Stock-Based Compensation Plans

Webster has established stock-based compensation plans that cover employees and directors (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 is summarized in the following table:



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2013		2012		2013		2012
Stock options	$	886,281	$	737,208	$	2,831,966	$	1,795,501
Restricted stock	1,276,153		1,826,888		4,925,085		4,939,347
Stock-based compensation	$	2,162,434	$	2,564,096	$	7,757,051	$	6,734,848

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 September 30, 2013, there was $3.0 million of unrecognized compensation expense related to non-vested options that is expected to be recognized over a remaining weighted-average vesting period of 1.7 years.

The following table summarizes stock option activity under the Plans for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-Average Exercise Price
Outstanding, at January 1, 2013	2,476,645	$	28.99
Granted	436,043	23.00
Exercised	59,521	17.19
Forfeited/Expired	156,312	29.65
Outstanding, at September 30, 2013	2,696,855	$	28.25

Exercisable, at September 30, 2013	2,107,489	$	29.72
Expected to vest, at September 30, 2013	540,314	$	22.95

At September 30, 2013, options outstanding included 2,458,697 non-qualified and 238,158 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 222,585 time-based shares. Webster records compensation expense over the vesting period based on the market value on the date of grant.

The following table summarizes time-based restricted stock activity under the Plans for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-average Grant Date Fair Value		Number of Units	Weighted-average Grant Date Fair Value
Outstanding, at January 1, 2013	249,294	$	22.12	33,742	$	22.12
Granted	222,585	22.80		—	—
Vested ⁽¹⁾	154,133	21.78		19,700	22.21
Forfeited/Modified	20,531	22.40		9,778	21.67
Outstanding, at September 30, 2013	297,215	$	22.55	4,264	$	22.75

(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 versus 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 for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-average Grant Date Fair Value
Outstanding, at January 1, 2013	94,407	$	25.44
Granted	163,519	24.04
Vested ⁽¹⁾	64,169	24.77
Forfeited/Modified	34,825	24.55
Outstanding, at September 30, 2013	158,932	$	24.46

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

As of September 30, 2013, there was $10.7 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 1.9 years.