Share-Based Compensation Arrangements

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 and nonvested performance shares are as follows:



(Dollars in thousands)
	Three Months				Nine Months
Periods ended September 30,	2012		2011		2012		2011
Share-based compensation expense		$528		$357		$1,404		$1,037
Related tax benefit		$188		$128		$501		$370

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

Share Options

During the nine months ended September 30, 2012 and 2011, the Corporation granted 106,775 and 57,450 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 was 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,	2012		2011
Expected term (years)	9		9
Expected dividend yield	3.45	%	3.33	%
Weighted average expected volatility	42.97	%	41.90	%
Weighted average risk-free interest rate	1.53	%	3.05	%

The weighted average grant-date fair value of the share options awarded during the nine months ended September 30, 2012 and 2011 was $7.46.

A summary of the status of Washington Trust's share option activity as of September 30, 2012, and changes during the nine months ended September 30, 2012, is presented below:



	Number of Share Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (000's)
Outstanding at January 1, 2012	712,061			$22.96
Granted	106,775		23.37
Exercised	(113,324	)	20.08
Forfeited or expired	(19,575	)	26.79
Outstanding at September 30, 2012	685,937			$23.39	5.0		$2,267
As of September 30, 2012:
Options exercisable	427,912			$24.89	2.8		$882
Options expected to vest in future periods	258,025			$20.90	8.7		$1,385

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, 2012 and 2011 was $592 thousand and $360 thousand, respectively.

Nonvested Share Units

The Corporation granted 29,725 nonvested share units to directors and certain key employees during the nine months ended September 30, 2012 with three to five-year cliff vesting terms. The Corporation granted 31,950 nonvested share units to directors and certain key employees during the nine months ended September 30, 2011 with one, to three-year cliff vesting terms. The nonvested share units 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, 2012, and changes during the nine months ended September 30, 2012, is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012	91,250			$19.84
Granted	29,725		23.62
Vested	(6,752	)	19.37
Forfeited	(5,448	)	21.54
Nonvested at September 30, 2012	108,775			$20.82

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 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.

During the nine months ended September 30, 2012, performance share awards were granted to certain executive officers for the opportunity to earn shares of common stock of the Corporation ranging from zero to 61,600 shares. The performance shares awarded were valued at $23.65, the fair market value at the date of grant, and will be earned over a three-year performance period. The current assumption based on the most recent peer group information results in the shares vesting at 160% of the target, or 49,340 shares.

During the nine months ended September 30, 2011, performance share awards were granted to certain executive officers for the opportunity to earn shares of common stock of the Corporation ranging from zero to 73,502 shares. The performance shares awarded were valued at $21.62, the fair market value at the date of grant, and will be earned over a three-year performance period. The current assumption based on the most recent peer group information results in the shares vesting at 155% of the target, or 51,180 shares.

A summary of the status of Washington Trust’s performance share awards as of September 30, 2012, and changes during the nine months ended September 30, 2012, is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Performance shares at January 1, 2012	76,341			$19.97
Granted	46,200		23.65
Vested	(2,666	)	21.62
Forfeited	(855	)	7.50
Performance shares at September 30, 2012	119,020		$21.45

As of September 30, 2012, there was $3.8 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 2.2 years.