Share-Based Compensation Arrangements

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

The 2013 Stock Option and Incentive Plan (the “2013 Plan”) was approved by shareholders 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 stock 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 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 and nonvested performance share units 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 2013 Plan and the 2003 Plan).

The following table presents share-based compensation expense and the related income tax benefit recognized in the Consolidated Statements of Income for stock options, nonvested share awards and nonvested performance shares:



(Dollars in thousands)

Years ended December 31,	2016		2015		2014
Share-based compensation expense		$2,190		$2,074		$1,880
Related income tax benefit		$810		$767		$676

Compensation expense for awards is recognized over the service period based on the fair value at the date of grant. Nonvested performance share unit 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

Washington Trust uses historical data to estimate stock option exercise and employee departure behavior used in the option-pricing model. 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.

The following presents the assumptions used in determining the grant date fair value of the stock option awards granted to certain key employees:



	2016		2015		2014
Options granted	53,400		48,600		25,850
Cliff vesting period (years)	3		3-5		3
Expected term (years)	7.5		7.5		8
Expected dividend yield	3.89	%	3.94	%	3.83	%
Weighted average expected volatility	29.99	%	40.76	%	41.84	%
Weighted average risk-free interest rate	1.66	%	1.95	%	2.27	%
Weighted average grant-date fair value	$7.92		$11.15		$9.92

The following table presents a summary of the status of Washington Trust’s stock options outstanding as of and for the year ended December 31, 2016:



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (000’s)
Beginning of period	309,116			$26.84
Granted	53,400		40.25
Exercised	(143,237	)	22.87
Forfeited or expired	—		—
End of period	219,279			$32.70	7.17		$5,121
At end of period:
Options exercisable	89,954			$25.34	4.77		$2,763
Options expected to vest in future periods	129,325			$37.82	8.85		$2,358

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.

The following table presents additional information concerning options outstanding and options exercisable at December 31, 2016:



	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
$15.01 to $20.00	13,200	2.93		$17.52	13,200		$17.52
$20.01 to $25.00	54,090	4.52	23.08		47,090	22.84
$25.01 to $30.00	—	—	—		—	—
$30.01 to $35.00	51,689	6.90	32.76		29,564	32.77
$35.01 to $40.00	46,900	8.74	39.39		100	39.55
$40.01 to $45.00	53,400	9.80	40.25		—	—
	219,279	7.17		$32.70	89,954		$25.34

The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $3.2 million, $1.2 million and $1.0 million, respectively.

Nonvested Shares

In 2016, the Corporation granted to directors and certain key employees 22,175 nonvested share units, with 3-year cliff vesting. In 2015, the Corporation granted to directors and certain key employees 16,275 nonvested share units, with 3- to 5-year cliff vesting. In 2014, the Corporation granted to certain key employees 11,630 nonvested share units with 3-year cliff vesting.

The following table presents a summary of the status of Washington Trust’s nonvested shares as of and for the year ended December 31, 2016:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	47,225			$33.46
Granted	22,175		38.82
Vested	(16,797	)	29.24
Forfeited	(2,928	)	36.11
End of period	49,675			$37.12

Nonvested Performance Shares

The Corporation grants performance share units to certain executive officers providing the opportunity to earn shares of common stock over a 3-year performance period based on various profitability results of the Corporation in comparison to a peer group. The number of shares earned can range from zero to 200% of the target number of shares depending upon the Corporation’s core return on equity and core earnings per share growth ranking among an industry peer group.

The following table presents a summary of the performance share awards as of December 31, 2016:



		Grant Date Fair Value per Share	Current Performance Assumption	Expected Number of Shares
Performance shares awarded in:	2016	$36.11	140%	47,532
	2015	38.02	142%	37,683
	2014	34.66	133%	16,783
Total				101,998

The following table presents a summary of the status of Washington Trust’s performance share awards as of and for the year ended December 31, 2016:



	Number of Shares		Weighted Average Grant Date Fair Value
Beginning of period	110,891			$32.81
Granted	47,532		36.11
Vested	(48,090	)	27.30
Forfeited	(8,335	)	37.26
End of period	101,998			$36.58

As of December 31, 2016, there was $1.7 million of total unrecognized compensation cost related to share-based compensation arrangements (including stock 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 1.76 years.