Stock-Based Compensation Plans

Webster has established stock-based compensation plans that cover employees and directors, and a non-employee director compensation plan (collectively, the “Plans”). The Plans, which are shareholder-approved, permit the grant of incentive and non-qualified stock options, restricted stock and stock appreciation rights (“SARS”) for up to 10.9 million shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. As of December 31, 2012, no SARS have been granted and the Plans had 2.9 million common shares available for future grants.

Compensation cost related to the Plans, based on the grant-date fair value, is included as a component of compensation and benefits reflected in non-interest expense, on a straight-line basis over the requisite service period of such awards, net of estimated forfeitures. The costs of an award to retirement eligible employees is recognized immediately, however, the award is subject to a one year minimum hold before vesting. Stock-based compensation expense recognized in the accompanying Consolidated Statements of Income was $9.0 million, $6.0 million and $6.7 million for the years ended December 31, 2012, 2011 and 2010, respectively, consisting of (1) stock options expense of $2.4 million, $0.8 million, and $1.4 million, respectively, and (2) restricted stock expense of $6.6 million, $5.2 million and $5.3 million, respectively. The total income tax benefit recognized in the accompanying Consolidated Statements of Income for stock-based compensation arrangements was $2.8 million, $2.1 million and $0.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Stock Options

Stock option awards are granted with an exercise price equal to the market price of Webster’s stock at the date of grant and vest over periods ranging from three to four years. These options grant the holder the right to acquire a share of Webster common stock for each option held, with a contractual life of no more than ten years. Shares for the exercise of stock options are expected to come from the Company’s treasury shares or authorized and unissued shares.

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		2010
Weighted-average assumptions:
Expected term	6.6 years		6.5 years		6.2 years
Expected dividend yield	1.00	%	1.00	%	1.00	%
Expected forfeiture rate	9.00	%	9.00	%	5.00	%
Expected volatility	61.03	%	57.41	%	56.44	%
Risk-free interest rate	1.30	%	2.68	%	2.98	%
Fair value of option at grant date	$11.71		$12.74		$6.87

These assumptions can be highly subjective and, therefore, Webster uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is then derived from this output of the option valuation model. The expected dividend yield is based on the current annual dividend on a current stock price. The expected forfeiture rate was calculated based on historical actual forfeiture activity. The expected volatility was derived from historical returns of the daily closing stock price over periods of time equal to the duration of the expected term of options granted. The risk-free interest rate for periods that coincide with the contractual life of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

As of December 31, 2012, there was $2.2 million of unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a remaining weighted-average vesting period of 1.9 years. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $777.1 thousand, $102.4 thousand and $85.4 thousand, respectively.

The following table provides a summary of stock option activity, under the plans, for the year ended December 31, 2012:



	Number of Shares	Weighted-Average Exercise Price
Options outstanding, at beginning of year	2,513,327	$	30.03
Options granted	398,616	23.81
Options exercised	77,539	12.85
Options forfeited or expired	357,759	34.02
Options outstanding, at end of year	2,476,645	$	28.99
Options exercisable, at end of year	2,068,845	$	30.15
Options expected to vest, at end of year	372,758	$	23.12

At December 31, 2012, total options outstanding included 2,264,743 non-qualified and 211,902 incentive stock options.

The following table summarizes information about options outstanding and options exercisable at December 31, 2012:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Remaining Contractual Life (years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Remaining Contractual Life (years)	Weighted- Average Exercise Price
$ 5.01 —$20.00	767,488	6.2	$	10.94	744,210	6.1	$	10.88
20.01 — 30.00	532,352	8.1	23.79		147,830	6.8	23.80
30.01 — 35.00	302,387	4.6	32.22		302,387	4.6	32.22
35.01 — 40.00	36,625	0.3	37.42		36,625	0.3	37.42
40.01 — 50.00	837,793	2.4	47.31		837,793	2.4	47.31
	2,476,645	5.0	$	28.99	2,068,845	4.3	$	30.15

The weighted-average remaining contractual term for options expected to vest at December 31, 2012 was 5.0 years. At December 31, 2012, the aggregate intrinsic value of options outstanding, options exercisable and options expected to vest was $7.4 million, $7.9 million and $6.4 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between Webster’s closing stock price on the last trading day of 2012 and the weighted-average exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2012.

Restricted Stock

Under the Plans, the fair value of the restricted stock awards to management and directors is based on the market price of Webster’s stock on the grant-date and is amortized to compensation expense over the applicable service vesting period ranging from one to five years. The Plans limit the number of time-based restricted stock shares that may be granted to an eligible individual in a calendar year to 100,000 shares. During the years ended December 31, 2012, 2011, and 2010, respectively, there were 115,056, 153,527, and 7,953 shares of time-based restricted stock granted to senior management.

The Plans also provide for performance-based restricted stock awards. The performance-based awards vest after three years in a range from zero to 200% of the target number of shares under the grant. There were no performance-based restricted stock awards granted for the years ended December 31, 2011 and 2010. On February 22, 2012, the Company granted 149,479 performance shares of which 50% vest after three years in a a range from zero to 200% of the target number of shares under the grant dependent upon Webster's ranking for total shareholder return versus a KBW Regional Banking Index (KRX) and the remaining 50% vest dependent upon Webster's return on equity over the three year vesting period. The KRX blend of companies has been utilized since 2009 because it represents the mix of size and type of financial institutions that best compare with Webster. Webster records compensation expense over the vesting period based on a fair value calculated using the Monte-Carlo simulation model which allows for the incorporation of the performance condition for 50% of the performance shares. Webster records the remaining 50% of performance shares expense over the vesting period based on fair value calculated on the date of grant adjusted for management's assessment for meeting the ROE performance condition.

During the year ended December 31, 2008, there were 113,412 shares of performance-based restricted stock awards granted. Webster recorded compensation expense over the vesting period based on a fair value calculated using the Monte-Carlo simulation model which allowed for the incorporation of the performance condition. On January 23, 2012, the Compensation Committee of the Board met and approved that the participants in the performance-based restricted stock awards granted in 2008 and measured verses the KRX , as was the policy for that period, had met 200% of target. Dividends are paid on the performance shares when the performance hurdle is met.

A Director Retainer Fees Plan had provided non-employee directors with restricted stock for a portion of their annual retainer for services rendered as directors. On April 26, 2011, the Director Retainer Fees Plan expired. Therefore, from that date forward this type of grant made to non-employee directors comes from the 1992 Stock Option Plan. For the years ended December 31, 2012 and 2011 there were 25,065 and 25,137 shares granted to Directors, respectively, with a vesting schedule of 3 years from the 1992 Stock Option Plan. For the year ended December 31, 2010, there were 18,036 shares, granted to non-employee directors with a vesting schedule of one year from the since expired Director Retainer Fees Plan.

As of December 31, 2012, there was $8.7 million of unrecognized compensation cost related to non-vested restricted stock awards. That cost is expected to be recognized over a remaining weighted-average vesting period of 1.8 years. The weighted-average grant-date fair value of restricted stock awards granted during the years ended December 31, 2012, 2011, and 2010 was $24.63, $22.29, and $19.47, respectively. The weighted average fair value of restricted stock awards vested during the years ended December 31, 2012, 2011, and 2010 was $9.1 million, $4.8 million, and $4.9 million, respectively.

The following tables summarize restricted stock activity, under the plans, for the year ended December 31, 2012:



	Time - Based			Performance - Based
	Number of Shares	Weighted-average Grant Date Fair Value		Number of Shares	Weighted-average Grant Date Fair Value
Restricted stock, at beginning of period	384,385	$	20.20	—	$	—
Granted	203,990	22.37		149,479	25.44
Vested (1)	266,807	19.68		43,996	25.44
Forfeited/Modified	72,274	21.42		11,075	25.44
Restricted stock, at end of period	249,294	$	22.12	94,407	$	25.44

(1) Shares vested for purposes of recording compensation expense. Shares legally vest after a period of 1-5 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.



	Year ended December 31, 2012
	Time-Based
	Number of Units	Weighted Average Grant Date Fair Value
Restricted units, at beginning of period	—	$	—
Modified	51,496	21.11
Vested	17,754	19.19
Restricted units, at end of period	33,742	$	22.12

Long-Term Cash Awards

In 2009 and 2008, Webster granted 357,043 and 265,544 long-term cash incentive awards, respectively to certain vice presidents and senior vice presidents of the Company. The value of these cash awards is converted to “phantom shares” by dividing the award value by the average price of Webster common stock for the 10 day period prior to the grant date. The “phantom shares” have a vesting period ranging from 3 to 5 years. Webster calculates the initial cost of the respective awards using the respective stock price on the grant date of those awards. This cost is then amortized and ratably recognized over the respective vesting period. Periodically, but at least on a reporting period basis, the unvested amount is marked to market using the current stock price. The value is subject to a floor of the initial grant price and a ceiling equal to twice the grant price. An adjustment is recorded to the liability and as an expense increase or reduction. For the years ended December 31, 2012, 2011 and 2010, no awards were granted. Compensation expense included $1.2 million, $3.0 million and $4.1 million related to these awards for the years ended December 31, 2012, 2011 and 2010, respectively. Long-term cash awards of $27 thousand and $4.4 million were included in other liabilities at December 31, 2012 and 2011, respectively.