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

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 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.

Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Corporation uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Corporation uses unobservable inputs to determine appropriate valuation adjustments using methodologies applied consistently over time.

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

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of June 30, 2011 and December 31, 2010, Level 3 securities were comprised of two pooled trust preferred debt securities, in the form of collateralized debt obligations, which were not actively traded. As of June 30, 2011 and December 31, 2010, the Corporation concluded that the low level of activity for its Level 3 pooled trust preferred debt securities continued to indicate that quoted market prices are not indicative of fair value. The Corporation obtained valuations including broker quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected limited sales evidenced by a relatively inactive market. The cash flow scenarios were prepared using discounted cash flow methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions.

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

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

For purposes of potential valuation adjustments to its interest rate swap contracts, the Corporation evaluates the credit risk of its counterparties as well as that of the Corporation. Accordingly, Washington Trust considers factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life, among other factors, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management adjusts appraised values to reflect estimated market value declines or applies 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.

Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of loan servicing rights using a valuation model that calculates the present value of the estimated future net servicing income. The model incorporates assumptions used in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service and contractual servicing fee income. Loan servicing rights are subject to fair value measurements on a nonrecurring basis. Fair value measurements of our loan servicing rights use significant unobservable inputs and, accordingly, are classified as Level 3.

Property acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

(Dollars in thousands)							Assets/
	Fair Value Measurements Using						Liabilities at
June 30, 2011	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	–	$	33,249	$	–	$	33,249
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		–		431,692		–		431,692
States and political subdivisions		–		81,975		–		81,975
Trust preferred securities:
Individual name issuers		–		25,611		–		25,611
Collateralized debt obligations		–		–		934		934
Corporate bonds		–		14,968		–		14,968
Common stocks		882		–		–		882
Perpetual preferred stocks		2,269		-		–		2,269
Derivative Assets (1)
Interest rate swap contracts with customers		–		3,893		–		3,893
Forward loan commitments		–		–		160		160
Total assets at fair value on a recurring basis	$	3,151	$	591,388	$	1,094	$	595,633
Liabilities:
Derivative Liabilities (1)
Mirror swaps with counterparties	$	–	$	4,015	$	−	$	4,015
Interest rate risk management contracts		−		1,369		−		1,369
Forward loan commitments		–		–		198		198
Total liabilities at fair value on a recurring basis	$	–	$	5,384	$	198	$	5,582

(Dollars in thousands)							Assets/
	Fair Value Measurements Using						Liabilities at
December 31, 2010	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	–	$	40,994	$	–	$	40,994
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		–		429,771		–		429,771
States and political subdivisions		–		81,055		–		81,055
Trust preferred securities:
Individual name issuers		–		23,275		–		23,275
Collateralized debt obligations		–		–		806		806
Corporate bonds		–		15,212		–		15,212
Common stocks		809		–		–		809
Perpetual preferred stocks		2,178		–		–		2,178
Derivative Assets (1)
Interest rate swap contracts with customers		–		3,690		–		3,690
Forward loan commitments		–		–		602		602
Total assets at fair value on a recurring basis	$	2,987	$	593,997	$	1,408	$	598,392
Liabilities:
Derivative Liabilities (1)
Mirror swaps with counterparties	$	–	$	3,806	$	–	$	3,806
Interest rate risk management contract		–		1,098		–		1,098
Forward loan commitments		–		–		167		167
Total liabilities at fair value on a recurring basis	$	–	$	4,904	$	167	$	5,071

Three months ended June 30,	2011								2010
	Securities		Derivative						Securities			Derivative
	Available		Assets /						Available			Assets /
(Dollars in thousands)	for Sale (1)		(Liabilities) (2)			Total			for Sale (1)			(Liabilities) (2)			Total
Balance at beginning of period	$	752	$	(27	)	$	725		$	1,154		$	9		$	1,163
Gains and losses (realized and unrealized):
Included in earnings (3)		–		(11	)		(11	)		(354	)		(193	)		(547	)
Included in other comprehensive income		182		–			182			72			–			72
Purchases		–		–			–			–			–			–
Issuances		–		–			–			–			–			–
Settlements		–		–			–			–			–			–
Transfers into Level 3		–		–			–			–			–			–
Transfers out of Level 3		–		–			–			–			–			–
Balance at end of period	$	934	$	(38	)	$	896		$	872		$	(184	)	$	688

Six months ended June 30,	2011									2010
	Securities			Derivative						Securities			Derivative
	Available			Assets /						Available			Assets /
(Dollars in thousands)	for Sale (1)			(Liabilities) (2)			Total			for Sale (1)			(Liabilities) (2)			Total
Balance at beginning of period	$	806		$	435		$	1,241		$	1,065		$	153		$	1,218
Gains and losses (realized and unrealized):
Included in earnings (3)		(33	)		(473	)		(506	)		(417	)		(337	)		(754	)
Included in other comprehensive income		161			–			161			224			–			224
Purchases		–			–			–			–			–			–
Issuances		–			–			–			–			–			–
Settlements		–			–			–			–			–			–
Transfers into Level 3		–			–			–			–			–			–
Transfers out of Level 3		–			–			–			–			–			–
Balance at end of period	$	934		$	(38	)	$	896		$	872		$	(184	)	$	688

(3)

Losses included in earnings for Level 3 securities available for sale consisted of credit-related impairment losses on two Level 3 pooled trust preferred debt securities. No credit-related impairment losses were recognized during the second quarter of 2011 and $354 thousand were recognized during the second quarter of 2010. Credit-related impairment losses of $33 thousand and $417 thousand, respectively, were recognized during the six months ended June 30, 2011 and 2010. The losses included in earnings for Level 3 derivative assets and liabilities, which were comprised of interest rate lock commitments written for our residential mortgage loans that we intend to sell, were included in net gains on loan sales and commissions on loans originated for others in the Consolidated Statements of Income.

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.

(Dollars in thousands)	Carrying Value at June 30, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Collateral dependent impaired loans	$	–	$	–	$	3,292	$	3,292
Property acquired through foreclosure or repossession		–		–		1,449		1,449
Total assets at fair value on a nonrecurring basis	$	–	$	–	$	4,741	$	4,741

Collateral dependent impaired loans with a carrying value of $3.3 million at June 30, 2011 were subject to nonrecurring fair value measurement during the six months ended June 30, 2011. As of June 30, 2011, the allowance for loan losses allocation on these loans amounted to $900 thousand.

During the six months ended June 30, 2011, properties acquired through foreclosures or repossession with a fair value of $801 thousand were transferred from loans. Prior to the transfer, the assets whose fair value less costs to sell was less than the carrying value were written down to fair value through a charge to the allowance for loan losses. For the three and six months ended June 30, 2011, such valuation adjustments charged to the allowance for loan losses amounted to $124 thousand. Subsequent to foreclosures, valuations are updated periodically and assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments charged to earnings totaled $238 thousand for the three and six months ended June 30, 2011.

(Dollars in thousands)	Carrying Value at June 30, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Collateral dependent impaired loans	$	–	$	–	$	2,824	$	2,824
Loan servicing rights		–		–		492		492
Property acquired through foreclosure or repossession		–		–		535		535
Total assets at fair value on a nonrecurring basis	$	–	$	–	$	3,851	$	3,851

Collateral dependent impaired loans with a carrying value of $2.8 million at June 30, 2010 were subject to nonrecurring fair value measurement during the six months ended June 30, 2010. As of June 30, 2010, the allowance for loan losses allocation on these loans amounted to $1.5 million.

During the six months ended June 30, 2010, certain loan servicing rights were written down to their fair value resulting in an immaterial valuation allowance increase, which was recorded as a component of net gains on loan sales and commissions on loans originated for others in the Corporation’s Consolidated Statement of Income.

During the six months ended June 30, 2010, properties acquired through foreclosures or repossession with a fair value of $630 thousand was transferred from loans. Prior to the transfer, the assets whose fair value less costs to sell was less than the carrying value were written down to fair value through a charge to the allowance for loan losses. For the three and six months ended June 30, 2010, there were no such valuation adjustments charged to the allowance for loan losses. Subsequent to foreclosures, valuations are updated periodically and assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments charged to earnings totaled $50 thousand in the three and six months ended June 30, 2010.

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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	71,745	$	71,745	$	92,736	$	92,736
Mortgage loans held for sale		8,825		9,033		13,894		13,894
Securities available for sale		591,580		591,580		594,100		594,100
FHLBB stock		42,008		42,008		42,008		42,008
Loans, net of allowance for loan losses		2,027,799		2,097,501		1,967,055		2,029,951
Accrued interest receivable		8,637		8,637		8,568		8,568
Bank-owned life insurance		52,802		52,802		51,844		51,844
Customer related interest rate swap contracts		3,893		3,893		3,690		3,690
Forward loan commitments (1)		160		160		602		602

Financial Liabilities:
Noninterest-bearing demand deposits	$	261,016	$	261,016	$	228,437	$	228,437
NOW accounts		236,162		236,162		241,974		241,974
Money market accounts		355,096		355,096		396,455		396,455
Savings accounts		227,014		227,014		220,888		220,888
Time deposits		916,755		930,099		948,576		962,608
FHLBB advances		558,441		594,883		498,722		533,802
Junior subordinated debentures		32,991		22,765		32,991		22,092
Securities sold under repurchase agreements		19,500		20,128		19,500		20,543
Other borrowings		2,505		2,505		3,859		3,859
Accrued interest payable		3,795		3,795		3,999		3,999
Customer related interest rate swap contracts		4,015		4,015		3,806		3,806
Interest rate risk management contract		1,369		1,369		1,098		1,098
Forward loan commitments (1)		198		198		167		167