,393	100.0	%		$772,674	100.0	%

Consumer Loans

Consumer loans amounted to $330.9 million at March 31, 2014 , an increase of $4.1 million , or 1% , from December 31, 2013 . Our consumer portfolio is predominantly home equity lines and home equity loans, representing 83% of the total consumer portfolio at March 31, 2014 . Consumer loans also include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles.

Asset Quality

Nonperforming Assets

Nonperforming assets include nonaccrual loans, nonaccrual investment securities and property acquired through foreclosure or repossession.

The following table presents nonperforming assets and additional asset quality data for the dates indicated:



(Dollars in thousands)	Mar 31, 2014			Dec 31, 2013
Nonaccrual loans:
Commercial mortgages		$2,293			$7,492
Commercial construction and development	—			—
Other commercial	1,198			1,291
Residential real estate mortgages	8,975			8,315
Consumer	1,108			1,204
Total nonaccrual loans	13,574			18,302
Nonaccrual investment securities	—			547
Property acquired through foreclosure or repossession, net	750			932
Total nonperforming assets		$14,324			$19,781

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

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

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

Nonaccrual Loans

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



(Dollars in thousands)	March 31, 2014								December 31, 2013
	Days Past Due								Days Past Due
	Over 90		Under 90		Total		% (1)		Over 90		Under 90		Total		% (1)
Commercial:
Mortgages		$2,238		$55		$2,293	0.29	%		$7,492		$—		$7,492	0.94	%
Construction and development	—		—		—		—		—		—		—		—
Other commercial	428		770		1,198		0.23	%	731		560		1,291		0.24	%
Residential real estate mortgages	5,634		3,341		8,975		1.11	%	5,633		2,682		8,315		1.08	%
Consumer	701		407		1,108		0.33	%	656		548		1,204		0.37	%
Total nonaccrual loans		$9,001		$4,573		$13,574	0.55	%		$14,512		$3,790		$18,302	0.74	%


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

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

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

The largest nonaccrual relationship in the commercial mortgage category totaled $1.2 million at March 31, 2014 , down from $4.7 million at December 31, 2013 . In the first quarter of 2014, payoff proceeds of $2.6 million were received and final charge-offs of previously determined loss exposure of $853 thousand were recognized on two of the loans in this relationship. The relationship is largely secured by light industrial and office space and is collateral dependent. Based on the estimated fair value of the underlying collateral, a $146 thousand loss allocation was deemed necessary at March 31, 2014 . The Bank has additional accruing residential mortgage loans, which are related to the borrower by common guarantor, totaling $816 thousand at March 31, 2014 . These additional loans have performed in accordance with the terms of the loans and were not past due at March 31, 2014 .

In addition, during the first quarter of 2014, a paydown of $1.6 million was received on a nonaccrual commercial mortgage loan that had a carrying value of $1.7 million at December 31, 2013 .

Nonaccrual residential mortgage loans increased by $660 thousand from the balance at the end of 2013 . Management believes that the increase is partly due to the lengthening of time to resolve problem credits, including foreclosure efforts, resulting from a higher level of regulatory and judicial requirements. As of March 31, 2014 , the $9.0 million balance of nonaccrual residential mortgage loans consisted of 38 loans, with $8.0 million located in Rhode Island, Connecticut and Massachusetts. The loss allocation on total nonaccrual residential mortgages was $1.7 million at March 31, 2014 . Included in total nonaccrual residential mortgages at March 31, 2014 were eighteen loans purchased for portfolio and serviced by others amounting to $3.9 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.

Past Due Loans

The following table presents past due loans by category as of the dates indicated:



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		% (1)		Amount		% (1)
Commercial:
Mortgages		$2,253	0.29	%		$7,492	0.94	%
Construction and development	—		—	%	—		—	%
Other commercial loans	3,906		0.75	%	1,309		0.25	%
Residential real estate mortgages	9,131		1.13	%	10,958		1.42	%
Consumer loans	2,724		0.82	%	2,144		0.66	%
Total past due loans		$18,014	0.73	%		$21,903	0.89	%

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

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

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

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

Troubled Debt Restructurings

of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

The following table sets forth information on troubled debt restructured loans as of the dates indicated. The carrying amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below.



(Dollars in thousands)	Mar 31, 2014		Dec 31, 2013
Accruing troubled debt restructured loans:
Commercial mortgages		$22,796		$22,800
Other commercial	989		1,265
Residential real estate mortgages	1,467		1,442
Consumer	233		236
Accruing troubled debt restructured loans	25,485		25,743
Nonaccrual troubled debt restructured loans:
Commercial mortgages	—		—
Other commercial	369		542
Residential real estate mortgages	447		—
Consumer	29		38
Nonaccrual troubled debt restructured loans	845		580
Total troubled debt restructured loans		$26,330		$26,323

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

The largest troubled debt restructured relationship at March 31, 2014 consisted of an accruing commercial mortgage relationship with a carrying value of $9.5 million, secured by mixed use properties. The restructuring took place in the second quarter of 2013 and included a modification of certain payment terms and a below market rate concession for a temporary period. At March 31, 2014 , the second largest troubled debt restructured relationship consisted of an accruing commercial mortgage relationship with a carrying value of $8.1 million, secured by a hotel industry property. The restructuring took place in the third quarter of 2012 and included a modification of certain payment terms and a below market interest rate reduction for a temporary period on approximately $3.1 million of the total balance. In connection with this restructuring, additional collateral was also provided by the borrower during the third quarter of 2012. The third largest troubled debt restructured relationship consisted of a commercial mortgage with a carrying value of $4.9 million, secured by commercial property. The restructuring took place in the third quarter of 2013 and included a modification of certain payment terms and a below market rate concession for a temporary period. In connection with this restructuring, a principal pay-down of $1.2 million was provided by the borrower during the third quarter of 2013.

Potential Problem Loans

The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at March 31, 2014 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. The Corporation has identified approximately $1.5 million in potential problem loans at March 31, 2014 , compared to $931 thousand at December 31, 2013 . The increase from December 31, 2013 was due to the change in credit quality on two commercial and industrial loan relationships. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.”

Allowance for Loan Losses

Establishing an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. For a more detailed discussion on the allowance for loan losses, see additional information in Item 7 under the caption “Critical Accounting Policies and Estimates” of Washington Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .

The allowance for loan losses is management’s best estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. The status of nonaccrual loans, delinquent loans and performing loans were all taken into consideration in the assessment of the adequacy of the allowance for loans losses. In addition, the balance and trends of credit quality indicators, including the commercial loan categories of Pass, Special Mention and Classified, are integrated into the process used to determine the allocation of loss exposure. See Note 5 to the Unaudited Consolidated Financial Statements for additional information under the caption “Credit Quality Indicators.” While management believes that the level of allowance for loan losses at March 31, 2014 is adequate and consistent with asset quality and delinquency indicators, management will continue to assess the adequacy of the allowance for loan losses in accordance with its established policies.

The Bank’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Bank recognizes full or partial charge-offs on collateral dependent impaired loans when the collateral is deemed to be insufficient to support the carrying value of the loan. The Bank does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

The estimation of loan loss exposure inherent in the loan portfolio includes, among other procedures, (1) identification of loss allocations for individual loans deemed to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, historical loss experience, delinquency factors and other similar credit quality indicators, and (3) an unallocated allowance maintained for measurement imprecision and to reflect management’s consideration of other environment factors. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. We analyze historical loss experience in the various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios as of the balance sheet date. Revisions to loss allocation factors are not retroactively applied.

The methodology to measure the amount of estimated loan loss exposure includes an analysis of individual loans deemed to be impaired. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or if the loan is collateral dependent, at the fair value of the collateral. For collateral dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is dependent on the operation of the collateral, such as accruing troubled debt restructured loans, estimated costs to sell are not incorporated

into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.

The following is a summary of impaired loans by measurement type:



(Dollars in thousands)	Mar 31, 2014		Dec 31, 2013
Collateral dependent impaired loans (1)		$16,325		$21,940
Impaired loans measured on discounted cash flow method (2)	14,800		15,553
Total impaired loans		$31,125		$37,493


(1)	Net of partial charge-offs of $2.2 million and $2.4 million , respectively, at March 31, 2014 and December 31, 2013 .


(2)	Net of partial charge-offs of $130 thousand and $141 thousand , respectively, at March 31, 2014 and December 31, 2013 .

Impaired loans consist of nonaccrual commercial loans, troubled debt restructured loans and other loans classified as impaired. The loss allocation on impaired loans amounted to $1.0 million and $1.5 million , respectively, at March 31, 2014 and December 31, 2013 . Various loan loss allowance coverage ratios are affected by the timing and extent of charge-offs, particularly with respect to impaired collateral dependent loans. For such loans, the Bank generally recognizes a partial charge-off equal to the identified loss exposure; therefore, the remaining allocation of loss is minimal.

Other individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using the internal rating system and the application of loss allocation factors. The loan rating system is described under the caption “Credit Quality Indicators” in Note 5 to the Unaudited Consolidated Financial Statements. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. Portfolios of more homogeneous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, as well as our historical loss experience for each type of credit product. We continue to periodically reassess and revise the loss allocation factors and estimates used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience.

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. Updates to appraisals are generally obtained for troubled or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.

For residential mortgages and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis.

The provision for loan losses charged to earnings for the three months ended March 31, 2014 amounted to $300 thousand , compared to $600 thousand for the same period in 2013 . Net charge-offs for the three months ended March 31, 2014 totaled $1.1 million compared to $334 thousand for the first quarter of 2013. Included in net charge-offs in the first quarter of 2014 , was an $853 thousand charge-off on the largest nonaccrual commercial mortgage relationship described under the caption “Nonaccrual Loans.”

As of March 31, 2014 , the allowance for loan losses was $27.0 million , or 1.09% of total loans, compared to $27.9 million , or 1.13% of total loans, at December 31, 2013 . The decline in the ratio of the allowance for loan losses to total loans reflects charge-offs and a decrease in specific reserves on impaired loans. See Note 5 to the Unaudited Consolidated Financial Statements for additional information under the caption “Credit Quality Indicators.”

The following table presents additional detail on the Corporation’s loan portfolio and associated allowance for loan losses as of the dates indicated:



(Dollars in thousands)	March 31, 2014						December 31, 2013
	Loans		Related Allowance		Allowance / Loans		Loans		Related Allowance		Allowance / Loans
Impaired loans individually evaluated for impairment		$31,125		$1,027	3.30	%		$37,493		$1,481	3.95	%
Loans collectively evaluated for impairment	2,447,478		18,642		0.76	%	2,425,391		18,494		0.76	%
Unallocated	—		7,374		—		—		7,911		—
Total		$2,478,603		$27,043	1.09	%		$2,462,884		$27,886	1.13	%

The following table presents the allocation of the allowance for loan losses as of the dates indicated:



(Dollars in thousands)	March 31, 2014				December 31, 2013
	Amount		% (1)		Amount		% (1)
Commercial:
Mortgages		$6,547	32	%		$6,969	32	%
Construction and development	269		1		362		2
Other	5,201		21		5,433		22
Residential real estate:
Mortgage	4,948		32		4,571		30
Homeowner construction	139		1		129		1
Consumer	2,565		13		2,511		13
Unallocated	7,374				7,911
Balance at end of period		$27,043	100	%		$27,886	100	%


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

Sources of Funds

Our sources of funds include deposits, brokered certificates of deposit, FHLBB borrowings, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. Washington Trust uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders.

Management’s preferred strategy for funding asset growth is to grow low-cost deposits, including demand deposit, NOW and savings accounts. Asset growth in excess of low-cost deposits is typically funded through higher-cost deposits (including certificates of deposit and money market accounts), brokered certificates of deposit, FHLBB borrowings, and securities portfolio cash flow.

Deposits

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

Washington Trust is a participant in the Insured Cash Sweep (“ICS”) program, Demand Deposit Marketplace (“DDM”) program, and the Certificate of Deposit Account Registry Service (“CDARS”) program. Washington Trust uses these deposit sweep services to place customer funds into interest-bearing demand accounts, money market accounts, and/or certificates of deposits issued by other participating banks. Customer funds are placed at one or more participating bank to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. ICS, DDM and CDARS deposits are considered to be brokered deposits for bank regulatory purposes. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out of- market brokered deposits.

Total deposits amounted to $2.59 billion at March 31, 2014 , up by $ 86.3 million , or 3% , from the balance at December 31, 2013 . This included a net increase of $73.3 million of out-of-market wholesale brokered time certificates of deposit, which were

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

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

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

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

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

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

Borrowings

The Corporation utilizes advances from the FHLBB as well as other borrowings as part of its overall funding strategy. FHLBB advances are used to meet short-term liquidity needs, to purchase securities and to purchase loans from other institutions. FHLBB advances amounted to $203.4 million at March 31, 2014 , down by $84.7 million from the balance at the end of 2013 .

As disclosed in the “Overview” section under the caption “Composition of Earnings,” Washington Trust prepaid FHLBB advances totaling $99.3 million in early March 2014 , These advances had a weighted average rate of 3.01% and a weighted average remaining term of thirty-six months. Other wholesale funding in the form of brokered time certificates of deposits as well as existing on balance sheet liquidity were utilized as the funding source for the prepayments. The replacement wholesale funding amounted to $80.0 million , with maturities ranging from 2015 through 2019, a weighted average maturity of thirty-five months and an initial weighted average cost of approximately 0.93% . The net impact of these funding transactions was a reduction in interest expense of approximately $170 thousand in the first quarter of 2014 .

Liquidity and Capital Resources

Liquidity Management

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust’s primary source of liquidity is deposits, which funded approximately 79% of total average assets in the three months ended March 31, 2014 . While the generally preferred funding strategy is to attract and retain low cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLBB term advances and brokered certificates of deposit), cash flows from the Corporation’s securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although management has no intention to do so at this time. For a more detailed discussion on Washington Trust’s detailed liquidity funding policy and contingency funding plan, see additional information in Item 7 under the caption “Liquidity and Capital Resources” of Washington Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .

Liquidity remained well within target ranges established by the Corporation’s Asset/Liability Committee (“ALCO”) during the three months ended March 31, 2014 . Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding will meet anticipated funding needs.

For the three months ended March 31, 2014 , net cash used in financing activities amounted to $2.3 million . FHLBB advances decreased by $84.7 million, while total deposits increased by $86.3 million in the first three months of 2014 . See additional disclosure in the “Sources of Funds” section under the caption “Borrowings.” Net cash used in investing activities totaled $23.7 million for the three months ended March 31, 2014 . The most significant elements of cash flow within investment activities

were principal payments received and maturities of mortgage backed securities and other securities, proceeds from sale of our merchant processing service business line and net outflows related to growth in the loan portfolio. Net cash provided by operating activities amounted to $1.4 million for the three months ended March 31, 2014 . Net income totaled $9.3 million in the first three months of 2014 and the most significant adjustments to reconcile net income to net cash provided by operating activities pertained to mortgage banking activities and the gain on the sale of our merchant processing service business line. See the Corporation’s Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Capital Resources

Total shareholders’ equity amounted to $335.9 million at March 31, 2014 , up by $6.2 million from December 31, 2013 , including $9.3 million of earnings retention and a reduction of $4.9 million for dividend declarations.

The ratio of total equity to total assets amounted to 10.51% at March 31, 2014 . This compares to a ratio of 10.34% at December 31, 2013 . Book value per share at March 31, 2014 and December 31, 2013 amounted to $20.19 and $19.84, respectively.

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

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

Contractual Obligations and Commitments

The Corporation has entered into numerous contractual obligations and commitments. The following tables summarize our contractual cash obligations and other commitments at March 31, 2014 :



(Dollars in thousands)	Payments Due by Period
	Total		Less Than 1 Year (1)		1-3 Years		3-5 Years		After 5 Years
Contractual Obligations:
FHLBB advances (2)		$203,429		$17,518		$44,744		$105,590		$35,577
Junior subordinated debentures	22,681		—		—		—		22,681
Operating lease obligations	23,314		2,511		4,061		3,255		13,487
Software licensing arrangements	4,266		2,397		1,869		—		—
Other borrowings	167		45		103		19		—
Total contractual obligations		$253,857		$22,471		$50,777		$108,864		$71,745


(1)	Maturities or contractual obligations are considered by management in the administration of liquidity and are routinely refinanced in the ordinary course of business.


(2)	All FHLBB advances are shown in the period corresponding to their scheduled maturity. Some FHLBB advances are callable at earlier dates.



(Dollars in thousands)	Amount of Commitment Expiration – Per Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Other Commitments:
Commercial loans		$282,716		$155,481		$71,069		$24,745		$31,421
Home equity lines	196,744		—		—		—		196,744
Other loans	36,139		28,409		4,235		3,495		—
Standby letters of credit	2,903		2,756		147		—		—
Forward loan commitments:
Interest rate lock commitments	26,779		26,779		—		—		—
Commitments to sell residential mortgage loans	36,931		36,931		—		—		—
Customer related derivative contracts:
Interest rate swaps with customers	111,986		28,775		22,565		23,278		37,368
Mirror swaps with counterparties	111,986		28,775		22,565		23,278		37,368
Interest rate risk management contract:
Interest rate swap contracts	22,681		—		22,681		—		—
Total commitments		$828,865		$307,906		$143,262		$74,796		$302,901

Off-Balance Sheet Arrangements

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

Asset/Liability Management and Interest Rate Risk

Interest rate risk is the primary market risk category associated with the Corporation’s operations. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with Washington Trust’s liquidity, capital adequacy, growth, risk and profitability goals.

The ALCO manages the Corporation’s interest rate risk using income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, the 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.

The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of March 31, 2014 and December 31, 2013 , net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months, no more than 10% over the second 12 months, and no more than 10% over the full 60-month simulation horizon. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

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

changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of March 31, 2014 and December 31, 2013 . Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.



	March 31, 2014			December 31, 2013
	Months 1 - 12		Months 13 - 24	Months 1 - 12	Months 13 - 24
100 basis point rate decrease	(1.07	)%	(4.40)%	(1.66)%	(6.02)%
100 basis point rate increase	1.56	%	2.42%	2.22%	3.91%
200 basis point rate increase	3.33	%	4.84%	4.44%	7.16%
300 basis point rate increase	3.70	%	4.03%	5.30%	6.98%

The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall from their already low levels and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market rates fall.

The positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag other market rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles. The relative decrease in positive exposure of net interest income to rising rates from December 31, 2013 to March 31, 2014 was largely attributable to changes in balance sheet composition and the shape of the yield curve.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. Due to the current low level of market interest rates, the banking industry has experienced relatively strong growth in low-cost core deposits over the past several years. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled increased amounts of deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation. It should be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as

well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data.

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



(Dollars in thousands)
Security Type	Down 100 Basis Points		Up 200 Basis Points
U.S. government-sponsored enterprise securities (noncallable)		$62		($124	)
U.S. government sponsored enterprise securities (callable)	170		(1,071		)
Obligations of states and political subdivisions	1,045		(2,059		)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	4,461		(15,429		)
Trust preferred debt and other corporate debt securities	34		649
Total change in market value as of March 31, 2014		$5,772		($18,034	)

Total change in market value as of December 31, 2013		$6,863		($20,841	)

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, of the Corporation’s disclosure controls and procedures as of the periods ended March 31, 2014 . Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Corporation’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.

Internal Control Over Financial Reporting

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by the Exchange Act Rule 13a-15(f). The Corporation’s internal control system was designed to provide reasonable assurance to its 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 its internal control over financial reporting as of the end of the period covered by this report.

There has been no change in our internal control over financial reporting during the period ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

There have been no material changes in the risk factors described in Item IA to Part I of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 6. Exhibits

(a) Exhibits. The following exhibits are included as part of this Form 10-Q:



Exhibit Number
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
32.1	Certifications 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 – Furnished herewith. (3)
10.1	Form of Nonqualified Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.2	Form of Nonqualified Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.3	Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.4	Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.5	Form of Restricted Stock Unit Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.6	Form of Restricted Stock Unit Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.7	Form of Performance Share Unit Award Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.8	Form of Incentive Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
101	The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements - Furnished herewith. (4)

____________________


(1)	Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Exchange Act, reference is made to the documents previously filed with the Securities and Exchange Commission, which are incorporated by reference herein.


(2)	Management contract or compensatory plan or arrangement.


(3)	These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.


(4)	Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			WASHINGTON TRUST BANCORP, INC.
			(Registrant)

Date:	May 8, 2014	By:	/s/ Joseph J. MarcAurele
			Joseph J. MarcAurele
			Chairman and Chief Executive Officer
			(principal executive officer)

Date:	May 8, 2014	By:	/s/ David V. Devault
			David V. Devault
			Vice Chair, Secretary and Chief Financial Officer
			(principal financial and accounting officer)

Exhibit Index



Exhibit Number
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
32.1	Certifications 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 – Furnished herewith. (3)
10.1	Form of Nonqualified Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.2	Form of Nonqualified Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.3	Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.4	Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.5	Form of Restricted Stock Unit Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for non-employee directors. Filed herewith. (2)
10.6	Form of Restricted Stock Unit Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.7	Form of Performance Share Unit Award Agreement under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
10.8	Form of Incentive Stock Option Certificate and Statement of Terms and Conditions under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan for employees. Filed herewith. (2)
101	The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements - Furnished herewith . (4)

____________________


(1)	Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Exchange Act, reference is made to the documents previously filed with the Securities and Exchange Commission, which are incorporated by reference herein.


(2)	Management contract or compensatory plan or arrangement.


(3)	These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.


(4)	Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

NONQUALIFIED STOCK OPTION CERTIFICATE

FOR NON-EMPLOYEE DIRECTORS

TO: <NAME>

THIS OPTION is made as of the Grant Date by WASHINGTON TRUST BANCORP, INC. (the “Corporation”) to <NAME> (the “Optionee”), a member of the Board of Directors of the Corporation.

Pursuant to the Plan and the Statement of Terms and Conditions attached hereto and incorporated herein by reference (the “Statement”), the Corporation hereby awards as of the Grant Date to the Optionee a stock option (the “Option”), as described below, to purchase the Option Shares.


A.	Grant Date: <Date>


B.	Type of Option: Non-Qualified Stock Option


C.	Plan: Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”)


D.	Option Shares: <number of shares> shares of the Corporation’s common stock, U.S. $0.0625 par value per share (“Stock”).


E.	Option Exercise Price: <price per share> per share of Stock


F.	Latest Expiration Date: <Expiration Date> (the “Expiration Date”), subject to earlier termination as provided in the attached Statement and in the Plan.


G.	Exercisability Schedule: No portion of this Option may be exercised until such portion shall have become exercisable. Subject to the Statement, so long as the Optionee remains a director of the Corporation or a Subsidiary, the Option shall become vested and exercisable as follows:



Number of Option Shares Exercisable	Vesting and Exercisable Dates for Such Shares

Acceptance of this Option requires no action on the part of the Optionee. However, if the Optionee desires to refuse the Option, he or she must notify the Corporation at the address listed in the attached Statement. This Option is not intended to be an “incentive stock option,” as that term is described in Section 422 of the Internal Revenue Code of 1986, as amended.

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION INCENTIVE PLAN

NONQUALIFIED STOCK OPTION

FOR NON-EMPLOYEE DIRECTORS

STATEMENT OF TERMS AND CONDITIONS

This Statement of Terms and Conditions (the “Statement”) supplies the terms and conditions of a grant of a nonqualified stock option (the “Option”) by Washington Trust Bancorp, Inc. (the “Corporation”) under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”). The Option shall be subject to the provisions of the Plan, this Statement and the Certificate.

1. Termination .

(a) This Option shall terminate and be of no force or effect as of the earliest of the following:


(i)	The Expiration Date;


(ii)	Three years after the Optionee ceases to be an active member of the Board for any reason other than for cause;


(iii)	The date that the Optionee ceases to be an active member of the Board for cause.

Notwithstanding the foregoing, in the case of termination for cause, the ability to exercise this Option may be terminated on such earlier date as the Corporation may specify, and such date may be set so as to prevent the Optionee from further exercising any portion of this Option.

(b) The Administrator shall have discretion to determine whether any termination of Optionee’s service as an active member of the Board is to be considered as termination for cause for the purposes of this Statement. Any determination made by the Administrator with respect to any matter referred to in this Section 1 shall be final and conclusive on all persons affected thereby.

2. Nontransferability; Persons Able to Exercise .

This Option may not be transferred other than by will or the laws of descent and distribution. During the life of the Optionee, only the Optionee may exercise the Option. If the Optionee dies while still affiliated with the Corporation, or during the period specified in Section 1, this Option may be exercised by his executors, administrators, legatees or distributees, provided that such person or persons comply with the provisions of the Certificate, this Statement, and the Plan applicable to the Optionee.

3. Method of Exercising Option .

proof of the right of such person to exercise the Option. The written notice specified in this Section must be accompanied by payment of the Option Exercise Price for the shares being purchased in United States dollars in cash or by certified or bank check or other instrument acceptable to the Administrator. If approved by the Administrator, in its sole discretion, payment may also be made as follows:

(a) through the delivery (or attestation to the ownership) of shares of Stock, valued at Fair Market Value on the exercise date, that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Corporation plan; or

(b) by the Optionee delivering to the Corporation a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Corporation cash or a check payable and acceptable to the Corporation to pay the purchase price; provided that in the event the Optionee chooses to pay the purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure;

(c) by a “net exercise” arrangement pursuant to which the Corporation will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; or

(d) by any combination of the foregoing.

Payment instruments will be received subject to collection. The transfer to the Optionee on the records of the Corporation or of the transfer agent of the Option Shares will be contingent upon (i) the Corporation’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained in the Certificate, this Statement or in the Plan or in any other agreement or provision of law, and (iii) the receipt by the Corporation of any agreement, statement or other evidence that the Corporation may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Option shall be net of the number of shares attested to.

As soon as practical after receipt of this notice and payment and compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with the transfer of shares of Stock upon the exercise of this Option and with the requirements of this Statement, the Certificate and of the Plan, the shares of Stock purchased upon the exercise of this Option shall be transferred to the Optionee on the records of the Corporation or of the transfer agent. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Option unless and until this Option shall have been exercised pursuant to the terms hereof, the Corporation or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the shareholder of record on the books of the Corporation. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock. All shares purchased upon the exercise of this Option and payment of the full Option Exercise Price will be fully paid and nonassessable.

This Option shall not be exercised for the purchase of fewer than 50 shares or all shares to which the Option is currently exercisable if such number is less than 50. Notwithstanding any other provision hereof of or the Plan, no portion of this Option shall be exercisable after the Expiration Date hereof.

4. Change of Control .

If the Corporation is merged into or consolidated with another corporation under circumstances where the Corporation is not the surviving corporation, or if the Corporation is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan after the effective date of such merger, consolidation or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive in lieu of shares of Stock, shares of such stock or other securities as the holders of shares of Stock received pursuant to the terms of the merger, consolidation or sale. Notwithstanding the Certificate provisions regarding the vesting and exercisability of the Option in installments, this Option shall become immediately exercisable in the event of a Change of Control of the Corporation.

5. No Rights Other Than Those Expressly Created .

Neither this Option, nor the Certificate, nor this Statement, nor the Plan, nor any action taken hereunder shall be construed as (i) giving the Optionee any rights with respect to continuance as a director, (ii) [giving the Optionee any equity or interest of any kind in any assets of the Corporation, or (iii)] creating a trust of any kind or a fiduciary relationship of any kind between the Optionee and the Corporation. As to any claim for any unpaid amounts under this Option or this Statement, any person having a claim for payments shall be an unsecured creditor. The Optionee shall not have any of the rights of a shareholder with respect to any Option Shares until such time as this Option has been exercised and Option Shares have been issued.

6. Miscellaneous .

(a) Amendment . This Option may only be modified or amended by a writing signed by both parties, unless the Administrator determines that the proposed modification or amendment would not materially and adversely affect the Optionee, in which case the Optionee’s consent shall not be required for such modification or amendment.

(b) Notices . Any notices required to be given under this Option or this Statement shall be sufficient if in writing and if hand-delivered or if sent by first class mail and addressed as follows:

if to the Corporation :

Washington Trust Bancorp, Inc.

23 Broad Street

Westerly, Rhode Island 02891

Attention: Director of Human Resources

if to the Optionee :

at the address maintained in the Corporation’s payroll records

or to such other address as either party may designate under the provisions hereof.

(c) Applicable Law . All rights and obligations under this Option and this Statement shall be governed by the laws of the State of Rhode Island.

(d) Incorporation of Plan . Notwithstanding anything herein to the contrary, this Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers

of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in the Certificate and in this Statement shall have the meaning specified in the Plan, unless a different meaning is specified herein or therein.

(e) Data Privacy Consent . In order to administer the Plan and this Option and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Option (the “Relevant Information”). By accepting this Option, the Optionee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

PLEASE DIRECT ANY QUESTIONS TO:

Kristen L. DiSanto Elizabeth A. Musgrave

Executive Vice President, Human Resources Vice President, Human Resources

The Washington Trust Company The Washington Trust Company

8 Union Street or 8 Union Street

Westerly, RI 02891 Westerly, RI 02891

(401) 348-1204 (401) 348-1204

Email: kldisanto@washtrust.com Email: eamusgrave@washtrust.com

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

NONQUALIFIED STOCK OPTION CERTIFICATE

FOR EMPLOYEES

TO: <NAME>

THIS OPTION is made as of the Grant Date by WASHINGTON TRUST BANCORP, INC. (the “Corporation”) to <NAME> (the “Optionee”).


A.	Grant Date: <Grant Date>


B.	Type of Option: Non-Qualified Stock Option


C.	Plan: Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”)


D.	Option Shares: <number of shares> shares of the Corporation’s common stock, U.S. $0.0625 par value per share (“Stock”).


E.	Option Exercise Price: <grant price> per share of Stock


F.	Latest Expiration Date: <expiration date> (the “Expiration Date”), subject to earlier termination as provided in the attached Statement and in the Plan.


G.	Exercisability Schedule: No portion of this Stock Option may be exercised until such portion shall have become exercisable. Subject to the Statement, so long as the Optionee remains an employee of the Corporation or a Subsidiary, the Option shall become vested and exercisable as follows:



Number of Option Shares Exercisable	Vesting and Exercisable Dates for Such Shares

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND Incentive Plan

NONQUALIFIED STOCK OPTION

FOR EMPLOYEES

STATEMENT OF TERMS AND CONDITIONS

1. Termination .

(a) This Option shall terminate and be of no force or effect as of the earliest of the following:


(i)	The Expiration Date;


(ii)	The expiration of three months after the date of the Optionee’s retirement with consent of the Corporation, and during such three-month period, the Optionee shall have the right to exercise the Option hereby granted to the extent exercisable on the date of retirement;


(iii)	The expiration of three years after the date of death of the Optionee, if the Optionee dies while in the employment of the Corporation or within three months after retirement; and during such three-year period, Optionee’s executor, administrator, legatees or distributees shall have the right to exercise the Option hereby granted to the extent exercisable on the date of the Optionee’s death.


(iv)	The date of the termination of the Optionee’s employment for any other reason.

Notwithstanding the foregoing, in the case of termination for cause, the ability to exercise this Option shall terminate on the date of termination of employment and may be terminated on such earlier date as the Corporation may specify, and such date may be set so as to prevent the Optionee from further exercising any portion of this Option.

Upon the Optionee’s termination of employment, any portion of this Option that is not exercisable at such time shall immediately terminate and be of no force or effect.

(b) The Administrator, as defined in the Plan, shall have discretion to determine whether any termination of the Optionee’s employment by the Corporation is to be considered for

cause, or retirement with the consent of the Corporation for the purposes of this Option and this Statement and whether an authorized leave of absence on military or government service or otherwise shall constitute a termination of employment for the purposes of this Option or this Statement. Any determination made by the Administrator with respect to any matter referred to in this Section 1 shall be final and conclusive on all persons affected thereby. Employment by the Corporation shall be deemed to include employment of the Optionee by, and to continue during any period in which the Optionee is in the employment of, a subsidiary of the Corporation.

2. Nontransferability; Persons Able to Exercise . This Option may not be transferred other than by will or the laws of descent and distribution. During the life of the Optionee, only the Optionee may exercise the Option. If the Optionee dies while still affiliated with the Corporation, or during the period specified in Section 1, this Option may be exercised by his executors, administrators, legatees or distributees, provided that such person or persons comply with the provisions of the Certificate, this Statement, and the Plan applicable to the Optionee.

3. Method of Exercising Option . The Option may be exercised, in whole or in part, by written notice to the Director of Human Resources of the Corporation, on any business day prior to the Expiration Date or earlier date specified in Section 1, specifying the number of shares which the Optionee wishes to purchase and including payment of the Option Exercise Price as provided below, provided that the Corporation, in its discretion, may modify or augment these requirements as provided in Section 7 of this Statement, or where appropriate because a person other than the Optionee is exercising the Option pursuant to Section 2. In the event this Option is exercised by any person other than the Optionee, the notice shall be accompanied by appropriate proof of the right of such person to exercise the Option. The written notice specified in this Section must be accompanied by payment of the Option Exercise Price for the shares being purchased in United States dollars in cash or bank check or other instrument acceptable to the Administrator. If approved by the Administrator, in its sole discretion, payment may also be made as follows:

(d) by any combination of the foregoing.

agreement, statement or other evidence that the Corporation may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Option shall be net of the number of shares attested to.

4. Change of Control . If the Corporation is merged into or consolidated with another corporation under circumstances where the Corporation is not the surviving corporation, or if the Corporation is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan after the effective date of such merger, consolidation or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive in lieu of shares of Stock, shares of such stock or other securities as the holders of shares of Stock received pursuant to the terms of the merger, consolidation or sale. Notwithstanding the Certificate provisions regarding the vesting and exercisability of the Option in installments, this Option shall become immediately exercisable in the event of a Change of Control of the Corporation or offer to effect a Change of Control of the Corporation.

5. No Rights Other Than Those Expressly Created . Neither this Option, nor the Certificate, nor this Statement, nor the Plan, nor any action taken hereunder shall be construed as (i) giving the Optionee any right to be retained in the employ of, or continue to be affiliated with, the Corporation, (ii) giving the Optionee any equity or interest of any kind in any assets of the Corporation, or (iii) creating a trust of any kind or a fiduciary relationship of any kind between the Optionee and the Corporation. As to any claim for any unpaid amounts under this Option or this Statement, any person having a claim for payments shall be an unsecured creditor. The Optionee shall not have any of the rights of a shareholder with respect to any Option Shares until such time as this Option has been exercised and Option Shares have been issued.

6. Withholding of Taxes . The Optionee shall, not later than the date as of which the exercise of this Option becomes a taxable event for Federal income tax purposes, pay to the Corporation or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required

by law to be withheld on account of such taxable event. The Corporation shall have the authority to cause the minimum required tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

7. Miscellaneous.

(b) Notices . Any notices required to be given under this Option or this Statement shall be sufficient if in writing and if hand-delivered or if sent by first class mail and addressed as follows:

if to the Corporation :

Washington Trust Bancorp, Inc.

23 Broad Street

Westerly, Rhode Island 02891

Attention: Director of Human Resources

if to the Optionee :

at the address maintained in the Corporation’s payroll records

or to such other address as either party may designate under the provisions hereof.

(c) Applicable Law . All rights and obligations under this Option and this Statement shall be governed by the laws of the State of Rhode Island.

(d) Incorporation of Plan . Notwithstanding anything herein to the contrary, this Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Statement and the Certificate shall have the meaning specified in the Plan, unless a different meaning is specified herein or therein.

PLEASE DIRECT ANY QUESTIONS TO:

Kristen L. DiSanto Elizabeth A. Musgrave

Executive Vice President, Human Resources Vice President, Human Resources

The Washington Trust Company The Washington Trust Company

8 Union Street or 8 Union Street

Westerly, RI 02891 Westerly, RI 02891

(401) 348-1204 (401) 348-1459

Email: kldisanto@washtrust.com Email: eamusgave@washtrust.com

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

FOR NON-EMPLOYEE DIRECTORS



Name of Grantee:	<NAME>
No. of Shares:	<Number of Shares
Purchase Price per Share:	None
Grant Date:	<Grant Date>

Pursuant to the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, Washington Trust Bancorp, Inc. (the “Corporation”) hereby grants a Restricted Stock Award (an “Award”) to the Grantee named above. Upon acceptance of this Award, the Grantee shall receive the number of shares of common stock, par value U.S. $0.0625 per share (the “Stock”) of the Corporation specified above, subject to the restrictions and conditions set forth herein and in the Plan. Any consideration due to the Corporation with respect to the par value of the Stock will be satisfied in the form of cash or by past or future services rendered to the Corporation by the Grantee or such other form of consideration as is acceptable to the Administrator.

1. Acceptance of Award . The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award by signing and delivering to the Corporation a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Restricted Stock so accepted shall be issued and held by the Corporation’s transfer agent in book entry form or issued in the form of stock certificates, as determined by the Corporation, and the Grantee’s name shall be entered as the shareholder of record on the books of the Corporation. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares, including voting and dividend rights, subject, however, to the restrictions and conditions specified herein.

2. Restrictions and Conditions .

(a) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(b) In the event the Grantee ceases to be an active member of the Board for any reason other than those provided in Section 3 of this Statement prior to the applicable Vesting Date, all shares of Restricted Stock that have not vested shall be immediately and automatically be forfeited and returned to the Corporation.

3. Vesting of Restricted Stock . The restrictions and conditions in Paragraph 2 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule so long as the Grantee remains an active member of the Board on such Dates. If a series of Vesting Dates is specified, then the restrictions and conditions in Section 2 shall lapse only with respect to the number of shares of Restricted Stock specified as vested on such date.



Number of Shares Vested	Vesting Date

Subsequent to such Vesting Date or Dates, the shares of Stock on which all restrictions and conditions have lapsed shall no longer be deemed Restricted Stock. The Administrator may at any time accelerate the vesting schedule specified in this Section 3.

Notwithstanding the foregoing, the Grantee shall become vested in the shares of Restricted Stock prior to the Vesting Dates in the following circumstances:

(a) In the event of a Change of Control of the Corporation (as defined in the Plan), all shares of Restricted Stock that have not previously been forfeited shall immediately vest; provided that the Grantee is then an active member of the Board.

(b) In the event of the Grantee’s death, all shares of Restricted Stock that have not previously been forfeited shall immediately vest; provided that the Grantee was an active member of the Board immediately prior to the date of death.

(c) Upon the Retirement of the Grantee prior to the final Vesting Date, all shares of Restricted Stock that have not been previously forfeited shall immediately vest.

For purposes hereof, “Retirement” shall mean the Grantee’s cessation of service as a Director as of the Annual Meeting date following the attainment of age 70.

4. Certificates .

(a) Legended Certificates . The Grantee is executing and delivering to the Corporation blank stock powers to be used in the event of forfeiture. Any certificates representing shares of unvested Restricted Stock shall be held by the Corporation and such certificates (and, to the extent determined by the Corporation, any other evidence of ownership of unvested Restricted Stock) shall contain the following legend:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE ISSUER’S 2013 STOCK OPTION AND INCENTIVE PLAN AND A RESTRICTED STOCK AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE ISSUER. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF THE ISSUER.

(b) Book Entry . Any book entries for the shares of Restricted Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are subject to restrictions as set forth herein and in the Plan. If unvested shares of Restricted Stock are held in book entry form, the Grantee agrees that the Corporation may give stop transfer instructions to the transfer agent to ensure compliance with the provisions of this Agreement.

(c) Acknowledgement . The Grantee hereby (i) acknowledges that the Restricted Stock may be held in the book entry form on the books of the Corporation’s transfer agent and irrevocably authorizes the Corporation to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder; (ii) agrees to deliver to the Corporation, as a precondition to the issuance of any certificate or certificates with respect to unvested shares of Restricted Stock, one or more stock powers, endorsed in blank, with respect to such shares; and (iii) agrees to sign other powers and take such other action as the Corporation may reasonably request to accomplish the transfer or forfeiture of any shares of unvested Restricted Stock that are forfeited hereunder.

5. Dividends . Dividends on shares of Restricted Stock shall be paid currently to the Grantee.

6. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Award shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

7. Transferability . This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution.

8. Amendment . This Agreement may only be modified or amended by a writing signed by both parties, unless the Administrator determines that the proposed modification or amendment would not materially and adversely affect the Grantee, in which case the Grantee’s consent shall not be required for such modification or amendment.

9. Election Under Section 83(b) . The Grantee and the Corporation hereby agree that the Grantee may, within 30 days following the Grant Date of this Award, file with the Internal Revenue Service and the Corporation an election under Section 83(b) of the Internal Revenue Code. In the event the Grantee makes such an election, he or she agrees to provide a copy of the election to the Corporation. The Grantee acknowledges that he or she is responsible for obtaining the advice of his or her tax advisors with regard to the Section 83(b) election and that he or she is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents with regard to such election.

10. No Obligation to Continue Service as a Director . The Corporation is not obligated by or as a result of the Plan or this Agreement to continue the Grantee in service as a Director and neither the Plan nor this Agreement shall interfere in any way with the right of the Corporation or any Subsidiary to terminate the service of the Grantee at any time.

11. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Award and supersedes all prior agreements and discussions between the parties concerning such subject matter.

12. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

13. Notices . Notices hereunder shall be mailed or delivered to the Corporation at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Corporation or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

14. Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of Rhode Island, applied without regard to conflict of law principles.



WASHINGTON TRUST BANCORP, INC.
By:
	Joseph J. MarcAurele
	Chairman, President and Chief Executive Officer

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Corporation’s instructions to the Grantee (including through an online acceptance process) is acceptable.



Date		<Director Name>
		<Director Address>

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

FOR EMPLOYEES



Name of Grantee:	<Name>
No. of Shares:	<Shares Granted>
Purchase Price per Share:	None
Grant Date:	<Grant Date>

2. Restrictions and Conditions .

(a) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(b) If the Grantee’s employment with the Corporation and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of shares of Restricted Stock granted herein, all shares of Restricted Stock that have not vested shall be immediately and automatically forfeited and returned to the Corporation.

3. Vesting of Restricted Stock . The restrictions and conditions in Paragraph 2 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule so long as the Grantee remains an employee of the Corporation or Subsidiary on such Dates. If a series of Vesting Dates is specified, then the restrictions and conditions in Section 2 shall lapse only with respect to the number of shares of Restricted Stock specified as vested on such date.



Number of Shares Vested	Vesting Date

Notwithstanding the foregoing, the Grantee shall become vested in the shares of Restricted Stock prior to the Vesting Dates in the following circumstances:

(b) In the event of the Grantee’s death, all shares of Restricted Stock that have not previously been forfeited shall immediately vest and become exercisable; provided that the Grantee was employed by the Corporation or its Subsidiaries immediately prior to the date of death.

(c) Upon the Retirement of the Grantee prior to the Vesting Date, the Grantee shall vest in a number of his shares of Restricted Stock determined by multiplying the number of shares of Restricted Stock credited to the Grantee by a fraction, the numerator of which shall be the number of full months from the Grant Date to the date of the Grantee’s Retirement and the denominator of which shall be <term in months>.

For purposes hereof, “Retirement” shall mean the Grantee’s termination of employment with the Corporation or a Subsidiary with an election to commence promptly receipt of benefits under The Washington Trust Corporation Pension Plan.

4. Certificates .

OWNER AND THE ISSUER. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF THE ISSUER.

(b) Book Entry . Any book entry for the shares of Restricted Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are subject to the restrictions set forth herein and in the Plan. If unvested shares of Restricted Stock are held in book entry form, the Grantee agrees that the Corporation may give stop transfer instructions to the transfer agent to ensure compliance with the provisions of this Agreement.

5. Dividends . Dividends on shares of Restricted Stock shall be paid currently to the Grantee.

6. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

9. Tax Withholding . The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Corporation or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. Except in the case where an election is made pursuant to Section 10 below, the Corporation shall have the authority to cause the required minimum tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued or released by the transfer agent a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

10. Election Under Section 83(b) . The Grantee and the Corporation hereby agree that the Grantee may, within 30 days following the Grant Date of this Award, file with the Internal Revenue Service and the Corporation an election under Section 83(b) of the Internal Revenue Code. In the event the Grantee makes such an election, he or she agrees to provide a copy of the election to the Corporation. The Grantee acknowledges that he or she is responsible for obtaining the advice of his or her tax advisors

with regard to the Section 83(b) election and that he or she is relying solely on such advisors and not on any statements or representations of the Corporation or any of its agents with regard to such election.

11. No Obligation to Continue Employment . Neither the Corporation nor any Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Grantee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Corporation or any Subsidiary to terminate the employment of the Grantee at any time.

12. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Award and supersedes all prior agreements and discussions between the parties concerning such subject matter.

13. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

14. Notices . Notices hereunder shall be mailed or delivered to the Corporation at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Corporation or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

15. Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of Rhode Island, applied without regard to conflict of law principles.



WASHINGTON TRUST BANCORP, INC.
By:
	Joseph J. MarcAurele
	Chairman, President and Chief Executive Officer



Date		< Name >
		<Employee Address>

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK UNIT CERTIFICATE

FOR NON-EMPLOYEE DIRECTORS



Name of Grantee:	<Name>
Number of Units:	<Number of Shares>
Grant Date:	<Grant Date>
Vesting Date:	<Vesting Date>

Washington Trust Bancorp, Inc. (the “Corporation”) has selected you to receive the grant of restricted stock units identified above, subject to the provisions of its 2013 Stock Option and Incentive Plan (the “Plan”) and the Statement of Terms and Conditions. Acceptance of this grant requires no action on your part. However, if you desire to refuse this grant, you must notify the Company promptly.



WASHINGTON TRUST BANCORP, INC
By:
	Kathleen E.. McKeough
Title:	Compensation & Human Resources Committee Chairman

STATEMENT OF TERMS AND CONDITIONS

1. Preamble. This Statement of Terms and Conditions (the “Statement”) contains the terms and conditions of an award (the “Award”) of restricted stock units of the Corporation (the “Restricted Units”) made to the Grantee identified on the attached Certificate pursuant to the Plan. Any consideration due to the Corporation on the issuance of the Restricted Units has been deemed to be satisfied by past services rendered by the Grantee to the Corporation.

2. Restrictions on Transfer. The Restricted Units shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of, until and unless the Restricted Units shall have vested as provided in Section 3 of this Statement and Shares (as defined below) have been issued to the Grantee in accordance with the terms of the Plan and Section 6 of this Statement.

3. Vesting. The term “vest” as used in this Statement means the lapsing of the restrictions that are described in this Statement with respect to the Restricted Units. The Restricted Units shall vest in accordance with the schedule set forth on the Certificate, provided in each case that the Grantee is then, and since the Grant Date has continuously been, an active member of the Board. Notwithstanding the foregoing, the Grantee shall become vested in the Restricted Units prior to the vesting date set forth on the Certificate in the following circumstances:

(a) In the event of a Change in Control of the Corporation, all Restricted Units that have not previously been forfeited shall immediately vest; provided that the Grantee is then an active member of the Board.

(b) In the event of the Grantee’s death, all Restricted Units that have not previously been forfeited shall immediately vest; provided that the Grantee was an active member of the Board immediately prior to the date of death.

(c) Upon the Retirement of the Grantee prior to the Vesting Date, all Restricted Units that have not previously been forfeited shall immediately vest.

4. Forfeiture. In the event the Grantee ceases to be an active member of the Board for any reason other than those provided in Section 3 of this Statement prior to the Vesting Date, all Restricted Units that have not previously been forfeited on such date shall be immediately forfeited to the Corporation.

5. Dividend Equivalents.

(a) In the case of a dividend payable on shares of Common Stock (“Shares”) in the form of cash, the Corporation shall provide Grantee with an additional cash payment in an amount equal to the aggregate number of Restricted Units credited to the Grantee as of the record date of the dividend multiplied by the cash dividend per share amount.

(b) In the case of a dividend paid on Shares in the form of Shares, including without limitation a distribution of Shares by reason of a stock dividend, stock split or otherwise, the number of Restricted Units credited to the Grantee shall be increased by a number equal to the product of (i) the aggregate number of Restricted Units that have been awarded to the Recipient through the related dividend record date, and (ii) the number of Shares (including any fraction thereof) payable as dividend on one Share. Any additional Restricted Units shall be subject to the restrictions of this Statement in the same manner and for so long as the Restricted Units remain subject to such restrictions, and shall be promptly forfeited to the Corporation if and when the Restricted Units are so forfeited.

6. Issuance of Shares.

(a) As soon as practicable following the Grantee’s vesting in the Restricted Units (but in no event later than two and one-half months after the end of the year in which vesting occurs), the Corporation shall issue to the Grantee the number of Shares equal to the aggregate number of Restricted Units that have vested pursuant to

Section 3 of this Statement on such date and thereafter the Grantee shall thereafter have the rights of a shareholder of the Corporation with respect to such Shares. The issuance of certificates may be made in book entry form.

7. Defined Terms. For purposes of this Statement, “Retirement” shall mean the Grantee’s cessation of service as a Director as of the Annual Meeting date following the attainment of age 70.

8. Administration. The Committee shall have the authority to manage and control the operation and administration of this Statement. Any interpretation of the Statement by the Committee and any decision made by the Committee with respect to the Statement is final and binding.

9. Amendment. This Statement may be amended only by written statement between the Grantee and the Corporation, without the consent of any other person.

10. Incorporation of the Plan . Notwithstanding anything herein to the contrary, this Statement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Statement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

11. Section 409A of the Code . The Award and this Statement shall be interpreted in such a manner that all provisions relating to the settlement of the Award are exempt from the requirements of Section 409A of the Code as “short-term deferrals” as described in Section 409A of the Code.

12. No Obligation to Continue as a Director. Neither the Plan nor this Award confers upon the Grantee any rights with respect to continuance as a Director.

13. Data Privacy Consent . In order to administer the Plan and this Award and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Statement (the “Relevant Information”). By accepting this Award, the Grantee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK UNIT CERTIFICATE

FOR EMPLOYEES



Name of Grantee:	<NAME>
No. of Units:	<Number of Shares>
Grant Date:	<Grant Date>
Vesting Date:	<Vest Date>



WASHINGTON TRUST BANCORP, INC.
By:
	Joseph J. MarcAurele
	Chairman, President and Chief Executive Officer

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK UNIT CERTIFICATE

FOR EMPLOYEES

STATEMENT OF TERMS AND CONDITIONS

1. Preamble . This Statement of Terms and Conditions (the “Statement”) contains the terms and conditions of an award of restricted stock units of the Corporation (the “Restricted Units”) made to the Grantee identified on the attached Certificate pursuant to the Plan. Any consideration due to the Corporation on the issuance of the Restricted Units has been deemed to be satisfied by past services rendered by the Grantee to the Corporation.

2. Restrictions on Transfer . The Restricted Units shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of, until and unless the Restricted Units shall have vested as provided in Section 3 of this Statement and Shares (as defined below) have been issued to the Grantee in accordance with the terms of the Plan and Section 6 of this Statement.

3. Vesting . The term “vest” as used in this Statement means the lapsing of the restrictions that are described in this Statement with respect to the Restricted Units. The Restricted Units shall vest in accordance with the schedule set forth on the Certificate, provided in each case that the Grantee is then, and since the Grant Date has continuously been, employed by the Corporation or its Subsidiaries. Notwithstanding the foregoing, the Grantee shall become vested in the Restricted Units prior to the vesting date set forth on the Certificate in the following circumstances:

(a) In the event of a Change of Control of the Corporation (as defined in the Plan), all Restricted Units that have not previously been forfeited shall immediately vest; provided that the Grantee is then employed by the Corporation or its Subsidiaries.

(b) In the event of the Grantee’s death, all Restricted Units that have not previously been forfeited shall immediately vest; provided that the Grantee was employed by the Corporation or its Subsidiaries immediately prior to the date of death.

(c) Upon the Retirement of the Grantee prior to the Vesting Date, the Grantee shall vest in a number of his or her Restricted Units determined by multiplying the number of Restricted Units credited to the Grantee by a fraction, the numerator of which shall be the number of full months from the Grant Date to the date of the Grantee’s Retirement and the denominator of which shall be <months in term>.

4. Forfeiture . In the event the Corporation terminates the Grantee’s employment or the Grantee terminates his employment on his or her own initiative prior to the Vesting Date, all Restricted Units that have not previously been forfeited on such date shall be immediately forfeited to the Corporation.

5. Dividend Equivalents .

(a) In the case of a dividend payable on shares of Common Stock (“Shares”) in the form of cash, the Corporation shall provide Grantee with additional compensation in an amount equal to the aggregate number of Restricted Units credited to the Grantee as of the record date of the dividend multiplied by the cash dividend per share amount.

6. Issuance of Shares . As soon as practicable following the Grantee’s vesting in the Restricted Units (but in no event later than two and one-half months after the end of the year in which the vesting occurs), the Corporation shall issue to the Grantee the number of Shares equal to the aggregate number of Restricted Units that have vested pursuant to Section 3 of this Statement on such date and thereafter the Grantee shall have the rights of a shareholder of the Corporation with respect to such shares. The issuance of certificates may be made in book entry form.

(a) Notwithstanding the foregoing, in the event the Grantee becomes vested in the Restricted Units on account of his Retirement, if the Grantee is a “specified employee” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (“Section 409A”) upon his Retirement, the Shares shall not be issued to the Grantee until the seventh month after the Grantee’s “separation from service” within the meaning of Section 409A.

(b) Notwithstanding the foregoing, if the Grantee met the age or age and service requirement for Retirement and a Change in Control of the Company occurs prior to the issuance of Shares, if the Change in Control of the Company qualifies as a “change in control event” within the meaning of Section 409A, the Shares shall be issued to the Grantee as soon as practicable following the Change in Control of the Company. If the Change in Control of the Company does not qualify as a “change in control event” within the meaning of Section 409A, the Shares shall be issued to the Grantee upon the earliest of (i) the Vesting Date, (ii) the Grantee’s death, or (iii) the Grantee’s “separation from service” within the meaning of Section 409A; provided, however, that if the Grantee is a “specified employee” within the meaning of Section 409A upon his separation from service, the Shares shall not be issued until the seventh month after the Grantee’s separation from service.

7. Tax Withholding . The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Corporation or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Corporation shall have the authority to cause the required minimum tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Grantee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

8. Defined Terms . For purposes of this Statement, “Retirement” shall mean the Grantee’s termination of employment with the Corporation or a Subsidiary after attaining age 65 or after attaining age 55 with at least ten years of service.

9. Administration . The Administrator shall have the authority to manage and control the operation and administration of this Statement. Any interpretation of the Statement by the Administrator and any decision made by the Administrator with respect to the Statement is final and binding.

10. Amendment . This Statement may be amended only by written statement between the Grantee and the Corporation, without the consent of any other person.

11. No Obligation to Continue Employment . Neither the Corporation nor any Subsidiary is obligated by or as a result of the Plan or this Award to continue the Grantee in employment and neither the Plan nor this Award shall interfere in any way with the right of the Corporation or any Subsidiary to terminate the employment of the Grantee at any time.

12. Data Privacy Consent . In order to administer the Plan and this Award and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

PERFORMANCE SHARE UNIT AWARD AGREEMENT

Name of Grantee: <NAME>

No. of Target Shares: <Target Number of Shares>

Grant Date: <Grant Date>

Vesting Date: <Vesting Date>

Pursuant to the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, Washington Trust Bancorp, Inc. (the “Corporation”) hereby grants a Performance Share Unit Award (an “Award”) to the Grantee named above. No shares of Stock shall be issued unless the provisions of Paragraph 2, 3, 4 or 5 are satisfied.

1. Defined Terms . For purposes of this Agreement, the following terms shall mean:


(a)	Performance Measurement Period : January 1, 2014 through December 31, 2016. Performance will be assessed for each calendar year in the Performance Measurement Period.


(b)	Acceleration Event Date : The date of the Grantee’s death, Retirement or Permanent Disability or a Change in Control of the Corporation.

(c)

Shortened Performance Measurement Period : The period from January 1, 2014 through the Acceleration Event Date. Performance will be assessed as available for each year within the Shortened Performance Measurement Period. Calendar year performance will be used for each completed year; and for any partial years, year-to-date performance through the completed calendar quarter immediately preceding or coinciding with the Acceleration Event Date. Performance for a partial year will be weighted accordingly.


(d)	Peer Group : SNL Index of banks and thrifts located in New England and Mid-Atlantic with assets of $1.5 billtion to $6.5 billion (excluding instituitions in Puerto Rico) as constituted at the end of the Performance Measurement Period or Shortened Performance Measurement Period, as applicable.


(e)	Retirement : Separation from service from the Corporation or a Subsidiary after attaining age 65 or after attaining age 55 with at least ten years of service.

(f)

Permanent Disability : The Grantee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months or the Grantee is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months

under an accident and health plan covering employees of the Corporation or a Subsidiary.

2. Issuance of Stock . The actual number of shares of Stock to be issued to the Grantee will vary depending upon the Corporation’s performance during the Performance Measurement Period with respect to core return on equity (“Core ROE”) and core earnings per share growth (“Core EPS Growth”) relative to Core ROE and Core EPS Growth for the same period by the Peer Group. Core ROE and Core EPS Growth performance will receive equal weighting. The Corporation’s relative performance ranking in Core ROE and Core EPS Growth in each calendar year in the Performance Measurement Period will be averaged to determine the actual number of shares of Stock, if any, to be issued to the Grantee pursuant to the following table:



Corporation’s Performance vs. Peer Group’s Performance	Percentage of Target Shares
Below 25 ^th percentile	0%
25 ^th percentile	50%
50 ^th percentile	100%
75 ^th percentile	150%
100 ^th percentile	200%

The percentage of Target Shares to be issued where performance achievement is between stated percentiles is determined based on a straight line interpolation. Notwithstanding the foregoing, if relative performance for either the Corporation’s Core ROE or Core EPS Growth is less than the 25 ^th percentile relative to the Peer Group’s, the Award will be forfeited.

Once performance results for the Corporation and the Peer Group are available, the Administrator shall certify performance achievement within ten (10) days. Upon certification by the Administrator and subject to continued employment of the Grantee by the Corporation through the Vesting Date, the number of shares of Stock determined pursuant to this Paragraph 2 shall be issued and delivered to the Grantee, either via book entry or actual stock certificates, and the Grantee’s name shall be entered as the stockholder of record on the books of the Corporation, within ten (10) days following such certification or Vesting Date, if later. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares, including voting and dividend rights.

3. Death of the Grantee Prior to Issuance of Stock . In the event of the Grantee’s death prior to the end of the Performance Measurement Period, the Administrator shall determine the number of shares of Stock to be issued to the Grantee’s beneficiary or estate in accordance with the principles set forth in Paragraph 2 based upon the Corporation’s performance relative to the Peer Group’s during the Shortened Performance Measurement Period. In the event of the Grantee’s death after the end of the Performance Measurement Period but prior to the Vesting Date, the Administrator shall determine the number of shares of Stock to be issued to the Grantee’s beneficiary or estate in accordance with the provisions of Paragraph 2. The requirement that the Grantee be employed by the Corporation through the Vesting Date shall be waived in the event of the Grantee’s death. Stock shall be issued within 90 days of the Grantee’s death or the date that the Administrator certifies the performance achievement of the Corporation, if later.

Notwithstanding the foregoing, in the event the Grantee dies prior to the completion of at least one full calendar quarter in the Shortened Performance Measurement Period, no shares of Stock will be issued to the Grantee’s beneficiary or estate.

4. Retirement or Permanent Disability of the Grantee Prior to Issuance of Stock . In the event of the Grantee’s Retirement or Permanent Disability prior to the end of the Performance Measurement Period, the Administrator shall determine the number of shares of Stock to be issued in accordance with the principles set forth in Paragraph 2 based upon the Corporation’s performance relative to the Peer Group’s during the Shortened Performance Measurement Period. In the event of the Grantee’s Retirement or Permanent Disability after the end of the Performance Measurement Period but prior to the Vesting Date, the Administrator shall determine the number of shares of Stock to be issued to the Grantee in accordance with the provisions of Paragraph 2. The requirement that the Grantee be employed by the Corporation through the Vesting Date shall be waived in the event of the Grantee’s Retirement or Permanent Disability. The actual number of shares of Stock to be issued to the Grantee pursuant to this Paragraph 4 shall be determined by multiplying the number of shares determined by the Administrator pursuant to the preceding sentences by a fraction, the numerator of which shall be the number of full calendar months from the Grant Date through the Grantee’s Retirement or Permanent Disability, and the denominator of which shall be <Months in Term>.

If the Grantee becomes entitled to the shares on account of Permanent Disability, the shares of Stock shall be issued to the Grantee within 90 days after the Grantee is determined to be permanently disabled. If the Grantee becomes entitled to the shares on account of his Retirement, the shares of Stock so determined under this Paragraph 4 shall be issued to Grantee in the seventh month after the Grantee’s Retirement.

Notwithstanding the foregoing, in the event the Grantee’s Retirement or Permanent Disability occurs prior to the completion of at least one full calendar quarter in the Shortened Performance Measurement Period, no shares of Stock will be issued to the Grantee.

5. Change in Control . In the event a Change in Control of the Corporation (as defined in the Plan) occurs prior to the end of the Performance Measurement Period, the Administrator shall determine the number of shares of Stock to be issued in accordance with the principles set forth in Paragraph 2 based upon the Corporation’s performance relative to the Peer Group’s during the Shortened Performance Measurement Period. In the event a Change in Control of the Corporation (as defined in the Plan) occurs after the end of the Performance Measurement Period but prior to the Vesting Date, the Administrator shall determine the number of shares of Stock to be issued to the Grantee in accordance with the provisions of Paragraph 2. The requirement that the Grantee be employed by the Corporation through the Vesting Date shall be waived in the event of a Change in Control of the Corporation.

If the Change in Control of the Corporation qualifies as a “change in control event” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (“Section 409A”), the shares of Stock so determined under this Paragraph 5 (or cash equivalent if shares of Stock are no longer available) shall be issued to the Grantee immediately following the Change in Control of the Corporation, subject to certification of performance achievement of the Corporation within ten (10) days after performance results for the Corporation and the Peer Group become available. If the Change in Control of the Corporation does not qualify as a “change in control event” within the meaning of Section 409A, and subject to certification of performance achievement of the Corporation within ten (10) days after performance results for the Corporation and the Peer Group become available, the shares of Stock so determined under this Paragraph 5 (or cash equivalent if shares of Stock are no longer available) shall be issued to the Grantee upon the earliest of (i) the Vesting Date, (ii) the Grantee’s death, or (iii) the Grantee’s “separation from service” within the meaning of Section 409A; provided, however, that if the Grantee is a “specified employee” within the meaning of Section 409A upon his separation from service, the issuance shall be delayed until the seventh month after the Grantee’s separation from service.

Notwithstanding the foregoing, in the event the Change in Control of the Corporation occurs prior to the completion of at least one full calendar quarter in the Shortened Performance Measurement Period, no shares of Stock will be issued to the Grantee.

6. Restrictions and Conditions .

(a) The Award granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to issuance of shares of Stock.

(b) If the Grantee’s employment with the Corporation and its Subsidiaries is voluntarily or involuntarily terminated for any reason (other than death, Permanent Disability, Retirement or after a Change in Control) prior to the Vesting Date, the Award shall automatically be forfeited.

(c) If the Corporation is required to prepare an accounting restatement or due to the material noncompliance with any financial reporting requirement under the Federal securities laws, the Grantee is required to reimburse the Corporation for the value of shares of Stock issued to him under this Award that would not have been earned based on the restated financial results.

7. Dividend Equivalent . Upon the issuance of shares of Stock to the Grantee, the Corporation shall also provide the Grantee with a lump sum cash payment in an amount equal to the amount of dividends per share paid by the Corporation from the Grant Date through the share issuance date multiplied by the number of shares of Stock actually issued to the Grantee.

8. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

9. Tax Withholding . The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Corporation or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Grantee may elect to have the required minimum tax withholding obligation satisfied, in whole or in part, by authorizing the Corporation to withhold from shares of Stock to be issued, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

10. Miscellaneous .

(a) Notice hereunder shall be given to the Corporation at its principal place of business, and shall be given to the Grantee at the address maintained in the Corporation’s payroll records, or in either case at such other address as one party may subsequently furnish to the other party in writing.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Corporation or any Subsidiary.

(c) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Rhode Island, applied without regard to conflict of law principles.



WASHINGTON TRUST BANCORP, INC
By:
	Kathleen McKeough, Chairperson
	Compensation & Human Resources Committee

I hereby accept the Award in accordance with the terms of this Agreement.

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WASHINGTON TRUST BANCORP, INC.

2013 STOCK OPTION AND Incentive Plan

INCENTIVE STOCK OPTION CERTIFICATE

TO: <NAME>

THIS OPTION is made as of the Grant Date by WASHINGTON TRUST BANCORP, INC. (the “Corporation”) to <NAME> (the “Optionee”).


A.	Grant Date: <Grant Date>


B.	Type of Option: Incentive Stock Option


C.	Plan: Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”)


D.	Option Shares: <number of shares> shares of the Corporation’s common stock, U.S. $0.0625 par value per share (“Stock”).


E.	Option Exercise Price: <Grant Price> per share of Stock


F.	Latest Expiration Date: <expiration date> (the “Expiration Date”), subject to earlier termination as provided in the attached Statement and in the Plan.


G.	Exercisability Schedule: No portion of this Stock Option may be exercised until such portion shall have become exercisable. Subject to the Statement, so long as the Optionee remains an employee of the Corporation or a Subsidiary, the Option shall become vested and exercisable as follows:



Number of Option Shares Exercisable	Vesting and Exercisable Dates for Such Shares

Acceptance of this Option requires no action on the part of the Optionee. However, if the Optionee desires to refuse the Option, he or she must notify the Corporation at the address listed in the attached Statement. This Option is intended to be an “incentive stock option,” as that term is described in Section 422 of the Internal Revenue Code of 1986, as amended.

WASHINGTON TRUST BANCORP, INC.

2003 STOCK INCENTIVE PLAN

INCENTIVE STOCK OPTION

STATEMENT OF TERMS AND CONDITIONS

This Statement of Terms and Conditions (the “Statement”) supplies the terms and conditions of a grant of an incentive stock option (the “Option”) by Washington Trust Bancorp, Inc. (the “Corporation”) under the Washington Trust Bancorp, Inc. 2013 Stock Option and Incentive Plan (the “Plan”). The Option shall be subject to the provisions of the Plan, this Statement and the Certificate.

1. Termination .

(a) This Option shall terminate and be of no force or effect as of the earliest of the following:


(i)	The Expiration Date;


(ii)	The expiration of three months after the date of the Optionee’s retirement with consent of the Corporation, and during such three-month period, the Optionee shall have the right to exercise the Option hereby granted to the extent exercisable on the date of retirement;


(iii)	The expiration of three years after the date of death of the Optionee, if the Optionee dies while in the employment of the Corporation or within three months after retirement; and during such three-year period, Optionee’s executor, administrator, legatees or distributees shall have the right to exercise the Option hereby granted to the extent exercisable on the date of the Optionee’s death.


(iv)	The date of the termination of the Optionee’s employment for any other reason.

Upon the Optionee’s termination of employment, any portion of this Option that is not exercisable at such time shall immediately terminate and be of no force or effect.

(b) The Administrator, as defined in the Plan, shall have discretion to determine whether any termination of the Optionee’s employment by the Corporation is to be considered for cause, or retirement with the consent of the Corporation for the purposes of this Option and this

Statement and whether an authorized leave of absence on military or government service or otherwise shall constitute a termination of employment for the purposes of this Option or this Statement. Any determination made by the Administrator with respect to any matter referred to in this Section 1 shall be final and conclusive on all persons affected thereby. Employment by the Corporation shall be deemed to include employment of the Optionee by, and to continue during any period in which the Optionee is in the employment of, a subsidiary of the Corporation.

2. Nontransferability; Persons Able to Exercise.

3. Method of Exercising Option.

The Option may be exercised, in whole or in part, by written notice to the Director of Human Resources of the Corporation, on any business day prior to the Expiration Date or earlier date specified in Section 1, specifying the number of shares which the Optionee wishes to purchase and including payment of the Option Exercise Price as provided below, provided that the Corporation, in its discretion, may modify or augment these requirements as provided in Section 7 of this Statement, or where appropriate because a person other than the Optionee is exercising the Option pursuant to Section 2. In the event this Option is exercised by any person other than the Optionee, the notice shall be accompanied by appropriate proof of the right of such person to exercise the Option. The written notice specified in this Section must be accompanied by payment of the Option Exercise Price for the shares being purchased in United States dollars in cash or bank check or other instrument acceptable to the Administrator. If approved by the Administrator, in its sole discretion, payment may also be made as follows:

resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Option shall be net of the number of shares attested to.

4. Change of Control.

If the Corporation is merged into or consolidated with another corporation under circumstances where the Corporation is not the surviving corporation, or if the Corporation is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan after the effective date of such merger, consolidation or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive in lieu of shares of Stock, shares of such stock or other securities as the holders of shares of Stock received pursuant to the terms of the merger, consolidation or sale. Notwithstanding the Certificate provisions regarding the vesting and exercisability of any option in installments, this Option shall become immediately exercisable in the event of a Change of Control of the Corporation or offer to effect a Change of Control of the Corporation.

5. No Rights Other Than Those Expressly Created.

Neither this Option, nor the Certificate, nor this Statement, nor the Plan, nor any action taken hereunder shall be construed as (i) giving the Optionee any right to be retained in the employ of, or continue to be affiliated with, the Corporation, (ii) <giving the Optionee any equity or interest of any kind in any assets of the Corporation, or (iii)> creating a trust of any kind or a fiduciary relationship of any kind between the Optionee and the Corporation. As to any claim for any unpaid amounts under this Option or this Statement, any person having a claim for payments shall be an unsecured creditor. The Optionee shall not have any of the rights of a stockholder with respect to any Option Shares until such time as this Option has been exercised and Option Shares have been issued.

the minimum required tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

7. Miscellaneous.

(b) Notices . Any notices required to be given under this Option or this Statement shall be sufficient if in writing and if hand-delivered or if sent by first class mail and addressed as follows:

if to the Corporation :

Washington Trust Bancorp, Inc.

8 Union Street

Westerly, Rhode Island 02891

Attention: Director of Human Resources

if to the Optionee :

at the address maintained in the Corporation’s payroll records

or to such other address as either party may designate under the provisions hereof.

(c) Applicable Law . All rights and obligations under this Option and this Statement shall be governed by the laws of the State of Rhode Island.

(d) Incorporation of Plan . Notwithstanding anything herein to the contrary, this Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Statement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

(e) Status of the Stock Option . This Option is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), but the Corporation does not represent or warrant that this Option qualifies as such. The Optionee should consult with his or her own tax advisors regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. To the extent any portion of this Option does not so qualify as an “incentive stock option,” such portion shall be deemed to be a non-qualified stock option. If the Optionee intends to dispose or does dispose (whether by sale, gift, transfer or otherwise) of any Option Shares within the one-year period beginning on the date after the transfer of such shares to him or her, or within the two-year period beginning on the day after the grant of this Option, he or she will so notify the Corporation within 30 days after such disposition.

(f) Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Corporation, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or

professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Optionee (i) authorizes the Corporation to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

PLEASE DIRECT ANY QUESTIONS TO:

Kristen L. DiSanto Elizabeth A. Musgrave

Executive Vice President, Human Resources Vice President, Human Resources

The Washington Trust Company The Washington Trust Company

8 Union Street or 8 Union Street

Westerly, RI 02891 Westerly, RI 02891

(401) 348-1204 (401) 348-1459

Email: kldisanto@washtrust.com Email: eamusgave@washtrust.com

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph J. MarcAurele, Chairman, President and Chief Executive Officer of Washington Trust Bancorp, Inc., certify that:


1.	I have reviewed this quarterly report on Form 10-Q, for the period ended March 31, 2014 , of Washington Trust Bancorp, Inc. (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


(c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



Date:	May 8, 2014	By:	/ s / Joseph J. MarcAurele
			Joseph J. MarcAurele
			Chairman and Chief Executive Officer
			(principal executive officer)

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David V. Devault, Senior Executive Vice President, Secretary and Chief Financial Officer of Washington Trust Bancorp, Inc., certify that:


1.	I have reviewed this quarterly report on Form 10-Q, for the period ended March 31, 2014 , of Washington Trust Bancorp, Inc. (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


(c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



Date:	May 8, 2014	By:	/s/ David V. Devault
			David V. Devault
			Vice Chair, Secretary and Chief Financial Officer
			(principal financial and accounting officer)

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned officer of Washington Trust Bancorp, Inc. (the “Corporation”), hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.



Date:	May 8, 2014	By:	/ s / Joseph J. MarcAurele
			Joseph J. MarcAurele
			Chairman and Chief Executive Officer
			(principal executive officer)



Date:	May 8, 2014	By:	/ s / David V. Devault
			David V. Devault
			Vice Chair, Secretary and Chief Financial Officer
			(principal financial and accounting officer)