Share-Based Compensation Arrangement

Washington Trust has two share-based compensation plans, Bancorp’s 2003 Stock Incentive Plan, as amended, and Bancorp’s 1997 Equity Incentive Plan, as amended, (collectively “the Plans”).

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



(Dollars in thousands)
	Three Months				Nine Months
Periods ended September 30,	2011		2010		2011		2010
Share-based compensation expense	$	357	$	271	$	1,037	$	666
Related tax benefit	$	128	$	96	$	370	$	237

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

Share Options

During the nine months ended September 30, 2011 and 2010, the Corporation granted 57,450 and 83,700 non-qualified share options, respectively. The share options awarded were granted to certain key employees with three-year cliff vesting and provide for accelerated vesting upon a change in control, death or retirement (as defined in the plans).

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



Nine months ended September 30,	2011		2010
Expected term (years)	9.0		9.0
Expected dividend yield	3.33	%	3.16	%
Weighted average expected volatility	41.90		41.95
Expected forfeiture rate	0	%	0	%
Weighted average risk-free interest rate	3.05	%	3.42	%

The weighted average grant-date fair value of the share options awarded during the nine months ended September 30, 2011 and 2010 was $7.46 and $6.29, respectively.

A summary of share option activity under the Plans as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below:



(Dollars in thousands)	Number Of Share Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2011	795,257		$	22.46
Granted	57,450		21.71
Exercised	(83,626	)	18.38
Forfeited or expired	(24,180	)	23.20
Outstanding at September 30, 2011	744,901		$	22.84	4.2 years	$	219
As of September 30, 2011:
Options exercisable	588,569		$	23.83	2.9 years	$	—
Options expected to vest in future periods	156,332		$	19.09	8.9 years	$	219

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of share options exercised during the nine months ended September 30, 2011 and 2010 was $360 thousand and $217 thousand, respectively.

Nonvested Shares and Share Units

The Corporation granted 31,950 and 46,500 nonvested share units to directors and certain key employees during the nine months ended September 30, 2011 and 2010, respectively. The nonvested share units awarded were granted with one to five-year cliff vesting and also provide for accelerated vesting if there is a change in control, death or retirement (as defined in the plans).

A summary of the status of Washington Trust’s nonvested shares as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2011	85,907		$	20.11
Granted	31,950		22.25
Vested	(25,400	)	23.93
Forfeited	—		—
Nonvested at September 30, 2011	92,457		$	19.80

Nonvested Performance Shares

Performance share awards are granted providing the opportunity to earn shares of common stock of the Corporation, the number of which will be determined pursuant to, and subject to the attainment of, performance goals during a specified measurement period. The number of shares awarded upon vesting 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.

During the nine months ended September 30, 2011, performance share awards were granted to certain executive officers providing the opportunity to earn shares of common stock of the Corporation ranging from zero to 73,502 shares. The performance shares awarded were valued at $21.62, the fair market value at the date of grant, and vest over a three-year period. The current assumption based on the most recent peer group information results in the shares vesting at 155% of the target, or 56,966 shares.

During the nine months ended September 30, 2010, a performance share award was granted to an executive officer providing the opportunity to earn shares of common stock of the Corporation ranging from zero to 25,000 shares. The performance shares awarded were valued at $15.11, the fair market value at the date of grant, and vest over a three-year period. The current assumption based on the most recent peer group information results in the shares vesting at 155% of the target, or 19,375 shares.

A summary of the status of Washington Trust’s performance share awards as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below:



	Number of Shares	Weighted Average Grant Date Fair Value
Performance shares at January 1, 2011	16,500	$	15.11
Granted	59,841	21.31
Vested	—	—
Forfeited	—	—
Performance shares at September 30, 2011	76,341	$	19.97

As of September 30, 2011, there was $3.0 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share options, nonvested share awards and performance share awards) granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.3 years.