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”). Compensation cost related to the Plans, based on the grant-date fair value, net of estimated forfeitures, is included as a component of compensation and benefits reflected in non-interest expense. The cost of an award to retirement eligible employees is recognized immediately, while the award is subject to a one year minimum hold before vesting. Stock-based compensation expense recognized in the accompanying Condensed Consolidated Statements of Income was $3.1 million and $2.4 million, consisting of (1) stock options expense of $1.1 million and $0.8 million and (2) restricted stock expense of $2.0 million and $1.6 million for the three months ended June 30, 2013 and 2012, respectively, and was $5.6 million and $4.2 million, consisting of (1) stock options expense of $1.9 million and $1.1 million and (2) restricted stock expense of $3.7 million and $3.1 million for the six months ended June 30, 2013 and 2012, 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. Each option grants the holder the right to acquire a share of Webster common stock over a contractual life of up to ten 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:



	2013		2012
Weighted-average assumptions:
Expected term	6.9 years		6.6 years
Expected dividend yield	1.80	%	1.00	%
Expected forfeiture rate	10.00	%	9.00	%
Expected volatility	58.97	%	61.03	%
Risk-free interest rate	1.36	%	1.30	%
Fair value of option at grant date	$10.96		$11.71

As of June 30, 2013, there was $4.9 million of unrecognized compensation expense related to non-vested options that is expected to be recognized over a remaining weighted-average vesting period of 1.9 years.

The following table summarizes stock option activity under the Plans:



	Three months ended June 30, 2013			Six months ended June 30, 2013
	Number of Shares	Weighted-Average Exercise Price		Number of Shares	Weighted-Average Exercise Price
Options outstanding, at beginning of period	2,906,253	$	28.10	2,476,645	$	28.99
Options granted	—	—		436,043	23.00
Options exercised	18,995	19.83		18,995	19.83
Options forfeited or expired	53,338	39.95		59,773	38.69
Options outstanding, at end of period	2,833,920	$	27.93	2,833,920	$	27.93
Options exercisable, at end of period	2,128,154	$	29.57	2,128,154	$	29.57
Options expected to vest, at end of period	628,032	$	22.97	628,032	$	22.97

At June 30, 2013, options outstanding included 2,558,210 non-qualified and 275,710 incentive stock options.

Restricted Stock

The Company grants time-based restricted stock awards that vest over the applicable service period ranging from one to five years. The Plans limit the number of time-based awards that may be granted to an eligible individual in a calendar year to 100,000 shares. In 2013, the Company granted 211,274 time-based shares. Webster records compensation expense over the vesting period based on the market value on the date of grant.

The following tables summarize time-based restricted stock activity under the Plans:



	Three months ended June 30, 2013			Six months ended June 30, 2013
	Time - Based			Time - Based
Restricted Shares	Number of Shares	Weighted-average Grant Date Fair Value		Number of Shares	Weighted-average Grant Date Fair Value
Beginning of period	373,247	$	22.31	249,294	$	22.12
Granted	33,665	22.96		211,274	22.60
Vested (1)	53,998	22.29		100,498	22.22
Forfeited/Modified	4,160	22.53		11,316	22.25
End of period	348,754	$	22.38	348,754	$	22.38



	Three months ended June 30, 2013			Six months ended June 30, 2013
	Time-Based			Time-Based
Restricted Units	Number of Units	Weighted-average Grant Date Fair Value		Number of Units	Weighted-average Grant Date Fair Value
Beginning of period	26,884	$	22.11	33,742	$	22.12
Vested (1)	6,857	22.17		13,715	22.17
End of period	20,027	$	22.09	20,027	$	22.09

(1) Vested for purposes of recording compensation expense on a straight-line basis.

The Company grants performance-based restricted stock awards that vest after three years. On February 20, 2013, the Company granted 163,519 performance-based shares , the vesting of which is based 50% upon Webster's ranking for total shareholder return versus Webster's 14 bank compensation peer group companies and 50% upon Webster's return on equity over the three year vesting period. Shares vest in a range from zero to 200% of the target number of shares under the grant depending on performance. The 14 bank compensation peer group companies are utilized because they represent 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 the 50% of the performance-based shares tied to total shareholder return verses the bank compensation peer group and based on the market value on the date of grant of the remaining 50% of performance-based shares tied to Webster's return on equity. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition.

The following table summarizes performance-based restricted stock activity under the Plans:



	Three months ended June 30, 2013			Six months ended June 30, 2013
	Performance - Based			Performance - Based
Restricted Shares	Number of Shares	Weighted-average Grant Date Fair Value		Number of Shares	Weighted-average Grant Date Fair Value
Beginning of period	240,536	$	24.52	94,407	$	25.44
Granted	—	—		163,519	24.04
Vested (1)	24,748	24.67		40,619	24.81
Forfeited/Modified	—	—		1,519	25.47
End of period	215,788	$	24.50	215,788	$	24.50

(1) Vested for purposes of recording compensation expense on a straight-line basis.

As of June 30, 2013, there was $13.0 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a remaining weighted-average vesting period of 2.1 years.