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 these share awards better align the interests of its employees with those of its shareholders. Share awards are issued from available treasury shares. Stock-based compensation cost is recognized over the required service vesting period for the awards, 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. Awards to retirement eligible employees are subject to a one-year service vesting period.

The following table provides a summary of stock-based compensation expense recognized in the accompanying Condensed Consolidated Statements of Income:



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2014		2013		2014		2013
Stock options	$	167	$	886	$	943	$	2,832
Restricted stock	2,076		1,276		6,850		4,925
Stock-based compensation	$	2,243	$	2,162	$	7,793	$	7,757

The following table provides a summary of unrecognized stock-based compensation expense:



	At September 30, 2014
(Dollars in thousands)	Unrecognized Compensation Expense		Weighted-Average Period To Be Recognized
Stock options	$	654	1.3 years
Restricted stock	$	11,659	2.0 years

The following table provides a summary of the activity under the Plans for the nine months ended September 30, 2014:



	Restricted Stock Awards Outstanding												Stock Options Outstanding
	Time-Based								Performance-Based				Stock Options Outstanding
	Number of Shares		Weighted-Average Grant Date Fair Value		Number of Units		Weighted-Average Grant Date Fair Value		Number of Shares		Weighted-Average Grant Date Fair Value		Number of Shares		Weighted-Average Exercise Price
Outstanding, at January 1, 2014	267,119		$	22.96	1,705		$	22.75	138,450		$	24.43	2,325,797		$	26.97
Granted	215,412		29.65		13,678		29.34		146,248		29.94		—		—
Exercised options	—		—		—		—		—		—		(108,841	)	15.98
Vested restricted stock awards ⁽¹⁾	(166,008	)	24.68		(9,685	)	28.18		(113,394	)	25.84		—		—
Forfeited	(21,941	)	25.27		—		—		(16,909	)	26.47		(94,380	)	35.30
Outstanding, at September 30, 2014	294,582		$	26.71	5,698		$	29.34	154,395		$	28.40	2,122,576		$	27.16

Options exercisable, at September 30, 2014													1,814,294		$	27.83
Options expected to vest, at September 30, 2014													294,667		$	23.24

(1) Vested for purposes of recording compensation expense.

Time-based restricted stock awards 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 recorded over the vesting period is based on a fair value of the grant-date market price of the Company's common stock.

Performance-based restricted stock awards vest after three years, with share quantity dependent on performance. Prior to January 1, 2014, awards vest in a range from zero to 200% and subsequent to that date, awards vest in a range from zero to 150% of the target number of shares under the grant. The performance-based shares granted in 2014 vest, based 50% upon Webster's ranking for total shareholder return versus 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 versus the fourteen-bank compensation peer group, and based on a fair value of the market price on the date of grant for 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 accrued on the performance-based shares and paid when the performance target is met.

Stock option awards have an exercise price equal to the market price of Webster's stock on 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. There were no stock options granted in 2014. At September 30, 2014, stock options outstanding included 1,942,570 non-qualified and 180,006 incentive options.