Stock-Based Compensation Plans

Webster maintains stock-based compensation plans (collectively, the “Plans”) under which non-qualified stock options, incentive stock options, restricted stock, restricted stock units or stock appreciation rights may be granted to employees and directors. The Company believes that such awards better align the interests of its employees with those of its shareholders. The Plans have shareholder approval for up to 10.9 million shares of common stock. As of December 31, 2013, no stock appreciation rights have been granted while the Plans had 2.3 million common shares available for future grants. The shares are expected to come from the Company’s treasury shares or authorized and unissued shares. Stock-based compensation cost is recognized over the requisite service period for the awards on a straight-line vesting expense schedule. The cost is based on the grant-date fair value, net of estimated forfeitures and 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, and the related income tax benefit, recognized in the accompanying Consolidated Statements of Income is summarized in the following table:



	Years ended December 31,
(In thousands)	2013		2012		2011
Stock option expense	$	3,902	$	2,405	$	809
Restricted stock expense	6,762		6,550		5,231
Stock-based compensation	$	10,664	$	8,955	$	6,040

Income tax benefit	$	5,344	$	2,841	$	2,127

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		2011
Weighted-average assumptions:
Expected term	6.9 years		6.6 years		6.5 years
Expected dividend yield	1.80	%	1.00	%	1.00	%
Expected forfeiture rate	10.00	%	9.00	%	9.00	%
Expected volatility	58.97	%	61.03	%	57.41	%
Risk-free interest rate	1.36	%	1.30	%	2.68	%
Fair value of option at grant date	$10.96		$11.71		$12.74

These assumptions can be highly subjective and, therefore, Webster uses historical data within the valuation model. The expected term of options granted is derived from actual option exercise and employee termination tendencies. The expected dividend yield is based on the current annual dividend on a current stock price. The expected forfeiture rate is calculated based on actual forfeiture activity trends. The expected volatility is 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 is based on the U.S. Treasury yield curve in effect at the date of grant for periods that coincide with the contractual life of the option.

As of December 31, 2013, there was $2.0 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 year ended December 31, 2013:



	Number of Shares		Weighted-Average Exercise Price
Outstanding, at beginning of year	2,476,645		$	28.99
Granted	436,043		23.00
Exercised	(165,036	)	16.81
Forfeited/expired	(421,855	)	38.72
Outstanding, at end of year	2,325,797		$	26.97

Exercisable, at end of year	1,751,602		$	28.19
Expected to vest, at end of year	538,731		$	23.24

At December 31, 2013, options outstanding included 2,129,892 non-qualified and 195,905 incentive, stock options. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $1.8 million, $777.1 thousand and $102.4 thousand, respectively.

The following table summarizes information about options outstanding and options exercisable at December 31, 2013:



	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	660,602	5.2	$	10.63	658,546	5.2	$	10.62
20.01 — 30.00	815,271	8.0	23.45		243,132	6.0	23.84
30.01 — 40.00	259,572	3.6	32.23		259,572	3.6	32.23
40.01 — 50.00	590,352	1.8	47.81		590,352	1.8	47.81
	2,325,797	5.1	$	26.97	1,751,602	3.9	$	28.19

The weighted-average remaining contractual term for options expected to vest at December 31, 2013 was 8.7 years. At December 31, 2013, the aggregate intrinsic value of options outstanding, options exercisable, and options expected to vest was $19.9 million, $15.3 million, and $4.3 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 the year 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 at that time.

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. Compensation expense is recorded over the vesting period based on the grant-date market price of the Company’s common stock. During 2012, certain time-based restricted shares were converted into restricted units. A total of 164,260 restricted shares were converted into restricted units. There was no additional compensation expense recognized as a result of the modification.

The following table summarizes time-based restricted stock activity under the Plans for the year ended December 31, 2013:



	Number of Shares		Weighted-average Grant Date Fair Value		Number of Units		Weighted-average Grant Date Fair Value
Outstanding, at beginning of year	249,294		$	22.12	33,742		$	22.12
Granted	246,133		23.26		—		—
Vested ⁽¹⁾	(205,601	)	22.36		(22,259	)	22.75
Forfeited	(22,707	)	22.40		(9,778	)	21.67
Outstanding, at end of year	267,119		$	22.96	1,705		$	22.75

(1) Vested for purposes of recording compensation expense.

The Company grants performance-based restricted stock awards that vest after three years. The shares vest in a range from zero to 200% of the target number of shares under the grant depending on performance. The performance-based shares granted in 2013 vest, based 50% upon Webster's ranking for total shareholder return verses Webster's fourteen-bank compensation peer group companies and 50% upon Webster's return on equity, over the three year vesting period. The fourteen-bank compensation peer group companies are utilized because they represent the mix of size and type of financial institutions that best compare with Webster. The Company 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 fourteen-bank compensation peer group and based on the market value on the date of grant of the remaining 50% of the 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. Dividends are paid on the performance-based shares when the performance target is met.

The following table summarizes performance-based restricted stock activity under the Plans for the year ended December 31, 2013:



	Number of Shares		Weighted-average Grant Date Fair Value
Outstanding, at beginning of year	94,408		$	25.44
Granted	163,519		24.04
Vested ⁽¹⁾	(84,652	)	24.74
Forfeited	(34,825	)	24.55
Outstanding, at end of year	138,450		$	24.43

(1) Vested for purposes of recording compensation expense.

As of December 31, 2013, there was $9.5 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. The total fair value of restricted stock awards vested during the years ended December 31, 2013, 2012 and 2011 was $2.0 million, $9.1 million and $4.8 million, respectively.

Long-Term Cash Incentive Awards

Webster granted long-term cash incentive awards to certain vice presidents and senior vice presidents of the Company, prior to 2010. The cash value of the award is converted to “phantom shares” upon dividing the total cash value by the average price of the Company's common stock for the 10 days prior to the grant date. The “phantom shares” have a vesting period ranging from three to five years. The cash value of the "phantom shares" is subsequently adjusted based upon the stock price, subject to a floor equal to the grant-date value and a cap equal to twice the grant-date value. The cost is ratably amortized over the applicable vesting period. On a quarterly basis, the current stock price is used to mark to market the unvested amount by recording an adjustment to the liability with the offset to compensation expense. Compensation expense related to these awards, recognized in the accompanying Consolidated Statements of Income, was $8 thousand, $1.2 million and $3.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. Other liabilities related to these awards, recorded in the accompanying Consolidated Balance Sheets was $34 thousand and $27 thousand at December 31, 2013 and 2012, respectively.