M&T Bank Corp (MTB) 2003 Q3 法說會逐字稿

Good morning, and welcome to the M&T Bank third-quarter 2003 earnings conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to introduce your host for today's call, Mr. Mike Piemonte, Senior Vice President of Corporate Finance. Sir, you may begin.

Good morning to everybody. I'd like to thank everyone for participating in M&T's third-quarter 2003 earnings conference call, both by telephone and via webcast. Hopefully everyone has had an opportunity to read our news release issued this morning. If you've not read the news release, you may access it along with the financial tables and schedules from our web site, www.M&TBank.com, and clicking on the investor relations link.

Also, before we start, I'd like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and M&T Bank Corporation. M&T encourages participants to refer to our SEC filings found on Forms 10-K and 10-Q for a complete discussion of forward-looking statements. At this time, I'd like to introduce Mike Pinto, M&T's CFO.

Thank you, Mike, and good morning, everyone. Before I respond to questions, I'd like to cover a few points from this morning's earnings release. I will begin with a summary of the third quarter, focusing on the changes from third quarter of 2002 and the second quarter of this year.

M&T's financial results for this year's second and third quarters reflect the impact of operations acquired on April 1st through the Allfirst Financial acquisition. Our third-quarter results provide evidence that the ongoing integration of all First systems and operations (indiscernible) M&T is proceeding smoothly. We are very pleased with the results of the conversion of all major First's major data processing systems into those of M&T over the July 4th weekend. Through the end of the third quarter this year, we also (indiscernible) the folio has remained stable. In fact, average quarter (indiscernible) balances for September of this year were actually up from Allfirst's March 2003 average balances. We continue to focus on introducing all of our new employees to M&T's culture and management style. We are on track toward achieving the estimated cot synergies, and keep confident -- and continue to be confident that the Allfirst acquisition will not be dilutive to 2003's net operating earnings per share. Before we get into the financials for the quarter, please note that the large part of the variances from last year are the result of the Allfirst transaction. As we get into the details of the quarter, we will try to quantify some of that impact.

As previously announced, we began expensing stock options in January of this year. As a result, net income in this year's third quarter was reduced by $9 million or 7 cents per share compared with $7 million or 7 cents per share in last year's third quarter and $7 million or 6 cents per share in the linked quarter. As we have discussed before, M&T is one of very few companies electing to use the retroactive restatement method, which not only recognizes expense related to option grants in the current year, but also for those options granted in the previous years. This method requires us to restate prior year to include the expense that would have been recognized in those years had the same method been used, so that the numbers are comparable. As a result, all references to 2002 in our earnings release and in this call reflect these restated numbers. Diluted earnings per share, which includes the expensing of stock options, the amortization of core deposits and other intangible assets and (indiscernible) costs, were $1.28 from this year's third quarter, up 10 percent from the $1.16 from 2002's third quarter, and 16 percent above the 1.10 on the linked quarter.

The amortization of core deposits and other intangible assets amounted to 11 cents to share in the second and third quarters of this year compared to 8 cents per share in last year's third quarter. (indiscernible) costs, net of applicable taxes, totaled $12 million in the most recent quarter or 10 cents per share compared with $22 million or 17 cents per share in the linked quarter.

These amounts represent the after (ph) tax costs for professional services, travel, and other expenses associated with the Allfirst acquisition and the related integration of data processing and other operating systems and functions. There were no (indiscernible) costs in last year's third quarter.

As mentioned in our earnings release this morning, although M&T will incur additional (indiscernible) expenses during the remainder of 2003, (technical difficulty) Allfirst operations are fully integrated into M&T, these charges are not expected to be material.

Third-quarter net operating earnings per share, which excludes the amortization of core deposits and other intangible assets, and excludes (indiscernible) costs, were $1.49, up 20 percent from $1.24 in 2002's third quarter, and up 8 percent from the $1.38 in the linked quarter. By the way, consistent with last quarter, I'm sure many of you have noticed that in this morning's press release, we have a tabular reconciliation of GAAP and non-GAAP results.

Net income from the quarter was $156 million, up 42 percent from a year ago, and up 17 percent from the 134 million earned in the linked quarter. Net operating income for the quarter was $183 million, up 55 percent from a year ago and up 8 percent from the $169 million earned in the linked quarter. The return on average assets was 1.24 percent in the recent quarter compared with 1.37 percent in 2002's third quarter, and 1.10 percent in the second quarter of this year.

Net operating return on average tangible assets was 1.55 percent in this quarter compared with 1.52 percent in 2002's third quarter and 1.48 percent in the second quarter of 2003. The return on average common equity was 11.37 percent for the quarter compared with 14.42 percent in the third quarter of last year, and 10 percent in the linked quarter.

Net operating return on average tangible common equity was 30.67 percent for the quarter, up from 25.46 percent in the third quarter of last year and up 29.89 (ph) percent in the linked quarter. The net interest margin in the third quarter was 4.22 percent, down 36 basis points from 2002's third quarter and down 10 basis points from the linked quarter. Much of the decline in net interest margin from the prior year was a direct consequence of the impact on the margin of the margin of the assets and liabilities obtained in the Allfirst acquisition. The decline in margin in from the sequential quarter was partially due to the impact of an extra day this quarter and partially due to margin compression as loans (indiscernible) priced at lower rates.

The end of the period loans totaled $37 billion (ph), up slightly from the second quarter of this year, and total loans averaged $37 billion during the third quarter of this year, up slightly from the linked quarter. Excluding the impact of the loans from the Allfirst market, average T&I (ph) remained relatively flat from the linked quarter; the period ending T&I loans were up 286 million or 5 percent from the end of last year. Average commercial mortgage loans were also flat to the linked quarter. Average consumer loans continued their strong growth, and were up 6 percent from this year's second quarter, again driven by solid growth in the auto loans and home equity portfolios. Average residential mortgages grew 13 percent from the sequential quarter.

Within the Allfirst franchise, average total loans declined during the third quarter by 6 percent. Average Allfirst commercial loans, which include T&I and commercial mortgages, declined 366 million, or 5 percent from the linked quarter. This decline was the result of our de-emphasizing certain specialized lending businesses, coupled with the sale of some nonperforming loans during the quarter, and a general slowdown in the commercial construction loan pipeline in the Washington D.C. and Baltimore markets. Average (indiscernible) for consumer loans declined 210 million, or 8 percent from the second quarter of this year. Much of this decline can be attributed to prepayment activity, and the (indiscernible) taking mortgage product. M&T now offers these borrowers opportunities to reclass these loans as first lien residential mortgages. Allfirst average residential mortgage balance during the third quarter was essentially flat to the linked quarter.

Our credit metrics showed marked improvement, as we have worked out some of loans acquired in the Allfirst merger during the third quarter of this year. The annualized charge-off rate for this year's third quarter was 17 basis points, down from 26 basis points from the linked quarter, and significantly lower than the 55 basis points in last year's third quarter.

Recoveries on two previously charged off commercial loans acquired from Allfirst (indiscernible) recoveries in the Allfirst loan portfolio for the third quarter. Excluding these recoveries, the net charge ratio was still a low 22 basis points of average loans for the quarter. On a dollar basis, net charges-offs for the quarter were $16 million, down from $36 million in the third quarter of 2002, and down from the 23 million in this year's second quarter. The quarterly provision for loan losses at $34 million exceeded net charge-offs, and was $3 million lower than last year's third quarter, and $2 million lower than the provision in the linked quarter. The allowance for credit losses was 1.67 percent of total loans at the end of the most recent quarter, up from 1.66 percent a year ago, and from the 1.63 percent at the end of the linked quarter. In dollar amounts, the allowance for credit losses totaled $621 million at the end of this quarter, and was $437 million at the end of last year's third quarter and 604 million at the end of the linked quarter.

The level of nonperforming loans decreased during the quarter to 285 million from the $319 million at the end of the previous quarter. This was primarily due to three large commercial loans totaling $26 million acquired from Allfirst (indiscernible) and paid in full was (indiscernible) during the quarter. The ratio of nonperforming loans declined to 77 basis points total loans this quarter, from 86 basis points in the linked quarter. Non-performing loans totaled $227 million or 86 basis points of total loans at the end of last year's third quarter.

Excluding the impact of Allfirst, non-performing loans totaled $204 million or 73 basis points of loans at the end of the recent quarter. Loans past due 90 days but still accruing were $174 million up from 148 million at the end of last year's third quarter, and up from 117 million at the end of this year's second quarter. This category includes $29 million in fresh loans acquired through the Allfirst transaction, and also includes government-guaranteed Ginnie Mae loans repurchased to reduce servicing expenses, which totaled 170million at the end of the third quarter.

Non-interest income, excluding securities transactions, was $232 million, slightly lower than the 233 million earned in the linked quarter, primarily due to a decline of 5 million in mortgage banking fees, fostered by an increase in service charges. The non-interest income was 80 percent higher than the 129 million earned in the third quarter of 2002.

Turning to expenses, operating expenses, which excludes the previously mentioned modulated charges and the amortization of intangible assets, but do include expenses attributable to stock-based compensation, was down $55 million, down 21 million from the linked quarter, and up 124 million from the third quarter of last year. Most of the increase from last year was related to the acquired Allfirst operation.

Also included in the THIRD quarter of this year was the reversal of $12 million of a valuation allowance associated with partial impairment of capitalized mortgage servicing rights. The partial reduction of the valuation allowance reflects the increase in value of CMSRs (ph) resulting from higher residential mortgage loan interest rates as compared to June 30th of this year. These higher rates (indiscernible) the expected rate of mortgage prepayments, used to calculate the estimated fair value of these mortgage servicing rights. Operating expenses in the second quarter of 2003 included impairment charges of $18 million related to capital mortgage servicing rights. That charge reflected the impact of declining interest rates during that quarter on the value of such servicing rights.

In 2002, the provisions for impairment of capitalized servicing rights in the three and nine-month period ending September 30 was 16 million and $19 million, respectively. Adjusted to exclude security gains and intangible amortization as well as the modulated costs, M&T's efficiency ratio in the third quarter was 53.2 percent compared with 56.2 percent in the previous quarter and 51.6 percent in the third quarter of last year.

Before we turn to questions, let me briefly hit some of the highlights related to the first three quarters of 2003, which include the results of two quarters of Allfirst operations. Most of these were covered in detail in the earnings release.

Diluted net operating earnings per share were $4.23, up 11 percent from 2002. Net operating income was $479 million, up 32 percent from 2002. Net operating return on average tangible equity was 28.55 percent in 2003 compared with 27.14 percent in '02. Allfirst-related modulated (ph) charges totaled $38 million after-tax in the first nine months of 2003. There were no modulated charges in the first nine months of 2002. As I mentioned earlier, although M&T will incur additional modulated expenses during the rest of the year, we do not anticipate such expenses to be material.

Diluted GAAP earnings per share was $3.59, up 2 percent from 2002. On a per share basis, the impact of Allfirst related (indiscernible) charges were 33 cents in 2003. Average loans were up 31 percent to 33 billion, and end of the period loans were up 41 percent to $37 billion. The net interest margin of 4.13 percent in 2003 was down 26 basis points from last year. Net charge off were $64 million or an annualized 26 basis points of average loans through nine months of 2003 compared with $77 million, or 40 basis points last year. Non-interest income was $597 million, up 60 percent from 2002, and operating expenses were $955 million, up 42 percent from 2002. Based on these operating numbers and excluding the effects of security gains, M&T's efficiency ratio for the first three quarters of 2003 was 53.5 percent compared with the 51.2 percent in 2002.

Finally, as we mentioned in our press release, we believe that M&T's full year results, excluding the impact of Allfirst modular-related (ph) charges, should be in line with the current consensus estimate of $5.30. We will now open up the call to questions, before which, Stephanie will briefly review the instructions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Our first question today is from Brian Harvey of Fox-Pitt Kelton. Please pose your question, sir.

Thank you. Good morning. I just had two questions. First is on the commercial loan growth side. Mike, if you could talk a little about what you're seeing in your markets in the old M&T as well as the Allfirst in terms of customers' activity as well as maybe the pipeline. And then the second question is regarding the cost-savings related to the Allfirst deal. Where are you with regard to the $60 million that you were targeting for this year?

Thank you, Bryan, and good morning to you. There are two questions. I will take the first one first. On the commercial loan side, as I said, in our existing markets, we were pretty much flat from third quarter to second quarter. If you recall, we had some growth in the second quarter. And what we've seen the third quarter, even though we have new volume, the line usage -- or the usage of the new lines granted actually went down by one percent; so that kind of offset the new volume that we put on in our existing market.

I would basically say that we're not seeing very robust commercial loan growth. We are seeing spotty loan growth. So I agree; every month or so, the line usage pops up, and then the next month, it pops down again. And that's a big number. Our line usage is down to about 41 percent or so. Where at the peak, it used to be in the mid '50s. In the Allfirst market, other than the loans that we -- in the fourth quarter, that we are deemphasizing -- we think that the commercial volume is fairly stable, again, in those markets. On the commercial real estate side, we have seen some slowdown, as I mentioned, on the construction loan pipeline.

In terms of cost savings, I think we're well on track to achieving the cost savings. We -- you know, the 60 million -- the cut-off is December 31st. So I think we would be around there; but that's not as important to me as the fact that I think in the December, we'll be at a run rate of savings that will be equivalent to the annualized savings that we talked about. Because December 31st, you know, you could miss by a couple of weeks one way or the other; there's no magic in meeting a certain date.

Okay. So, you think you are on target in terms of the cost-savings, not ahead of expectations?

No, it's hard to tell whether we are ahead right now, especially when you put a calendar date on it. But on a run rate basis, we feel very confident that we will get to the run rate savings, and maybe some more.

Okay. Thank you.

Your next question is coming from Fitzgibbon from Sandler O'Neill.

Hi, Mike. How are you?

Very good, Mark.

From your comments earlier about the net interest margin, it sounds as though we will see a bit of a rebound in the fourth quarter. I wondered if you could maybe just clarify that for us. And also give us a sense for how long you think it will take to bring the Allfirst margin up to this sort of historical M&T level. And then I have one follow-up.

You have too many questions, there, Mark. I will try to take them one by one. The net interest margin rebound? I wouldn't expect a rebound. I think what I said was there was a (indiscernible) effect -- partial (indiscernible) effect; and there's also a compression issue at the same time. So we are seeing some compression because in the quarter, we weren't able to lower our deposit rate. So we (indiscernible) close on our deposit rate. And to the extent that the portfolio keeps -- the loan portfolio keeps repricing (ph), I think you'll see a few basis points of compression in each quarter until the Fed. starts raising rates again. So I wouldn't say a rebound. I think we will get back what we gave up for the day (ph); actually, we won't, because the fourth quarter has the same number of days as the third quarter. So I would expect it to be more or less flat. In terms of the Allfirst franchise, I think that's going to take some time to work itself through because their margin is considerably lower than ours, and has been due to the loan portfolio that they have on their books. They tend to have a different profile than us, much less consumer lending than we have. So I expect that to increase very gradually. It takes usually one to two years for us to work that out based on our (indiscernible) state (ph) acquisition.

And then the second question I had for, with you guys doing such a great job integrating Allfirst, do you feel as though you are ready, willing and able to do additional deals at this point?

I think our focus really should be on keeping on with the integration of Allfirst. I don't think we're going to go looking for another deal, because I think the best bet for our shareholders is to focus on making sure that the Allfirst franchise is well integrated culturally. We've just finished the systems conversion, and that's just the start of cultural integration, of getting our businesses aligned, and also cross-fertilizing -- we have to work off certain portfolios that we don't like. We also have to capitalize on the fact that Allfirst had certain businesses which they did very well. And we can take those businesses into our footprint; and the investment management and cash management businesses that they ran are businesses that we could cross-fertilize our franchise with. Similarly, in our franchise, we did the mortgage banking business and the indirect lending business quite well, as well as the brokerage business -- the retail brokerage business in our branches. And we can expose that to the Allfirst franchise. I think we get more bang for the buck than any acquisition we could do in the next year from just focusing on those things. So I guess that is a long-winded saying way of saying, I think the systems conversion (indiscernible) qualify as okay now; (indiscernible) let's go looking for another one. I think we've got a long way to go to get the juice out of the acquisition.

Thanks, Mike.

(OPERATOR INSTRUCTIONS). Our next question today is coming from Bob Hughes of KBW Asset Management.

Actually, that's Keefe, Bruyette & Woods. Couple of quick questions. In the loan portfolio, could you comment on little bit on what kind of changes we might expect to see going forward? What additional impact there might be from your planned de-emphasis in certain categories from the Allfirst franchise. And then, to what extent we might see continued growth in the residential real estate portfolio?

Thanks, Bob. I think two questions. One is on the Allfirst portfolio. (indiscernible) extent that there are some businesses there that we are not in. Two that I can fine-tune is the shared national credit portfolio in general, the communications portfolio, the maritime portfolio within those shared national credit. Those are businesses that we don't wish to emphasize. We think you're going to see reduction in those businesses. The way we approach them is we almost take those businesses and divide them into three categories. One is -- the first category is where we have no other relationship with the customer, but they're happy with the credit. And then I think you will see a decline over time. The second category is where we have based off specialized loans, but with customers with whom we have deep relationships. So we probably keep those loans and try to grow that portfolio with an emphasis more on the relationship than specialized product. Then the last category are loans that we don't like from both a credit perspective and a relationship perspective. And those, if we get offers to sell out of them, we might take those offers very quickly. So I guess fair to say that the C&I portfolio in Allfirst, you're not going to see much of an increase; in fact, you might see a decline in that over the next year. On the consumer real estate side, as we (indiscernible), well, one of the portfolios that Allfirst had, we want to know, in the first mortgage business, as we are. And so one of the portfolios they had was a second mortgage loan portfolio, which we difficult substitute in their branch network for the first mortgage portfolio. What you'll see is as that portfolio goes down, we have more room in our first mortgage portfolio to increase that. So I guess we're sort of balancing the runoff in that Allfirst second mortgage portfolio by increasing our residential mortgage portfolio.

Great. And if I could follow that up with one question. It sounds to me like you're very comfortable with achieving the run rate of your cost savings. But if take a look at your expenses quarter-to-quarter, and I exclude the margin related charges and the impact from the impairment last quarter, and the recapture of your evaluation allowance this quarter, it looks to me like expenses are relatively flat, potentially even up slightly. So should we assume that nearing quarter-end, you were really starting to see a reduction in headcount, but a lot of those cost savings are not showing through this quarter? Or is my math wrong?

No, I think you've done a great job with your math there, Bob. (indiscernible) with the release this morning. Here's basically what happened. We have two or three (indiscernible) of expenses from the Allfirst franchise. The first one happened on April first. So you saw those cost savings come on April first. The second one -- the second tranche of savings was linked to the conversion date. And actually, the cost savings don't start for two months after, because we give people two months notice and pay them for two months after the conversion date. So, I guess what I'm saying is, we didn't see much in terms of those type of savings in the third quarter. And you should expect to see something in the third quarter from those savings. I think in December, as I said, we will get a run rate which should be as what we expected. So that was -- and so that was the reason you didn't see any decline in expenses. And then we had an increase in expenses that was merely -- that was basically linked to variable compensation patterns, that includes things like commissions, stock-based compensation and other incentive programs.

Great. Thanks, Mike. If I could ask you one more; I'm not sure you'd be willing to answer this. But any comments on the consensus outlook for 2004? Or would you intend to comment on that in your next quarterly release?

We're not yet sure whether we want to or not. So I pass on this part. But we're trying to work out what we do about 2004. In 2003, we had a lot of complicated things going on with the stock option expensing. So we decided that to clear up the old stock options expensing issue, we needed to give some guidance. We're not so sure that we want to or need to do that for 2004. So we're going to make that decision over the next couple months, Bob.

All right. Thanks a lot, guys.

Your next question is coming from Michael Granger of KBW Asset Management.

Hi, good morning, Mike. Could you just detail some of the numbers related to the mortgage banking business? Specifically -- in addition, you've given us numbers on the impairment reversal this quarter, and we have that number for last quarter. But could you give us the entire -- the entire amount of the expense item that's associated with MSR amortization? And is that in the non-interest expense line? That's question number one. Question number two really is, can you kind of break down that mortgage line on the non-interest income side, you know, by component? I think you kind of do that in the 10-Q. I don't know if you can do that now?

I would be more comfortable waiting for the -- till the Q comes out for all that detail, Mike. We do put it -- as you noticed -- we have segment reporting in our Q, where we report all of that. And our practice really is to focus on material changes each year. But I can answer that the amortization is in the expense line. And I know I mentioned that our fee income was down by $5 million from quarter to quarter, as a reversal of $12 million. So, another way to think of it is that the mortgage banking -- the (indiscernible) of the fee income decline and the reversal of the impairment was a $7 million positive number -- is one way of thinking about it. The amortization and other expenses are fairly steady from quarter to quarter.

Okay. Can you kind of give us some sense of how that -- those line items -- might change going forward, given different interest rates scenarios?

Okay. That's pretty easy. If rates go up, the mortgage income is going to decline significantly. We have already seen a significant drop-off in application volumes. Our application volumes were down 35 percent -- 35 to 40 percent in the third-quarter from the second quarter. So -- so, if rates stay where they are or increase, you're going to see a significant decline in the mortgage income line.

How about on the impairment reserve, though? That was a fairly significant swing from quarter-to-quarter?

And again --

About a $30 million pretax swing.

And again, due to the (indiscernible) of FASB, you'll see those swings every quarter, because I mean, the way they prescribe you to calculate that impairment reserve is almost like a bond calculation; it's on the last day of the month. If the payment of bonds -- or actually, we use the mortgage rate -- increases or decreases by 25 basis points, it will cause a large swing in the impairment. So you will see swings like that. But again, as I've mentioned before, we are looking for those things as a natural hedge for each other. So if you see the mortgage and fee income decline, you should see the impairment reserve go down. Or in other words, you should see a contra-expense (ph) from the impairment reserve. Though maybe not precisely in the same quarter. There could be a timing difference. And I don't want to spend all the time on the mortgage banking. But just to explain this -- suppose rats are low throughout the third quarter, and the origination business was still strong. But then over the last week of the quarter, rates went dramatically up. You could see where in that quarter, the hedge doesn't work, because you've got great mortgage fee income, and you've also got reversal of impairment -- because the impairment is calculated on that date.

Isn't it, Mike, also a function of -- you know, whether have a reserve or whether or not you've actually written down the asset, though?

Yeah, but one could argue that you should not write down the asset because if rates have fluctuated -- and just for the very reasons -- like the bond portfolio -- that we have the valuation of that portfolio fluctuates from day-to-day. So you could hardly call it permanent if it fluctuates every day or every quarter.

Okay. Thanks a lot.

Thanks, Mike.

Your next question is coming from Neil Stevens of Baliasini (ph) Asset Management. Please pose your question, sir.

Hi. It's Tom Anon (ph), and it was asked and answered. Thank you.

Thanks, Tom.

The next question is coming from Eric Fell of Kazaa (ph) Capital. Please pose your question, sir.

I just wanted to know what the capitalization rate was on the MSR asset (ph).

Actually, we disclosed the numbers in our earnings release. It works out -- if you calculate the numbers -- it works out to 188 basis points.

Eighty-eight basis points?

Yes.

Thank you.

The next question is coming from Adam Compton of Dresdner RCM.

Hi, Mike and Mike. On merger-related charges, I think your release said you don't expect anything significant in the fourth quarter?

Yes.

The total, I think, that you guys were expecting when you announced the deal was, I think, significantly larger than what you've recognized so far? Is there a lot left to go? Or, help me update on what we should expect to see on merger charges going forward.

Well, and like I said, it's not going to material; so I think we are pretty much done. We are coming in under what we said, what we expected when we did the merger. So the one thing that -- I'm glad you asked this question because there's one thing I'd like to just clarify. When we did the merger, we said we expected $192 million in onetime expenses. We look at that as cash out. Some of those expenses of that 192 did -- (indiscernible) in goodwill -- and is a calculation of goodwill, and (indiscernible). The way we analyze it, we look at it as cash out, so when we do a cash flow, we look at the cash going out. So just to clarify that, part of those -- the only part that we expected to hit the income statement at announcement was about $100 million of that, pretax. And what we have done year-to-date is about $58 million. So -- and like I said, we don't expect anything material in the fourth quarter, so we will be significantly below those numbers.

Okay, that's helpful. One other question was it looks like average non-interest-bearing deposits was up pretty good, sequentially? Is there something in particular driving that? Or could you just help me out a little bit on that line?

Well, I think the thing you should look at is the net of that line with the other assets line. We've actually acquired a lot of companies that do a lot of processing transactions. And (indiscernible) balances of those companies fluctuate a lot from month-to-month. But they're also typically (indiscernible). Just to give you an example of that, if it's a -- for example, a mortgage lending company that collects payments from its customers, that money comes in and is reflected in DDA, but at the same time when we send those checks out for collection, the contract (ph) of that is enclosed. So, not wanting to get too technical, if you look at both DDA (ph) and other assets and look at the change in those two categories from quarter-to-quarter, you'll get a better idea of how much the core group (ph) is.

Okay. And as far as mortgage-related deposits, can you give us an idea what the size of that is?

Mortgage escrows?

Yeah.

I think -- I don't know the exact (indiscernible) of that, Adam. You can -- we will call you back and give it to you.

Okay. Thanks for the help.

Thanks, Adam.

(OPERATOR INSTRUCTIONS). Our next question today is coming from Mr. John Otis of Deutsche Banc. Please pose your question, sir.

Good morning, all.

Hi, John.

With regard to those certain loans that you don't like, or the relationship ones that you're going to sort of exit over time, can you quantify the size of those, and are you thinking about putting them into a held-for-sale category?

No. I mean, we're not putting them into held for sale, because like I said, the strategy is threefold. We won't sell them unless we get a bid that we like. For us, each loan is (indiscernible) on a loan-by-loan basis or a portfolio-by-portfolio basis. We don't see any need to specifically (ph) sell anything at a huge discount. So that's why we don't consider them for held-for-sale, because we're not bound to sell them. The second question is, we don't disclose that level of information. I feel uncomfortable giving you that information.

Okay. Are these mostly currently performing loans?

Well, Mike, like I said, we sold most of them off of (indiscernible) portfolios where we don't -- they don't fit strategically into the business that we do. But some of them are also non-performing. And like I mentioned, we sold some of the nonperforming during the quarter.

Okay. And just on those, the ninety-day past due loans that are still accruing?

Yes.

Is that a desirable business for you? I mean, you seem very comfortable running with those -- I guess the lost content of (indiscernible). Does that meet your internal hurdle (ph) rates?

Yes. It's actually quite simple. When you're a servicer, if a loan goes non-performing -- these are Ginnie Mae-backed loans, so there's no credit issue; they're fully guaranteed by Ginnie Mae. But if they go delinquent because of the servicing agreements, we have to advance the coupon rate -- we the servicer -- have to advance the coupon rate to the person holding the security. So we advance that coupon rate, but they're not getting any interest -- because the borrower is delinquent. If we buy back the security from the pool, then our cost is only the cost of carry, which today is one percent, and not the coupon rate. So as you can imagine, there's a huge strength between the cost to us of carrying those loans -- if we buy them back, it's one percent; and if we don't buy them back, we have to advance the coupon, which could be as high as 5 or 6 percent. So it's a pure cost-savings exercise where we buy them back.

Okay. So it meets your internal hurdle rates?

Oh, yes, because there is no credit risk. They're fully guaranteed.

All right. Now just, with regard to repurchases, how high would your capital levels have to get before you'd start repurchasing shares again? Is there any one metric that you're targeting?

Well, we target the (indiscernible) -- we internally target the tangible equity ratio. And, you know, we look at that -- if you look at our ratio before we did the transaction -- the Allfirst transaction -- before we announced the Allfirst transaction -- that's pretty much where we like to be. When we did the Allfirst transaction, we brought -- net ratio came down -- pretty significantly. And I guess I would say that I would be more comfortable within the 5.5 percent range.

All right. That's all. Thank you, very much.

Thank you.

The final question today is coming from Ed Nejarian (ph) of Merrill Lynch. Please pose your question, sir.

Yeah, Mike, hi. My question has been answered. Thank you.

Gentlemen, do you have any closing comments today?

No. Again, we'd like to thank everyone for participating in our third-quarter conference call. In clarification of any of the terms in the news release, if necessary, please call the investor relations department -- Area code 716-842-5138. Thanks, again.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time, and have a great day. Thank you.