Webster Financial Corporation

Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the second quarter of 2012.

I'll now introduce your host, Jim Smith, Chairman and CEO of Webster. Thank you, sir.

You may begin.

Good morning, everyone. Welcome to Webster's Second Quarter 2012 Earnings Call and webcast.

Our earnings release, tables and slides are in the Investor Relations section of our website at wbst.com. I'll provide highlights on the quarter and comment on strategic initiatives; President and COO Jerry Plush will discuss key aspects of performance and trends in our business units; then CFO Glenn MacInnes will review the quarter's financial results, after which we'll take your questions.

I'll characterize our second quarter as very solid with increasing momentum. We showed continuing improvement in most financial metrics, and our performance demonstrated that our strategic investments are bearing fruit.

in revenue growth, expense control, operating leverage, loan growth, asset quality, deposit mix and strategic progress. Both net interest income and non-interest income rose linked-quarter and year-over-year, while non-interest expense declined linked-quarter and was flat year-over-year, creating positive operating leverage once again that drove the efficiency ratio lower linked-quarter by 1.9% to 63.75%, and keeps us on track to achieve 60% efficiency in Q4.

We're obviously not satisfied with the 8.5% return on equity for the quarter, but we're making measurable progress toward our overarching financial goal to earn a return that, at a minimum, exceeds our cost of capital. We're endeavoring to invest our capital and resources in strategies that will maximize economic profits over time.

That's how we'll distinguish ourselves as a high-performing regional bank.

I'm pleased to report that our Commercial Bank segment is earning in excess of its cost of capital. Consumer Finance is coming on strong.

And we've been actively retooling our consumer banking model with the goal of responding to changing customer behaviors in a manner that improves returns.

Q2 was notable for strong loan originations pretty much across-the-board as Jerry will describe. In fact, including residential loans originated for sale, we're reporting the highest quarterly originations since before the Great Recession and among the highest in our history.

The loan pipelines continued to expand quarter-to-quarter, too, which bodes well for future performance. The story on asset quality for Q2 was similarly strong as evidenced by a continuing decline in nonperforming loans, including the lowest inflow of nonperformers in several years, significantly lower charge-offs and a sharp drop in commercial classified loans.

Our proactive efforts in the early identification and rapid resolution of problem credits has contributed to our good performance, punctuated by other real estate owned of less than $5 million.

Looking at the net interest margin, we're not unhappy with the 4-basis-point decline from Q1, as we continue to succeed in partially offsetting declining yields on earning assets by reducing liability costs. Our cultural pricing discipline, coupled with growth in earning assets, is what propelled net interest income higher linked-quarter and year-over-year even as interest rate sensitivity remained neutral.

As you'll hear, origination yields and spreads have held up well in the sub-2% 10-year swap environment. And in turn, prepayments have been less than might have otherwise occurred.

Fee income in the quarter benefited from a strong contribution from Mortgage Banking and sales of corporate finance products. Transaction account deposits grew to 39% of our overall deposit base from 38% in Q1 and 35% a year ago.

Webster's good Q2 performance comes in the midst of modest but continuing economic expansion in our region. Despite slowing a bit, the regional manufacturing sector shows continued growth in the Fed's most recent Beige Book.

Retail activity remained solid and the regional tourism industry is expecting a strong summer season. According to the Federal Reserve Bank of Boston, employment is expanding, most notably in the Boston area, the region's primary economic engine.

There is significant investor interest in the Boston commercial real estate market.

The New England unemployment rate is under 7%. Housing markets are improving with construction indicators showing increases from a year ago.

The pace of year-over-year housing price declines are moderating and outperforming the U.S. overall.

In our core Connecticut market, May home sales rose 15% year-over-year, marking the fifth consecutive month of increase. Inventories of unsold homes are stable, and the market appears to be largely in balance.

We're going to provide a brief update on our progress in executing the strategic priorities we've laid out in earlier calls. As we continue to evolve our business model, we're shifting significant investment from physical to electronic infrastructure and deploying our marketing and customer-facing resources to build broader, deeper relationships with customers across lines of business, as these relationships offer more value for our customers and our shareholders.

The biggest structural changes have been taking place in retail banking as we strive to meet the rapidly changing needs of consumers and small businesses in an operating environment which challenges any bank to generate economic profits.

One of our significant investments has been the accelerated installation of deposit automated ATMs across our system. As of June 30, about 45% of our 253 deposit-taking ATMs have been converted to envelope-free image capture technology, with most of those also now offering touchscreen convenience.

All ATM upgrades will be completed by year end. In our test markets, we're finding that deposits at these upgraded ATMs increased by up to 40%.

Preferences and same-day availability will be rolled out in Q3, followed shortly by a mobile app and then Remote Deposit Capture for consumers, which has proven to be popular with small businesses.

Not only do these technology upgrades allow customers to choose how they interact with us and enable them to do so with greater ease, they free up branch personnel for relationship-deepening interactions with our customers. In that vein, later this month we'll begin a pilot Universal Banker program in select branches.

Universal Banker will be trained to assist customers with a wider variety of banking matters than has typically been the case, breaking down the silos that separate the teller line from other branch functions. Universal Banker will make us more financial advisory oriented and meaningfully more efficient.

During the quarter, we continued the optimization of our branch network by closing one branch, announcing plans to relocate another to a newer, smaller, state-of-the-art facility close by, and we broke ground on a new Greenwich, Connecticut facility that will combine offices of Webster Private Bank and a small retail branch under one roof.

We've also completed the system enhancements that will enable branch personnel instant decision-making capabilities for issuing credit cards with our new partner Elan. This new program offers significantly better economics for Webster and provides a broad credit card product suite that we have lacked in the past.

Already, the Elan relationship is off to a strong start with promising numbers of new cards issued well ahead of plan. The Elan relationship is not an outsourcing, but rather functions like a partnership.

Not only does our agreement allow us the option to take card receivables onto our books, it also provides us the ability to integrate the card with our Cash Management capabilities to offer our business customers corporate cards, a service many have long wanted. This product suite is an important addition to the credit and Cash Management offerings for our Commercial Bank, our Private Bank and our Small Business bankers.

A related revenue initiative is the build out of our newly created Treasury Services group that brings together all of our Cash Management services and features up-to-date automated capabilities that will enable us to best meet our customers' Cash Management needs. During Q2, we recruited Phil Picillo, an experienced Treasury Services executive who most recently worked at SunTrust to head up the group.

Our Middle Market and Small Business banking teams are at the heart of our relationship-building strategy. Their combined portfolio growth of over 13% year-over-year with originations up 34% demonstrate their successful pursuit of relationship-based, value-creating strategies.

The Private Bank is also expanding its team and making progress toward its revenue goals.

Meanwhile, our Consumer Finance group's very strong performance was driven by the near doubling of our loan originator sales force, our emphasis on purchased mortgage business and our success in positioning the loan as a relationship product.

At our fast-growing HSA Bank, we've successfully increased our strategic focus on midsized employers. In 3 years, the size of HSA's average employer has grown from 50 -- from 15 to 60 employees and most of our business is done electronically.

We believe that the Supreme Court's recent ruling on the President's Health Care Act could be a boon for HSA Bank by increasing the adoption rate for Health Savings Accounts as more consumers choose or are forced to take greater responsibility for their healthcare decisions.

Our IT co-location project reached an important milestone during the quarter with the migration of more than 90% of our IT applications to third-party hosted data centers in Andover, Massachusetts and Bethlehem, Pennsylvania. With this project almost complete, our IT infrastructure is far more resilient and better able to recover quickly from power outages and natural disasters, significantly reducing operating risk.

I want to make a few comments about capital management. You can see from Slide 4 that our capital position is strong and increasing.

We manage our capital so as to ensure that we have sufficient capital to support our businesses consistent with our risk appetite and our risk exposure, including under stressed conditions, while remaining a source of strength to the bank.

We have at least $500 million more capital at the holding company than required to be well-capitalized by any regulatory ratio under current guidelines. There were 2 notable regulatory developments relative to capital in Q2, headlined by the June 7 joint agency notice of proposed rulemakings.

Two of the NPRs affect Webster. The Basel III NPR proposes changes to capital requirements outlined in Basel III and Dodd-Frank.

And the standardized approach NPR proposes changes to the calculation of risk-weighted assets for all U.S. banks and for bank holding companies with over $500 million in assets.

While the risk-weighted proposals were surprisingly complex and rigid, the capital rules are generally consistent with our expectations, including the phase-out of Trust Preferred Securities as Tier 1 Capital beginning January 1. What was not expected was that smaller banks will also lose their TruPS, in their case over 10 years versus our 4, making it increasingly difficult for them to meet higher capital requirements and likely adding another accelerant to an imminent and meaningful industry consolidation.

We viewed the NPR as a regulatory capital treatment event and moved to call $136 million of 7.65% TruPS at par since they would no longer qualify as Tier 1 Capital. We expect to complete that call this month.

Using a 5% duration matched savings projection, we expect to generate about $1 million in net interest expense benefits quarterly beginning later this month. We'll also reclassify 25% of our remaining $77 million of low coupon floating rate TruPS into Tier 2 capital on January 1 of each year beginning in 2013.

The other new items in the Basel III NPR appear to have minimal impact on us. Some actually are favorable relative to our expectations, though we're keeping an eye on the possible phase-in of unrealized gains and losses on available-for-sale securities, which could be phased in at 20% a year, beginning in 2014.

This rule is still under advisement and we hope may ultimately exempt very low risk-weighted assets from the calculation given their minimal credit risk.

The standardized approach NPR makes many changes to the calculation of risk-weighted assets. The rules are complex and will require further study to determine their impact before implementation in 2015.

Importantly, at this point, we don't expect the new rules to change our business strategy, but they could impact the design and pricing of some consumer products.

The bottom line for us is that we continue to significantly exceed all estimated, well-capitalized regulatory requirements on a fully phased-in basis. Specifically, if we take June 30 capital levels pro forma after the $136 million TruPS redemption and the immediate movement of the remaining $77 million of TruPS from Tier 1 to Tier 2, and then add up to $1 billion of additional risk-weighted assets, which would add about 7% to 8%, for the possible effect of the standardized approach NPR, Webster would exceed by more than 1.5%, the higher of fully phased-in well-capitalized minimums or minimum capital levels plus conservation buffers at both the bank and the holding company.

And we would exceed the Tier 1 common to risk-weighted asset ratio by more than 3%.

Much as we think the new capital rules are negative for overall economic growth and job creation, it's good to be a bank with less than $50 billion in assets and exempted from the countercyclical buffer and other as-yet-undefined capital surcharges for systemically important financial institutions. This may become an increasingly important competitive benefit as compared to the capital requirements imposed upon many of the large banks we compete against.

So I'll reiterate with confidence the comment I made last quarter, that with our tangible common equity ratio well over 7% and our Tier 1 common ratio close to 11%, we have ample room to grow the balance sheet and to increase exposure to higher risk-weighted assets that contribute to economic profits, meaning we can support meaningful loan growth at 100% risk weighting.

Another benefit of the rulemaking is that having more certainty around required capital ratios replaces the need to guess at how much excess capital we would have under different rulemaking scenarios. So as earnings improve, so does the likelihood of dividend increases.

We doubled our regular quarterly cash dividend in April to $0.10 a share, bringing us into the low 20% payout range. We expect to push that ratio to 30% or so as earnings continue to strengthen, and we'll take a closer look at implementing a stock repurchase plan.

As I've said in recent calls, while virtually every ounce of our effort is focused on executing our strategies that increase economic profits, we're keeping an eye on likely industry consolidation. Should the opportunity arise to strengthen our franchise through negotiated in-market or contiguous market combinations that meet our rigorous standards, we'll be prepared.

But let me be clear that we do not view acquisitions as a requirement for success or as a necessary condition for generating economic profits. One need only observe our progress and our momentum to conclude that we are making measurable organic progress toward our goal to be a high-performing bank.

Our strategies are working and our momentum is real. We talked about our plans to reach 60% efficiency in the fourth quarter, and you can only imagine the intensity with which we pursue that goal.

Barring unforeseen economic reversal or a drastic decline in net interest margin, we'll reach our goal based on expectations of continuing loan growth and higher fee-based revenues in multiple business units. And from myriad expense reductions, including importantly lower FDIC premiums, lower TruPS costs, our meaningfully efficient electronic forms project and lower data processing costs to name a few.

I'll now turn the call over to Jerry for comments on key aspects of performance and trends in our business units.

Thanks, Jim, and good morning, everyone. It's great to have this opportunity to review with you how our principal lines of business are doing as they pursue strategies to maximize economic profits over time.

So let's begin on Slide 5 with the Commercial Bank. Here you can see in the top left chart the Commercial Bank has $4.5 billion in loans and has posted solid growth in outstandings over the past year and again this quarter.

We're growing our key Middle Market industry segment and investor commercial real estate businesses with seasoned relationship-driven bankers and appealing to a growing preference for companies to partner with a strong, values-driven regional commercial bank. The business posted loan growth of $201 million or 4.6% from March 31 and $412 million or 10% from a year ago, inclusive of a net planned decline of $29 million in equipment finance from March 31 and $190 million from the prior year.

The yield on the portfolio increased by 3 basis points to 4.29% in Q2, while the spread increased by 8 basis points to 3.11%, attributable to pricing discipline on new originations and from FASB-related deferred fees.

Now let's move to the top right chart. You can see loan origination fundings totaled $424.3 million in the second quarter.

That's up 41% from Q1 and 93% from a year ago. The yield on new originations in the quarter was essentially the same as for the entire Commercial Bank portfolio, while the spread on new originations is higher.

Our Commercial Bank relationship managers know that they need to generate more than just loans. The focus is on the full banking relationship with our customers, so it's also worth noting that we had 23 interest rate risk management transactions, primarily swapping floating for fixed, that were booked for clients during the quarter, that generated $1.6 million in non-interest revenue.

And demand deposits totaled $766 million at June 30 compared to $699 million at March 31 and $631 million a year ago. The Commercial Bank team has opened 310 new demand deposit accounts so far this year, compared to 244 new accounts through June of last year.

So if we look at the chart on the bottom left, you can see our classified loans in the Commercial Banks have declined by $236 million or 39% over the past year. They now represent 8.23% of loans compared to almost 15% a year ago.

Glenn's going to speak to total commercial classified loan trends in his remarks. It's clear to note here that Commercial Bank has made significant strides in this key asset quality measure.

Finally, looking at the chart at the bottom right, you can see line usage trends within the 4 business segments of the Commercial Bank. While Middle Market industry segment banking and CRE demonstrate flattish or declining trends, we actually take the recent upward trend in asset based as a promising sign given the sensitivity to the overall economy that many of the unit's customers demonstrate.

The Commercial Bank's pipeline totaled $365 million at June 30 compared to $314 million at March 31. It's a good pipeline considering the strong Q2 originations, and the team is working to build it even further for a strong second half of the year.

Let's turn now to Slide 6. And here you can see the retail banking group has $10.2 billion in deposits, and included in that figure are $1.7 billion of Small Business deposits.

The Small Business unit also had $921 million in loans.

You can see in the top left chart how Small Business loans have grown by $20 million or 2.2% from March 31 and $69 million or 8.1% from a year ago. This growth is occurring while we continue to reduce non-performing loans, which are now down to 2.4% of the portfolio versus 4% at the same time last year.

The growth in loans is being driven by a sustained improvement in our loan production from our 29 dedicated business bankers and 165 branch managers, who recently completed a comprehensive business banking certification program.

Q2 Small Business new loan commitments were $73 million compared to $65 million in Q1 and $58 million a year ago. Our Q2 production represented one of the best quarters ever produced by our business banking team.

The Small Business pipeline remains very strong at $62 million at June 30, roughly the same as at March 31.

You can see in the top right the progress that's been made in taking transaction account deposits to 31% of total deposits in retail banking. The group has seen transaction deposit growth of $265 million or 9.2% over the past year.

The $265 million in transaction growth has come pretty evenly between our Consumer and Small Business units. At the same time, we've seen significant increases in average balances in transaction accounts.

Our Small Business transaction accounts have had an average balance of almost $22,000 in Q2, which is over 5% higher than Q1 and about 15% higher than the level a year ago. Similarly, the Consumer average balance per transaction account of $5,620 was 2.5% higher than in Q1 and almost 9% higher than a year ago.

The emphasis on transaction accounts and overall deposit pricing discipline has helped the retail banking group lower its cost of funds significantly over the past year. You can see in the bottom chart -- you can see the 47-basis-points cost of funds in Q2 is about 4 basis points lower than Q1 and it's 21 basis points lower than a year ago.

We show Small Business originations in the bottom left chart. Here you can see we just achieved the highest volume of $78.7 million in new originations in the past 5 quarters.

The chart on the bottom right provides a sense of the progress the retail banking group is making in migrating its business to lower cost channels. Over the 18 months, retail's closed 17 branches while opening 3 new locations, for a net reduction 14 in the past 18 months and 9 over the past year.

These actions are part of our strategy to optimize the configuration of the branch network as our customers channel preferences change, and that's evidenced by the steady increase in the percentage of active online users, which you can see is now up to 59.8%.

Turning to the product side, we introduced our eChecking product on April 1 to attract and retain customers who value the convenience of banking online and on the go. We opened over 3,000 eChecking accounts during the second quarter.

The eChecking product is designed for the customer that banks electronically, and it rewards them with a no-cost account when they utilize online debit, bill pay and mobile. And this rounds out our checking product line, which collectively offers value for balances, behavior and costs.

We'll turn now to Slide 7. And here you can see our Consumer Finance group has continued to add proven talent to their sales team, and they've increased the focus on jumbo mortgages as a key to relationship building with higher net worth clients, and it's showing in the results.

So referring to the top left chart, originations including loans sold with servicing retained, were more than $500 million in the second quarter. The performance represented growth of 20% over Q1 and 74% over the same quarter last year.

The yields on new originations improved by 14 basis points over the first quarter, and that's driven by higher sales of conforming fixed-rate mortgages. The gain on sale margin on originations that were sold in the second quarter was 2%, compared to 2.26% in Q1 and 1.72% just a year ago.

The Consumer Finance pipeline remains strong. It was about $573 million at June 30 compared to $546 million at March 31.

So if you look at the top right chart, Consumer Finance portfolio balances were relatively flat compared to Q1 as a result of continued consumer refinancing and de-leveraging, as well as from selling fixed-rate conforming mortgage production. Our portfolio yields declined by 7 basis points from Q1, largely driven by attrition.

On the bottom left, you can see the success we've had in growing jumbo mortgage originations. These originations represented 54% of total originations for portfolio in the second quarter, compared to 39% in Q1 and 48% a year ago.

This is driven by our increased focus on jumbos within existing territories; new hires in strategic markets; and also a strategic correspondent lending partnership with a premier real estate company in our footprint, with Webster underwriting the mortgages. The noticeable increase in jumbo originations over the past year results in jumbos now representing 39% of the resi portfolio compared to just 28% a year ago.

We view mortgages, especially jumbos, as a lead product in relationship development, and we continue to see strong internal referrals.

On the bottom right chart, you can see the progression in key asset quality metrics in the consumer portfolio. Delinquencies, non-accruals and charge-offs each posted declines from the first quarter.

We can turn now to Slide 8. And you can see our HSA bank unit, which ranks fourth among the top 20 Health Savings Accounts custodians in the country, has $1.2 billion in deposits, another $169 million in link brokerage accounts.

You can see in the chart on the top left we added another $21 million in deposits in the second quarter from the seasonally high first quarter. The shift in deposits from a year ago is 21 -- or excuse me, the growth in deposits from a year ago is 21%.

HSA Bank's shift in focus to midsized employers and providing differentiated value-added services is really paying off. We like the stickiness of the Health Savings deposits and the relatively low elasticity, which runs in the 35% to 40% range, compared to other retail deposits.

If you turn to look at the chart on the top right, you can see accounts have pretty much grown in tandem with the growth in deposits. The growth in accounts is around 19% compared to a year ago.

As with deposits, you can also see the seasonal strength in account growth in the first quarter when benefit plans years start for many employers and their employees.

The chart on the bottom left shows you the reduction in the cost of funds in HSA over the past year by 38 basis points. We've tightly managed the tier rate structure that we pay on Health Savings Account deposits.

For instance, we currently pay 19 basis points for balances between $2,500 and $5,000, and 49 basis points for balances between $5,000 and $10,000. If you'd like to see the full rate and fee schedule, just turn to HSA Bank's website at hsabank.com.

The chart on the bottom right provides our average balance by age of account. We think the fact that HSA's sole focus is on administration, service and support of Health Savings Accounts underpins our better-than-market performance on the important metric of average balance by age of account.

We'll turn now to Slide 9, and we'll look at our Private Banking unit. The focus here is on the segment of the high-net-worth market that is just below the threshold of the industry leaders and what we like to call the millionaire next door.

We expect to continue to grow this business by providing objective advice coupled with full local relationship banking and investment services to our relatively affluent customer base. Webster Private Bank, a trade name of Webster Financial Advisors, was launched in the first quarter.

So if you look at the chart on the top left, the group has $1.9 billion in assets under management and administration on June 30. The decline of $170 million from March 31 was driven primarily by $120 million in custody assets under administration that transferred out during the second quarter to a master trustee.

That $120 million was netting us only 5 basis points after platform costs, so even though AUA was down quarter-over-quarter, our overall investment revenue stayed the same because the lost assets had such a low fee. Our AUM was down slightly given some valuation declines compared to the first quarter.

If you look at the chart in the top right, our Private Banking loan originations picked up modestly in the second quarter, and they were primarily on the consumer side.

In tandem with the chart on the lower left, we saw an increase of $13 million in loans during the quarter. Growth was up significantly compared to a year ago and the pipeline's strong at $116 million [ph] at June 30 compared to $63 million at March 31 and $90 million a year ago.

We're also seeing a nice lift in deposit balances from growth of $11 million in the quarter and $35 million from a year ago.

The growth we're seeing in Private Banking reflects the recent addition of 3 relationship officers to take the current total, which is up to 7. We've got plans for 2 additional hires in the third quarter and an overall plan to have 14 relationship officers by the end of 2014.

In the meantime, the good news is that the people that we're hiring are producing at the levels anticipated.

We'll shift now from line of business performance to our principal -- what we'll call, say, our overall loan balances, which totaled $11.5 million. You can see this on Slide 10.

And we're showing growth of about $228 million or 2% linked-quarter, and $528 million or 4.8% year-over-year. Our total originations, including residential loans originated for sale with servicing retained, were almost $1.2 billion in the quarter, and that's up 27% from Q1 and 69% higher than Q2 of last year.

As we just reviewed, the pipelines for commercial and residential originations remain very strong. Commercial loans, exclusive of CRE, grew $97 million or 3.4% on a linked-quarter basis as we saw growth in Middle Market, Small Business and asset-based lending offset the decelerating planned decline of $29 million of equipment finance as we previously outlined.

Our expectations continue to be that the equipment finance portfolio will begin to stabilize over the second half of the year. Our Commercial Real Estate lending is another bright spot, with investor and owner-occupied CRE balances up about $125 million or 5.2% on a linked-quarter basis and about $328 million or 14.8% year-over-year, with originations more than doubling year-over-year.

Overall, the Commercial pipeline again looks strong across-the-board, ahead of where we were heading into the second quarter.

We'll turn now just for a quick comment or 2 on residential mortgages. You can see they grew $31 million, just a little under 1% linked-quarter, and $162 million or 5% year-over-year growth.

Originations were down slightly from the first quarter but higher year-over-year, while loans originated for sale were $198 million compared to $131 million in Q1 and $47 million a year ago.

Consistent with the consumer de-leveraging trend that we've been reporting the past several quarters, consumer loans declined about $25 million or about 1% linked-quarter, about $101 million or 3.6% year-over-year. The volumes on the origination side have been relatively consistent for all the periods shown here.

Similar though to Commercial, the good news is that the pipelines were going -- are up compared to where we were in the second quarter. So overall, a good quarter for loan growth, with expectations for continued growth headed into the third quarter.

So with that, I'll turn it over to Glenn, who will provide a review of the financials and also make some comments on the outlook for the third quarter.

Thank you, Jerry. Good morning, everyone.

Let me start by turning to Slide 11, which provides a quarterly trend in net income available to common shareholders and the return on average equity. I'll talk more about the drivers of our performance, but highlight the $40.6 million in earnings this quarter is up 6% over prior quarter, 21.8% over prior year, represents EPS of $0.44 per diluted share, a return on assets of 85 basis points and a return on average equity of 8.49%.

Slide 12 highlights our core earnings drivers. Before I discuss the key items, I'll highlight the following noncore items which were incurred in the quarter and are reported in pretax income.

During the quarter, we had a onetime security gain of $2.5 million from the sale of the CMO and the CMBS that we believe reached their full value. In addition, we recognized a gain on the sale of an equity position.

We prepaid $49 million in FHLB advances and recognized a $2.5-million debt prepayment expense. The advances had an average effective yield of 4.56% and an average remaining maturity of 15 months.

We also recognized $727,000 in contract termination severance expense as we continue to optimize our business.

Now turning to the core earnings drivers. Average interest earning assets increased by 1.8% over prior quarter and 7.3% from a year ago.

The $313-million increase compared to prior quarter was led by growth of $162 million in loans and loans held for sale, with the balance in investment securities. The $1.2-billion increase in average interest-earning assets from a year ago was the result of growth of $878 million in investment securities and $482 million in loans and loans held for sale.

The net interest margin for the quarter was 332 basis points, which represents a 4-basis-point decline from prior quarter and a 16-basis-point decline from a year ago. NIM compression versus the first quarter is a result of growth in our investment portfolio and lower overall portfolio yield from reinvestment and lower rates.

The decline in loan yields from Q1 was offset by further declines in deposits and borrowing cost. The reduction in deposit cost was achieved by both pricing actions and balance mix.

The NIM decline versus prior year was primarily driven by investment balance growth and reduced yields in the investment and consumer loan portfolios, partially offset by declines in deposit costs.

Despite the compression in NIM, as you see on the next line, our net interest income increased quarter-over-quarter by $1 million. Growth in earning assets increased the net interest income by $3.1 million, which was partially offset by reductions in spreads.

Versus prior year, we highlight that net interest income grew by $3.5 million. This was achieved by solid loan growth, the purchase of short-duration securities and pricing actions on our deposit base.

Core non-interest income, excluding securities gains was $44.8 million for the quarter, up from prior quarter by $830,000. The increase in the quarter was driven primarily by the sale of client interest rate swaps, activity in our direct investments and growth of $356,000 in deposit service fees during the quarter due to increased transaction volumes in our HSA Bank.

The increases were partially offset by declines of $1.3 million in loan fees from reduced prepayment penalties and a mortgage servicing rate impairment, as well as a decline of $759,000 in mortgage banking. The mortgage banking decline reflects a negative low-com [ph] adjustment of $300,000 in Q2 compared to a positive $1.3 million in Q1.

Versus prior year, you can see that core non-interest income is up by about 1%. This is despite the headwinds of $4 million of lost interchange revenue year-over-year from the Durbin Amendment.

In effect, we were able to offset the headwinds through increase revenue in mortgage banking activities as well as client swap activity.

Core non-interest expense totaled to $124.5 million in the quarter, which was down $2.4 million over prior quarter and flat to a year ago. Our continued focus on controlling expenses has contributed to positive operating leverage compared to both Q1 and a year ago.

Compared to the first quarter, core revenue grew 1% while core expenses declined 1.9%. Compared to a year ago, core revenue grew 2.1%, while core expenses were held flat.

The core non-interest expense decrease compared to prior quarter and a year ago reflects reductions in compensation and benefits, both from the seasonally high first quarter and lower staff levels from prior year. These reductions were partially offset by technology investments in the business, primarily the data center co-location initiative, and the timing of marketing programs relative to each period.

Finally, at the bottom of the slide, you see our pretax pre-provision earnings along with our reported pretax income. As Jim mentioned earlier, reported pretax income of $59.6 million in Q2 represents the highest quarterly level in 6 years.

In summary, we view this as another solid quarter for Webster as we pursue strategies that maximize economic profits.

Turning now to Slide 13, which highlights our asset quality progressions. I'll start with nonperforming loans in the chart on the top left, which declined by $9 million in Q2 or 5%, and $59 million or 26% from the year ago.

A number of the loan segments that we report had declines from the prior quarter. We had a combined reduction of $5.3 million of residential and consumer, which included $4.3 million of non-performing loans moved to held-for-sale after a $2-million charge.

We also had a $2.3-million reduction in commercial loan mortgage, which reflected a charge-off related to one credit. Non-accruals in equipment finance business increased by $1 million from a relatively low base of $5 million, while a $564,000 increase in non-accruals in consumer liquidating portfolio reflected ongoing volatility in this declining portfolio.

Our NPLs are now at 1.47% of total loans compared to 1.58% at March 31 and over 2% a year ago. The portfolio continues -- contains approximately $17 million of performing nonperformers.

So the balance of NPLs that the workout team is focused on is approximately $152 million of nonpaying loans at June 30. We continue to focus on reducing the level of NPLs and returning assets to accrual status, while reducing ongoing carrying and workout expense.

At June 30, OREO totaled $4.4 million, a decrease of about $1.6 million from the first quarter. The decrease was primarily driven by a reduction of $1.1 million in the commercial segment on the sale of one residential development property.

At the end of the quarter, the OREO portfolio consisted of 33 properties, as 16 properties were sold and 10 came in during the quarter. These have been marked at prices to expedite a sale within the year and 4 of these properties are already under contract.

Nonperforming assets to total loans plus OREO declined to 1.5% from 1.63% at March 31 and significantly down from 2.27% a year ago, reflecting the focus we've had and all the progresses that has been made on reducing NPAs.

The chart on the bottom left highlights commercial classified loans. And here we show that classified loans, a key factor in determining the overall level of allowance for loan loss, continue to decline and totaled $445 million at June 30, driven primarily by pay-offs and upgrades.

So the classified loans declined 12% from March 31 and 36% from a year ago, and we continue to make solid progress.

In the chart on the upper right, our past-due loans have been below 1% of total loans for 9 quarters now and were $65.9 million or 57 basis points at June 30, compared to $60 million or 53 basis points at March 31. We had a combined increase of $6.6 million in the residential and consumer portfolios primarily related to 4 large loans with a combined book balance of $4.5 million, where borrowers have been in and out of delinquency over the past several periods.

We have continuous dialogue with these customers and expect some amount to cure in the near term.

We've also included the NPL reconciliation on this page in the bottom right. For the quarter, new non-accruals were lower by $39.2 million, keeping in mind the first quarter included one large commercial non-mortgage loan for $20.9 million.

Cures and exits increased by $26.1 million, reflecting fewer upgrades and loan sales. Our annualized net charge-off rate of 58 basis points in Q2 is at its lowest level since the fourth quarter of 2007.

As in prior periods, additional credit and other performance data for our principal loan segments can be found in the supplemental information posted in the Investor Relations section of our website. Our TDR disclosures can also be found there.

We'll turn now to Slide 14, which highlights our allowance for loan losses. The provision was $5 million for the quarter.

The loan net charge-offs of $16.5 million. The modest increase from $4 million in prior quarter was within the range of expectation, taking into account, among other factors, loan growth by type, classified asset levels and the charge-off level in the quarter.

Our allowance for loan loss now represents 1.72% of total loans, and our coverage ratio is 117% of total non-performing loans. Our ability to record a provision less than net charge-offs reflects the continued improvement in all our key asset quality indicators that I just reviewed.

Our investment portfolio is highlighted on Slide 15. The portfolio totaled $6.2 billion at June 30, with about $3.1 billion in both available-for-sale and held for maturity.

The portfolio continues to represent about 1/3 of our total assets. As highlighted with the yellow line in the top chart, the overall portfolio yield was down 11 basis points in the quarter, primarily as a result of prepayments, growth and low reinvestment rates.

Included in the reduction in yield was an increase in the premium amortization of $1.8 million to $14.9 million from the first quarter. The increase is the result of a modest increase in our agency MBS CPR of 25% to 27%, which was expected, as well as continued reinvestment in securities at premiums to par.

During the second quarter, we purchased $465 million in securities at an average yield of 2.39% and duration of 4.1 years. 89% of the purchases were at agency MBS with a duration of 3.9 years and a yield of 2.21%.

Prepayments, calls, maturities amounted to $420 million at a yield of 3.38%. And we also sold $43 million in securities, yielding 3.9%.

As indicated in the bottom chart, the total portfolio duration was 2.8 years at June 30, which is about the same as March 31. The most significant influence on the portfolio's duration has been the rate and spread environment.

To give you a sense of this, on the chart the blue line reflects the duration of the past 5 quarters and the red line right above it represents the trend in the 10-year swap rate. Note the tight correlation between the 10-year swap rate and duration up until the second quarter.

In this quarter, we saw a significant spread widening as a result of a 51-basis-point decline in the swap rate, but only a 12.5-basis-point change in mortgage rates, which was primarily -- which was the primary driver of prepayment activity.

We don't expect the period-end size of the investment portfolio to change significantly in the next quarter unless ALM needs or the environment change. For the company overall, we consider our current interest rate profile to be essentially neutral to a rise in rates.

Let me turn now to Slide 16 for a review of our deposit trends. The top chart highlights that balances have remained relatively stable to a year ago.

However, as a result of continued pricing discipline and mix, we have reduced our cost by 4 basis points versus prior quarter and 19 basis points from the prior year.

One of our priorities has been to increase transaction account balances. The lower chart highlights the progress we've made in this initiative.

We define transaction accounts as demand accounts, Health Savings Accounts and other interest-bearing checking accounts. The transaction balances now provide over 39% of our total deposits, which is a high for us, and as you can see, have increased $176 million versus prior quarter and $673 million over prior year.

In addition to the pie chart that you see here with deposits by line of business, we have included a slide in the Appendix which also shows deposit costs by line of business. Note that net deposit growth of $30 million in the quarter was primarily led by $91 million in commercial and $73 million in Small Business.

Slide 17, we highlight our borrowing mix and cost. Borrowings totaled $3.2 billion at June 30, an increase of $110 million over prior quarter.

An increase in average short-term borrowings of $238 million from the prior quarter and the early termination of $49 million in FHLB advances in May helped to reduce the cost of total borrowings by 7 basis points. Given the current rate environment, incremental funding is primarily being done at short-term rates of 25 to 35 basis points.

The duration of total borrowings is 2 years at June 30 compared to 2.3 years at March 31.

As you know, we announced in June that we will be redeeming at par on July 18 the remaining $136 million of our 7.65% trust preferred issue. We are redeeming initially with excess cash at the holding company.

Over time, we would assume some replacement with term funding and would assign an average replacement funding cost of 2% to 3% for a net savings of roughly 500 basis points on the redemption going forward.

Slide 18 highlights the progress we've made against improving our operating efficiency. Again, we achieved positive operating leverage in Q2 against both last quarter and Q2 of 2011.

As you see in the chart, our core operating efficiency improved noticeably in the second quarter. Compared to Q1, the net reduction of $2.4 million in expense and the net increase of $1.9 million in revenue resulted in a 188-basis-point reduction in the efficiency ratio to 63.75%.

We also think it's significant that core expenses are flat to a year ago, while revenues have increased by $3.7 million, even taking into account the lower NIM and the reduced interchange revenue. We have achieved positive operating leverage compared to first quarter of '12 and second quarter of 2011 due to the revenue strength in the quarter, and we remain committed to achieving our 60% efficiency ratio by the fourth quarter.

So before turning it back over to Jim, let me provide a few comments on expectations as we continue into 2012. With respect to average earning assets, we expect our average earning assets to grow by about 2% in the third quarter.

Further, we expect the majority of this growth to occur in our loan portfolio given the robust loan pipeline.

Regarding net interest income, the industry continues to be adversely impacted by a low rate environment. The quarter-end 10-year swap rate of 2.29% in the first quarter dropped to 1.78% in the second quarter, a full 50-basis-point reduction, and we've seen it fall further in July.

While we continue to take management actions to minimize the adverse impact of lower NIM, we would expect NIM compression of 3 to 5 basis points in Q3, including the net benefit of the TruPS redemption.

That being said, we think our net interest income will be relatively flat to Q2, taking into account our earning asset growth partially offset by projected lower NIM.

As we highlighted, credit continues to experience positive trends along all key asset quality metrics. Assuming this continues, we expect a modest increase in Q3 provision commensurate with our anticipated loan growth.

We expect core noninterest income in Q3 to increase approximately 4% to 5% over Q2 as a result of the favorable gain on sale mortgage secondary markets, implementation of a retail fee structure and improvement in wealth management.

With regards to noninterest expense, we expect to see consistent reduction in our core expense as we implement those actions previously outlined as part of our P260 initiative. Our core efficiency ratio will continue to improve towards a 60% efficiency ratio in Q4 as identified savings continue to be realized.

Our effective tax rate on a non-FTE basis was 30.75% in Q2, and we expect the rate to remain in the range of 30% to 31% over the remainder of the year.

Lastly, average fully diluted shares based on our current market price, I would assume to be about 91.5 million.

With that, I'll turn things back over to Jim for his concluding remarks.

Glenn, thank you very much. Let me simply say that it's clear our performance is improving.

We have positive momentum, and we believe we're making real progress toward our goal being a top-performing regional bank. That concludes our formal remarks.

We'd be happy to take your questions.

I was a little curious, it's impressive your commercial loan yield actually seemed to tick a little bit higher this quarter, and I was wondering if there was anything sort of onetime or sort of how you all were able to manage that.

Well, I hope you could see the theme throughout the call of the sense of pricing discipline. Every relationship has to be measured against its return on that relationship against the capital that supports it.

The Commercial Bank, in particular, is extremely mindful of its responsibility to generate profitable relationships. And I think that's a lot of what we're seeing.

And I also think that the market has been fairly responsible. We haven't seen wild moves toward unrealistic pricing.

There's been a little bit of pressure here and there, but on balance, we're pleased with the discipline that we've seen overall in the market. But I credit this a lot to Joe Savage and his commercial banking team that worked extraordinarily hard to make sure that everybody appreciates how important it is to gauge each relationship based on its ultimate value.

Okay. Great.

I also was hoping maybe you could touch a little bit on the securities book. I know you all mentioned on the call a couple times sort of the challenge of securities prepayments, particularly as rates continue to fall.

Obviously, you're keeping a pretty short-duration book. What are you all doing to try and minimize the impact of securities prepayments and hold on to the yield that you have?

Yes, I think -- Bob, it's Glenn. A lot of what we've been buying on the CMBS side has been structured such that we can minimize prepayment risk, and the Treasury function has been very successful in looking at buying securities that have limited prepayment risk as a result of the size of the loans, as a result of geography.

And that's sort of been paying off in the last 2 quarters.

I'm wondering if you could share with us the size of the loan pipeline and what the complexion of that looks like?

It's Jim. Thanks for your leadership.

Glenn, you going to take that?

Mark, I gave comments throughout, but the pipeline on the commercial side is around $365 million. I think pretty much across-the-board, we're a little bit lower quarter-to-quarter in CRE because they had such a great second quarter in terms of origination volume, but we're up significantly in all other lines of business there.

Strong performance when you think about the way that the BTB team has rebuilt the pipeline, so we're relatively comparable numbers, even though, again, they had one of the strongest origination quarters -- actually, I think as we reported, one of the best quarters ever. I think the Consumer Finance team, the pipeline is actually up quarter-over-quarter.

And as you could tell from the origination volumes, that team did extremely well. And in WFA, we're up almost twice the pipeline that we have there.

And I think, again, strong primarily on the fact that we've added a number of business development officers there, and that's really starting to come through in the numbers.

Okay. And then also as it relates to the margin, I was curious, how much wiggle room do you think you have to drive your deposit cost down from here?

I think your -- the current cost's around 43 basis points.

Yes, we think we have just a few, 2 or 3 basis points over the short term, and we continue to drive that down.

Okay. And then lastly, in the press release you referenced that corporate finance products revenue.

What exactly is that?

Those are clients -- that's client swap activity, yes, in the commercial side.

So it sounds like from your comments you're still not seeing a pickup in competitive activity, no increase in irrational activity. Can we assume that average yields in the commercial banking pipeline are roughly comparable to what you saw in 2Q?

Dave, it's Jerry. I think that it's fair to say that our team has held the line and stayed very focused and disciplined in pricing.

So in terms of making comments on others, I'll hold off on that. I think our guys know we're very return-focused in the organization.

You could see that with, basically, the level of yields and the spreads that they booked. So a lot of this is really the payoff of high-quality people that have got good relationships in each of the markets in which we serve.

I think it -- the regional focus that we've got really paying off, the strength of the teams in Middle Market, in CRE, in ABL, in its industry segment, I think these guys all -- again to echo Jim's earlier comment, Joe and his team have just done a really, really good job of staying focused and disciplined. And I think that's really the bigger driver as it relates to the -- what you see in the results.

Great. And just switching to the margin real quick.

As a part of your margin guidance, in your prepayment speed assumptions, are you assuming any decline in mortgage rates from current levels? You talked about there's been a little bit of -- we've seen spread widening, but that's -- rate -- mortgage rates continue to ratchet down.

I was just curious as to how much lower you think they go and how that's baked in your prepayment speeds.

We think relatively flat. I mean, the actual prepayment speeds on resi were down quarter-over-quarter.

So we're projecting now a relatively flat environment.

And how long do you expect they remain elevated?

Hard to say, I mean, I guess at least through next year.

Okay. And that's -- I guess that's baked into your yield maturity assumptions on that bus [ph]?

It's baked into NIM, certainly.

Okay, great. And lastly, sorry if you already mentioned this, but can you just talk about the increase in the other income line this quarter and maybe talk about what a good run rate is for that going forward?

Yes. So we did see a very nice increase in other income and that's where a big part of the, what we call the Treasury derivatives income booked, the swap income.

So that was up a little over $1 million quarter-over-quarter. And then the other thing -- and so that we feel pretty good about ongoing, at least in the near term.

There was some onetime income in there that's relative to a direct investment, as I highlighted in my comments, as well as a mark on some of the other investments. And that was worth about the other half or $1 million of the total.

So that I would consider more onetime.

Jim, I was hoping you actually give a little more detail. You mentioned that you would consider buybacks.

I think you guys have commented on potentially looking at buybacks for a little while now. Where are you guys in that time frame?

At what point might you implement a buyback program or at least get the ball moving?

I would say that would be sooner rather than later. It's a process, as I've said before, and it began with increasing the dividend and then looking to push it up around 30%, and then looking to deploy some of those increased earnings as well and the excess capital to opportunistic repurchase opportunities.

I don't want to comment on it in a big way, because it would be opportunistic. But we think it is appropriate to have such a program, and it's always hard to put an absolute timeline on it, but I wouldn't be talking about it if it were going to be, let's say, longer than a year.

So I would say within some reasonable time frame and closer than we were 3 months ago.

All right. The other question I had, just on the expenses.

How much of expenses -- they ticked up at least -- they didn't go down as much as we had expected. And it looks like some of that may have been a little bit of discretionary spending.

How much discretionary spending do you have in the current expense run rate now that will go away by year end? I'm just trying to understand the magnitude of how much it drives the efficiency ratio down.

Yes, I'm not sure. I mean, we have -- discretionary is relative.

I mean, as Jim highlighted in his comments and I think I did as well, I mean the bulk of the reductions are coming in what I would consider the back office restructuring. So the 123, I'm not sure what you were expecting.

I think that's pretty much where we were expecting. And so I think if you look at efficiency coming down 190 basis points quarter-over-quarter, that's what you're going to see as we get to 60%.

It's actually Damon DelMonte. Just wondering if you guys could talk a little bit about the mortgage banking activity this quarter.

I think you may have said in your prepared remarks what originations were. But could you just repeat what the volume was for the quarter?

We probably want to point him to the slide on Page 7, right?

Yes, I think. Damon, do you have the handout?

Oh yes, I do. I just...

The one on Page 7...

[indiscernible]

Yes. We basically just outlined the loans sold with servicing retained.

We're more than $0.5 billion for the quarter, and that's growth of about 20% over the first quarter and 74% over the same quarter the year before. And the gains on margins were around 2% for the quarter compared to 2.26% in the first quarter and about 1.72% a year ago.

Okay. And how do you see the pipeline shaping up going forward?

Very strong. We're reporting a pipeline that's in excess of the $550 million or so that we had at March 31.

So the team's done a very nice job continuing to refill that as things actually get through the origination state.

Okay. That's helpful.

And then I guess my second questions have to do with the loan-loss reserve level. Again, we saw charge-offs exceeding the provision and understandably so, as credit quality continues to improve.

So the margins -- or the loan-loss provision reserve is now down to about 183. Where do you kind of see your long-term target for that ratio?

We see it drifting down, I think. It would probably come down about, say, around the 160 range by the end of the year.

All other things being considered, credit quality continues to improve. We stay on this trajectory, that's where I think we'd end -- we'd expect to end up.

I wanted to start, assuming that you do get to the 60% efficiency target by the fourth quarter, is the plan then to keep that efficiency ratio below 60% moving forward?

I think what we've said, Steve, is that we would probably pop up in the first quarter due to seasonality. But then from that point on, assuming we continue to see the rate environment the way it is and our business production, we fully expect to be below 60% going forward.

It's sustainable at that point.

Okay.

Steve, what we've said is that getting to 60% or below 60% is a necessary but not a sufficient condition of earning our cost of capital. So we know we have to be under 60%.

And over time, it's got to keep dropping from there. So we've said, achieve by Q4.

You get the natural blip ups in expenses in Q1, so you may pop up a bit and then sustainable by Q2 2013 and thereafter and improvable.

Okay. Great.

I'm curious, with mortgage backed security yields now at such low absolute levels, what are your thoughts on continuing to add to the portfolio at these yields versus just letting cash build or looking for alternatives?

I think our strategy has been to continue to do purchases. We see it as an interest rate risk hedge as well.

And you've seen us move from -- in the second quarter from liability-sensitive more to a neutral position right now. So we don't look at it just from an earnings standpoint.

We look at it from a structure standpoint. And we're getting about 200 basis points in spread on it, if you look at how we're funding it, so it continues to make sense for us.

That being said, as I highlighted in my comments, I think at $6.2 billion, we're sort of topping out on the investment portfolio, and you'll see growth as you see interest earning assets grow. It's going to be primarily loan, if not -- the majority will be loan volume going forward.

And with the pipelines that we highlight, I think we feel pretty confident in that.

Okay. Just a final question.

Looking at the commercial real estate growth, it looks like most of that was in shopping centers and multifamily. Maybe give some color on the shopping center growth and talking about what the concentration limit is on that portfolio and maybe then just pricing on the multifamily.

Yes, Steve, we gave no commentary on what type of loans, the type of industries we were lending into. I mean, we've done some things that are industrial, some partial office.

I mean, it's pretty spread. There's no concentrations in what we've been generating.

I was just looking at the Slide 32, and just comparing it to last quarter in that. Okay.

Maybe then can you just comment on the multifamily pricing?

Steve, I'm sorry, repeat your question?

Multifamily pricing.

We'll have Glenn get back to you on that.

Quick question. You've made some comments around loan growth and capital management.

You had commented a couple of times intra-quarter about an expectation to maybe get that TCE ratio down closer to 6.5% from 7.2% in 2Q. Could you give us a sense for, in that estimate, what breaks down from loan growth and an increase in capital management potentially?

Let me just make sure I understand your question. So you're looking at the difference between Tier 1 Common and TCE?

No, just from comments you guys made during presentations intra-quarter that you would expect the TCE ratio to move down closer to 6.5%, the 7.2% in the second quarter. So I'm trying to get a sense for what your underlying assumptions for loan growth and capital management are in that 6.5%.

Yes, let me make a comment on that. A lot of that -- what we're saying is 6.5% over some period of time.

That could extend out for a year or more. That would absorb significant loan growth, obviously, and would also accommodate some repurchase activity.

Okay. I appreciate the clarity on the timing.

When you do re-implement the buyback program, is there a targeted total payout ratio that you guys have in mind?

We -- at this point, while we're talking about it, what the ratio ought to be, we have not established firmly a ratio.

Okay. And then just with regard to loan growth, you've -- we saw how commercial yields held up, and you've mentioned an unwillingness to get more aggressive on pricing in order to drive growth.

How much loan production do you -- volume do you think you're walking away from due to competitive pricing beyond your tolerance level?

I think there's a couple things happening. One is we're in a very good position, because we are always in the considered set.

We are winning on relationship pricing. There's a lot of movement in the market in terms of what bank you want to deal with.

Do you want to be with the big bank? Do you want to be with the regional bank?

Webster's done a lot of things well in terms of serving its customers, being there for them during the downturn. And our reputation is in very, very good shape at this point.

And so we're taking a lot of business we might not have gotten a couple years ago. Plus, we brought people onto the team that are able to bring new relationships with them as well.

So there's a number of elements that are contributing to our performance, and so we're not having to win based on price. I would say that we're not giving up a material amount of business at this point as a result of holding our pricing, but we have lost some deals.

I think with the discipline of the relationship has to meet the test on economic profit, and you've got to do that over and over again, requires that we maintain that discipline rather than yield on that particular point. So at least for now, with the market relatively sane, that's going to be our approach.

Okay. And then last question was, you mentioned FASB-related deferred fees in the quarter.

Do you have what those were?

I'll have to come back to you, Russell, on those.

Do you have the amount of unamortized premium in your securities portfolio as of the end of the quarter?

Sure. It's $189 million.

All right. So that was -- that compares, what was it, $145 million last quarter?

No, it was $167 million last quarter.

Okay. All right.

And then do you have how much the premium amortization expense was this quarter that you incurred?

$14.9 million, I think I said in my comments.

Okay. All right.

And then in terms of your outlook there, in terms of how that could play out in terms of prepayment speeds and the implications for the expense, can you just give us your view on premium amortization expense in coming quarters given the progression in securities yields?

Yes. I mean we think it's going to stay fairly constant.

Like I said, I mean the credit of the Treasury function, they've been very successful in buying things that have lower prepayment speeds. And so if you look at the drop in rates, we don't expect to get a lot of acceleration.

We think the $14.9 million, you could probably say is fairly constant. I mean, that being said, obviously, we added like $1.9 million in premium amortization to get to the $14.9 million, and that's a result of buying our purchases at premium, which is what you're paying for that protection.

Okay. All right.

And then lastly, on the lines of the CRE growth. I know you mentioned that you're -- you weren't specifically setting a concentration, but can you just give us, then -- if you can't talk to us about any specific industry type, can you talk about what strategy you're employing there to really drive CRE growth in this market?

Because still across the bank group we're not seeing much volume yet on the CRE side broadly, but you're putting up some good growth here over the past couple quarters.

Yes. I think on the retail side, they're seeing opportunities where they're grocery-store-anchored properties.

So we feel really good about that as we refer to it as necessity retail. To the earlier question, I think as we dug through here, we're seeing some opportunity on the multifamily side.

The pricing's in the low- to mid-2s for stuff that's existing and a little higher for on the construction side. So I think the team sees opportunities in a number of places.

Again, remember our markets run from down in Philadelphia where there was an opportunity for some multifamily, to industrial and warehouse in some of those same markets. And then also, on the retail side, again, the -- a number of these are -- they're all through sponsors we know well in the footprint.

But there's a couple of projects, again in the multi side, that came our way during the quarter.

A question for Glenn on the margin. Appreciate the 5 bps down this quarter.

Does that mean -- with help from the TruPS retirement, does that mean that in this kind of interest rate environment that we should assume that the NIM compression is now greater than 5 bps beyond the third quarter here?

No. I mean we were down, we gave guidance that we'd be down 5 bps into this quarter.

We were down -- in fact, we were down 4. My guidance for the second quarter is 3 to 5...

Third quarter.

In the third quarter. Yes, I'm sorry, in the third quarter it's 3 to 5.

And I think if you do the math, the TruPS is probably going to -- a little over 1 basis point, say 1.25, the net benefit on that. So 3 to 5 is all-in and includes the benefits of the TruPS.

Okay. Got you.

And then just to clarify, the fee growth this quarter, you're expecting 4% to 5%. Is that right?

That's correct. We continue to see a strong gain on sale market in the mortgage side.

The rates have held up at about 200 basis points, and as Jerry talked about, as well as Jim, our volume, our pipeline looks pretty strong even for the sale side. We did $198 million this quarter versus $131 million last quarter that we sold.

So we're doing pretty well there. We're going to see that going into the third quarter.

And then the other side of it is the continued volume we're getting on client swaps is bringing in a lot of fee revenue. And it was a tough market for the investment services division, basically flat quarter-over-quarter.

We think we were going to get some traction -- some more traction there. Of course, it's dependent on the market.

So there's a couple of key drivers there. The last thing is we put in a new retail pricing structure in July, so there'll be additional fee revenue associated with that.

Okay. And so -- okay.

And then is there an appetite maybe to increase some of the short-term borrowings to help out on the deposit side or the funding cost? Or are you going to look to keep the book pretty neutral here?

I think we're going to look to keep the book neutral. I mean, I think as I indicated, we have a little more opportunity on the deposit pricing to reduce -- the retail deposit pricing, to reduce rates.

Some of that actions have been taken; they just haven't been realized in the full quarter. But I think as far as borrowings, of course, it's going to be based on loan growth and deposit gathering.

So that sort of the last piece that you look at.

Okay. And then just lastly, on the P260, is it -- I know originally you guys said that it was primarily going to be expenses, about 2/3 expenses, but is it -- from here is it -- what's the mix in terms of contribution from the expense and revenue side?

I think it's still holding to that ratio, 1/3 and 2/3. And so you can push out the numbers that way and then get a good sense of where we need to be on expenses, and we still feel comfortable with that.

Jim, I believe you mentioned that -- in your prepared remarks that 45% of the ATM network has been converted to do image capture.

Right.

And can you just give us some more color around maybe the Universal Banker initiative side of things to date and how much of the branch network at this point is employing that model?

Yes. We're not really employing it much right now.

We've just indicated internally, and I mentioned this in my remarks, of course, that we're going to have a pilot program for the Universal Banker in selected offices around the franchise, with the idea that with these touchscreen image-capture ATMs that don't need envelopes, that more and more of our deposits will take place there. And in fact, early on, it looks like up to a 40% increase in deposits in these ATMs.

And therefore, there'll be less need for transactional business in the offices. And when you take that plus online banking and mobile and all the other things that consumers are demanding that we are providing, then the amount of transactions that will occur in an office location go down.

And so it gives us an opportunity to use the personnel much more efficiently, to develop them, to break down the barriers between someone that's at the teller window and someone's that's at the platform, so that we can become much more an advisory-oriented institution that uses the offices to provide advice and build relationships rather than to conduct transactions. So that's the driver behind this.

And we think that over the planning horizon, which still goes through the end of 2014 right now, that the Universal Banker will take hold in a meaningful way and that we will gradually transform our system over that planning horizon, and it will create significant efficiencies from a staffing perspective over time. But for now, we're just embarking on this.

We have a lot to learn about it. It clearly is the right path.

It's part of the way that we're reconfiguring our consumer banking model in the very difficult operating environment we find ourselves, while also being responsive to our clients and driving for relationship development.

Okay. And then just a quick question on credit quality.

Just given the sharp drop in charge-offs this quarter, is there an NCO level or range that you would consider to be normalized given just the current portfolio mix and the environment?

Well, certainly down -- 58 basis points we're down. I think we were as high as 1.07 in the third quarter last year.

But I think we look to stay around that level. And over the next couple of quarters, you'll see it -- we think you'll start to see it even drop further.

I think 30 to 40 is probably a more normal number for us.

Yes, barring the lumpiness that...

Yes, it is [ph].

I just want to clarify on the mortgage banking business. I assume it's primarily refinance business.

Could you kind of give me a purchase/refinance breakdown on that?

Not sure we have that here.

We'll get it for you, but I just want to say a significant amount of this business is purchase business. We doubled our loan origination sales force.

They're spending much more time working with realtors. They're moving upmarket to do jumbo purchase transaction.

So I think you'll find that a high proportion is purchase, and it's one of the things we like about the book, is that when rates starts to rise and refi's go away and they will, I think the mortgage bankers who are positioned for purchase lending are going to be in the best shape, and that's what we're aiming for.

Do you expect those spreads to maintain at about 2% going forward into third quarter then as well? Or are they coming down?

Yes, on the gain on sale?

Yes.

Going to the third quarter, yes, we do.

Okay. And then secondly, on the allowance for loss reserve.

Obviously, as you are improving loan quality and growing loans, where do you see your allowance eventually settling out as a percentage of loans?

As a percent of loans?

Yes. You mean you're at 1.7% now, right -- 1.72%?

Yes, what we've said is -- I mean, Glenn already answered your question saying probably we'd be in the 1.60% range by the end of the year. But in terms of what we're comfortable with, assuming the economy continues to improve, it's around 1.5%, and it could be in the 1.25% to 1.50% range over time...

As we look over the planning horizon.

Just to clarify something you mentioned earlier. You said multifamily yields, you're seeing low to mid-2s.

Is that correct, that's your fixed-rate conventional type of product?

No. I think that was not multifamilies.

It was...

I think it was RMBS, right?

No, no, no. The multifamily, 2.25 over the 5 year.

Oh, it's spread over the 5 year, got you.

Over the 5 year, yes.

Okay, yes, I wanted to clarify that. To help us understand just some of the volatility in the yield that you're getting on the originations and the commercial banking group, first -- fourth quarter, it's 4.25.

First quarter it was down 3.86. First -- second quarter backed up to 4.30.

What areas are you seeing much better yields that is causing some of the better performance in the fourth quarter and in the second quarter and the volatility just quarter-to-quarter? And your total origination yields in the commercial banking group?

I think just generally, and I'm looking -- if I look at, Matt, the coupon rate that we're getting on the total commercial book, we are up 20 basis points quarter-over-quarter. And it's depending on the degree -- I mean, I think that on the Commercial Real Estate, we've seen, say, a 10-basis-point increase in the coupon rate.

And then on the CNI side, is where we've seen most progress as far as coupon. I mean, we're up 30, 40 basis points just quarter-over-quarter.

So there's always going to be some noise when you look at the total portfolio with respect to FAS 91 and things like that. But I mean, if you use coupon rate as a total, in the first quarter we were in the 3.90s.

We're in the 4.10s right now, so for the second quarter, and that's weighted on all the new production that we did.

Okay. And how sustainable do you think those spreads are that you saw in the second quarter as you go into the back half of the year?

Well, I mean, Jerry and Jim highlighted our loan pricing discipline and I think that continues. And I think that continues even in the fact that we have over -- probably over like $1 billion coming in at least in the pipeline.

So we're not giving up covenants and we're not giving up pricing. The short answer is I think it sustains now.

And the multifamily that you are originating throughout the footprint, are you going into the Metro New York area at all? Or...

Matt, I had referenced that we had been -- I think you've got Philly. I think you've got the different regions.

I mean, I'm not going to quote off the top of my head the -- let me grab a sheet here that I have on the side. But I think you're looking at -- we did some in -- so let me see here.

You're seeing some in the Boston region, some in the Philadelphia region. So I would tell you that, again, it's all in and around our footprint.

So you spoke at hiring in the residential mortgage lending area and the Private Banking area. Have you had any additions for teams in the CRE group or in the CNI group at the regional hubs?

You mean adding teams or adding to our teams?

Both.

We have -- over the last 24 months or so we have added several people to the Middle Market. We've added a couple in the CR -- in the Commercial Real Estate group, including in Boston, which by the way is doing extremely well and well ahead of the plan, both in terms of volume and operating contribution.

So yes, we net have added business bankers. We've added Middle Market bankers, Commercial Real Estate producers, and that's consistent with what's been happening in the mortgage lending and the Private Bank, the idea being that revenue producing would make up a greater portion of the workforce overall as we would support them more efficiently.

But we haven't hired at the same rate in the Commercial Bank as we have in the mortgage bank or the Private Bank.

Are any of these larger producers that are driving a more material part of your new originations?

No. All of our producers -- in fact, I think it's been one of our successes that we've attracted very high quality lenders that come and stay, and they bring their books and they do a good job.

And so it's not any one person; it's all of them. And it's not just the new people; it's the people that have been Webster that make it such an attractive place to be in the first place that are also producing at a high level.

And I think, as I was mentioning before, to some degree we're riding a very good reputation in the market, which has got us deep into considered set, which has been very helpful for us. So the longer-term personnel, as well as the new, have generated increasing volume and that's what you're seeing in the numbers.

Okay. And what about just market disruption?

Are you seeing any changes from that dynamic and your ability to gain share?

Well, yes, there is market disruption. I think that people are looking differently at their financial services providers, including their banks.

And we feel, and some of the recent studies that have been done are bearing this out, that businesses in particular are valuing the quality of the relationship that they have. So if you can provide a full range of services and you're local and you're relationship-oriented, you've got a really good opportunity to attract, let's say, clients who may be disaffected with the relationships that they have today.

But I do want to say that we're not targeting any particular institution. We target the market and we pull from the market overall, but yes, there is some dislocation going on.

Thank you all for being with us today.