Share-Based Compensation Arrangements

Washington Trust’s share-based compensation plans are described below.

The 2013 Stock Option and Incentive Plan (“2013 Plan”) was approved on April 23, 2013. Under the 2013 Plan, the maximum number of shares of the Bancorp’s common stock to be issued is 1,748,250. The 2013 Plan permits the granting of stock options and other equity incentives to officers, employees, directors and other key persons.

The 2003 Stock Incentive Plan (the “2003 Plan”) was amended and restated and 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 stock options and other equity incentives to officers, employees, directors and other key persons.

The 1997 Equity Incentive Plan, as amended (the “1997 Plan”), was approved by shareholders in April 1997 and provided for the granting of stock 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 exercise price of each stock 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. Stock options are designated as either non-qualified or incentive stock options. In general, the stock option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof. With respect only to non-qualified stock option grants issued under the 2013 Plan, the exercise may also be accomplished by withholding the exercise price from the number of shares that would otherwise be delivered upon a cash exercise of the option. The fair value of stock options on the date of grant is estimated using the Black-Scholes Option-Pricing Model.

Awards of nonvested share units, nonvested shares and nonvested performance shares are valued at the fair market value of the Bancorp’s common stock as of the award date. Performance share awards are granted in order to provide 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 stock 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 stock options, nonvested share awards and nonvested performance shares are as follows:



(Dollars in thousands)

Years ended December 31,	2013		2012		2011
Share-based compensation expense		$1,876		$1,962		$1,394
Related income tax benefit		$673		$700		$497

Compensation expense for stock options and nonvested 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.

Stock Options

During 2013, the Corporation granted to certain key employees 54,600 non-qualified stock options with three-year cliff vesting. During 2012, the Corporation granted to certain key employees 106,775 non-qualified stock options with three- to five-year cliff vesting. During 2011, the Corporation granted to certain key employees 57,450 non-qualified stock options with three-year cliff vesting.

The following assumptions were used in determining the grant date fair value of the stock option awards granted:



	2013		2012		2011
Expected term (years)	8		9		9
Expected dividend yield	3.77	%	3.45	%	3.33	%
Weighted average expected volatility	42.85	%	42.97	%	41.90	%
Weighted average risk-free interest rate	2.46	%	1.53	%	3.05	%
Weighted average grant-date fair value	$10.35		$7.46		$7.46

Washington Trust uses historical data to estimate stock 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 stock option was based on the U.S. Treasury yield curve in effect at the date of grant.

A summary of the status of Washington Trust’s stock options outstanding as of and the year ended December 31, 2013 is presented below:



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (000’s)
Beginning of period	645,797			$23.58
Granted	54,600		32.77
Exercised	(258,351	)	23.97
Forfeited or expired	(13,658	)	24.46
End of period	428,388			$24.50	5.9		$5,451
At end of period;
Options exercisable	206,938			$24.20	3.4		$2,694
Options expected to vest in future periods	221,450			$24.77	8.3		$2,757

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, 2013 is summarized as follows:



	Options Outstanding				Options Exercisable
Exercise Price Ranges	Number of Shares	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$16.39 to $19.66	65,282	6.0		$17.59	44,282		$17.44
$19.67 to $22.94	55,700	7.3	21.71		1,500	21.71
$22.95 to $26.22	159,192	6.6	23.70		67,542	24.12
$26.23 to $29.49	93,614	1.6	27.50		93,614	27.50
$29.50 to $32.77	54,600	9.8	32.77		—	—
	428,388	5.9		$24.50	206,938		$25.20

The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $1.7 million, $812 thousand and $493 thousand, respectively.

Nonvested Shares

During 2013 and 2012, the Corporation granted to directors and certain key employees 24,400 and 29,725 nonvested share units, respectively, with three- to five-years cliff vesting. During 2011, the Corporation granted to certain key employees 31,950 nonvested share units with three-year cliff vesting.

A summary of the status of Washington Trust’s nonvested shares as of and for the year ended December 31, 2013 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	108,775			$20.82
Granted	24,400		29.90
Vested	(40,089	)	18.30
Forfeited	(2,561	)	22.14
End of period	90,525			$24.34

Nonvested Performance Shares

During 2013, 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 $26.05 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 150% of the target, or 45,225 shares.

During 2012, 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 $23.65 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 154% of the target, or 38,654 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. The performance shares awarded were valued at $21.62 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 150% of the target, or 40,238 shares.

A summary of the status of Washington Trust’s performance share awards as of and for the year ended December 31, 2013 is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	119,020			$21.45
Granted	49,138		26.37
Vested	(17,975	)	15.11
Forfeited	(26,066	)	23.59
End of period	124,117			$23.87

As of December 31, 2013, 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 2.1 years.