Share-Based Compensation Arrangements

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

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

The Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which was shareholder approved, provided for the granting of share options and other equity incentives to key employees, directors, advisors, and consultants. The 1997 Plan permitted share options and other equity incentives to be granted at any time until April 29, 2007.

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

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

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

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



(Dollars in thousands)

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

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

Share Options

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

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



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

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

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



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

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

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



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

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

Nonvested Shares and Share Units

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

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



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

Nonvested Performance Shares

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

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

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

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



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

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