Stock-Based Compensation Plans

Webster has established stock-based compensation plans that cover certain employees and directors, as the Company believes that such awards better align the interests of its employees with those of its shareholders. Shares for awards of restricted stock or the exercise of stock options are expected to come from the Company’s treasury shares or authorized and unissued shares. The cost of the stock-based compensation plans is recognized based upon the grant-date fair value, on a straight-line basis over the requisite service period of such awards, net of estimated forfeitures, as a component of compensation and benefits reflected in non-interest expense. Stock-based compensation expense was $2.6 million and $1.5 million for the three months ended September 30, 2012 and 2011, respectively, consisting of (1) stock options expense of $737 thousand and $221 thousand, respectively, and (2) restricted stock expense of $1.8 million and $1.3 million, respectively. Stock-based compensation expense was $6.7 million and $4.6 million for the nine months ended September 30, 2012 and 2011, respectively, consisting of (1) stock options expense of $1.8 million and $602 thousand and (2) restricted stock expense of $4.9 million and $4.0 million, respectively.

Stock Options

The following table provides a summary of stock option activity under the plans for the three and nine months ended September 30, 2012:



	Three months ended September 30, 2012			Nine months ended September 30, 2012
	Number of Shares	Weighted-Average Exercise Price		Number of Shares	Weighted-Average Exercise Price
Options outstanding, at beginning of period	2,820,285	$	29.27	2,513,327	$	30.03
Options granted	—	—		398,616	23.81
Options exercised	29,833	12.85		62,707	12.85
Options forfeited or expired	45,301	27.52		104,085	31.32
Options outstanding, at end of period	2,745,151	$	29.47	2,745,151	$	29.47
Options exercisable, at end of period	2,168,744	$	31.86	2,168,744	$	31.86
Options expected to vest, at end of period	530,693	$	20.25	530,693	$	20.25

At September 30, 2012, total options outstanding included 2,481,816 non-qualified and 263,335 incentive stock options. As of September 30, 2012, there was $3.0 million of unrecognized compensation cost related to non-vested options expected to be recognized over a remaining weighted-average vesting period of 2.0 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions:



	2012		2011
Weighted-average assumptions:
Expected term (years)	6.6		6.5
Expected dividend yield	1.00	%	1.00	%
Expected forfeiture rate	9.00	%	9.00	%
Expected volatility	61.03	%	57.41	%
Risk-free interest rate	1.30	%	2.68	%
Fair value of option at grant date	$11.71		$12.74

Restricted Stock

The following tables summarize restricted share activity, under the plans, for the three and nine months ended September 30, 2012:



	Three months ended September 30, 2012
	Time - Based			Performance - Based
	Number of Shares	Weighted-average Grant Date Fair Value		Number of Shares	Weighted-average Grant Date Fair Value
Restricted shares, at beginning of period	409,691	$	21.36	129,277	$	25.44
Granted	2,819	20.52		—
Vested	69,413	19.70		11,897	25.44
Forfeited/Modified	57,044	21.24		6,338	25.44
Restricted shares, at end of period	286,053	$	21.78	111,042	$	25.44



	Nine months ended September 30, 2012
	Time - Based			Performance - Based
	Number of Shares	Weighted-average Grant Date Fair Value		Number of Shares	Weighted-average Grant Date Fair Value
Restricted shares, at beginning of period	384,385	$	20.20	—	$	—
Granted	186,898	22.39		149,479	25.44
Vested	219,353	19.61		32,099	25.44
Forfeited/Modified	65,877	21.30		6,338	25.44
Restricted shares, at end of period	286,053	$	21.78	111,042	$	25.44

For the nine months ended September 30, 2012, there were 4,497 shares of time-based restricted stock, of which all were granted in the first six months of 2012 and for the nine months ended September 30, 2012 there were 112,889 performance-based awards granted to senior management, of which all were granted during the first three months of 2012. The performance-based awards vest after three years in a range from zero to 200% of the target number of shares under the grant. A portion of the shares vest dependent upon Webster’s ranking for total shareholder return versus the KBW Regional Banking Index and the remaining portion vest dependent on Webster’s return on equity over the three year vesting period. As of September 30, 2012, there was $10.0 million of unrecognized compensation cost related to non-vested restricted stock awards expected to be recognized over a remaining weighted-average vesting period of 2.0 years.

During 2012, certain restricted shares were converted into restricted units. A total of 164,260 restricted shares were converted into 112,764 restricted units that were previously vested and 51,496 restricted units that will vest in future periods. There was no additional compensation expense recognized as a result of the modification.

The following tables summarize restricted unit activity, under the plans, for the three and nine months ended September 30, 2012:



	Three months ended September 30, 2012
	Time-Based
	Number of Units	Weighted Average Grant Date Fair Value
Restricted units, at beginning of period	—	$	—
Modified	51,496	21.11
Vested	9,215	18.22
Restricted units, at end of period	42,281	$	21.74

	Nine months ended September 30, 2012
	Time-Based
	Number of Units	Weighted Average Grant Date Fair Value
Restricted units, at beginning of period	—	$	—
Modified	51,496	21.11
Vested	9,215	18.22
Restricted units, at end of period	42,281	$	21.74