M&T Bank Corp (MTB) 2005 Q2 法說會逐字稿

Good morning, Ladies and gentlemen and welcome to the M&T Bank second quarter 2005 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to introduce Don MacLeod, Director of Investor Relations. Sir, the floor is yours.

Thank you, Jackie, and good morning, everyone. This is Don MacLeod and I'd like to thank you all for participating M&T's second quarter 2005 earnings conference call both by telephone and through the webcast.

If you've not read our earnings release you may access it along with the financial tables and schedules from our Web site at www.mandtbank.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 to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings found on Forms 10-K, 8-K and 10-Q for a complete discussion of forward-looking statements.

Now I'd like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning, everyone. Since this is my first conference call as Chief Financial Officer, I'll ask to you bear with me.

Mike Pinto did a terrific job on these calls, as he did on every other aspect of his role as CFO, and I'd like to thank him for the advice and guidance that he's provided the Company and to me personally over the time that we've worked together. Over the coming months I'm looking forward to working with many of you as well.

Before I respond to questions, I'd like to highlight a few points from this morning's earnings release. I'll begin with a summary of the second quarter, focusing on changes from this year's first quarter and the second quarter of 2004.

Diluted earnings per share which reflect the amortization of core deposit and other intangible assets were $1.69 in the second quarter of 2005, up 10% from the $1.53 earned in the second quarter of 2004, and up 4% from the $1.62 reported in the linked quarter. Amortization of core deposit and other intangible assets amounted to $0.07per share in the second quarter of 2005, compared with $0.10 per share in the second quarter of 2004, and $0.08 per share in this year's first quarter.

Second quarter diluted net operated earnings per share, which excludes the amortization of core deposit and other intangible assets, were $1.76, up 8% from the $1.63 in the second quarter of 2004, and 4% above the $1.70 in the linked quarter.

This morning's press release contains a tabular reconciliation of net operating results which are non-GAAP, the GAAP results including tangible assets and tangible equity.

Net income for the second quarter of 2005 was $197 million, up 7% from a year earlier, and 4% higher than the $189 million in the sequential quarter. Net operating income for the quarter was $205 million, up 5% from the second quarter of 2004, and was 3% higher than the $199 million earned in the linked quarter.

Return on average assets was 1.46% in the recent quarter, compared with 1.45% in the second quarter of 2004, and 1.44% in the first quarter of 2005. Net operating return on average tangible asset was 1.62% in the quarter, compared with 1.64% in the second quarter 2004, and 1.6% in the first quarter of 2005.

Return on average common equity was 13.73% for the quarter, compared with 13.12% in the second quarter of 2004, and 13.41% in the linked quarter. Net operating return on average tangible common equity was 29.88% for the quarter, compared with 30.12% in the second quarter of 2004, and 29.67% in the linked quarter.

Net interest margin in the second quarter was 3.78%, down 5 basis points from the linked quarter, and down 14 basis points from the second quarter of 2004. The year-over-year decline reflects the impact of rising short-term rates and the flatter yield curve.

Average loans for the second quarter were 39.2 billion, compared with 38.6 billion in the linked quarter, up an annualized 7%. End of period loans totaled 39.9 billion, up 838 million from the end of the first quarter of 2005.

Growth in our commercial loan and commercial real estate loan categories remained strong, with both categories up 11% on average from last year's second quarter. On a linked quarter basis, average commercial loans grew an annualized 15%, and average commercial real estate loans grew by 6% annualized.

The commercial loan pipeline was 1.4 billion at the end of June, up from approximately 1.3 billion at the end of March 2005. In addition, commercial lines usage improved to 45.3% in the second quarter, up from 44.6% at the end of March.

The results of our consumer loan portfolio reflect the continuation of the trends experienced since the fall of last year. Growth in home equity lines of credit was more than offset by continuing declines in auto loans and leases which decreased $240 million in total from the end of March.

On the whole, we continue to view auto loan pricing as economically unattractive and we'll maintain pricing discipline, likely resulting in a continuation of the current trend.

Credit quality continued to be strong during the second quarter. Non-performing loans totaled $184 million at the end of the recent quarter, up slightly from the $180 million at the end of the first quarter, but down $6 million from June 2004.

The non-performing loan ratio was 46 basis points at the end of June, unchanged from the end of the first quarter. That ratio was 51 basis points at the end of June 2004.

Net charge-offs for the quarter were $14 million, representing an annualized rate of 14 basis points of average loans. The charge-off rate is the lowest we've seen since 2000. This compares with net charge-offs of 19 million, or 20 basis points, in this year's first quarter, and $21 million, or 23 basis points, in the second quarter of 2004.

The provision for credit losses for the second quarter of 2005 of $19 million more than covered net charge-offs for the quarter and resulted in an allowance for credit losses of $637 million, or 1.60% of total loans at the end of June. This compares with allowance levels of 1.62% at the end of March 2005, and 1.66% at June 30, 2004.

Loans past due 90 days but still accruing were $123 million at the end of the recent quarter, down from $125 million at the end of the first quarter 2005, and $135 million at the end of June, 2004. At June 30, 2005, this category included $99 million in loans that are guaranteed by government-related entities.

Turning to non-interest income. Service charges were $93 million in the second quarter, up $2 million from the second quarter of 2004, and up $5 million from the first quarter of 2005. This linked quarter increase was entirely due to a return to normal levels of activity on the consumer side following seasonal slowness in the first quarter.

Mortgage banking revenues were $31 million, up $1 million from last year's second quarter but down $2 million from the linked quarter. The mortgage business assumed from Regions Financial in May did not have a significant impact on the quarter's net income.

The trust and brokerage lines taken together were sluggish, reflecting performance of the equity market and caution by customers regarding non-deposit investment products.

Other revenues were $68 million, up from $59 million in the second quarter of last year, and $60 million in the first quarter of this year. The majority of the increase in this category over the linked quarter is attributable to gains on the sale of commercial lease equipment and higher loan and letter of credit fees.

These items are considered part of our core business yet tend to fluctuate from quarter-to-quarter.

Operating expenses, which exclude amortization of intangible assets, were $366 million, up $28 million from the second quarter of 2004, and $15 million higher than the first quarter of 2005. The second quarter results include a $5 million addition to the valuation allowance for capitalized residential mortgage servicing rights, compared to a recovery from that allowance of $22 million in last year's second quarter, and a $4 million recovery in the first quarter of 2005.

Excluding the impact of MSR re-evaluation, operating expenses were up less than $2 million on a year-over-year basis, and up $6 million from the linked quarter.

Adjusted to exclude security gains and intangible amortization M&T's efficiency ratio for the second quarter was 52.6%, compared with 50.4% in the second quarter of 2004, and 51.6% in the first quarter of 2005. Excluding MSR revaluations, the efficiency ratio for the second quarter improved on both a linked quarter and a year-over-year basis.

During the quarter M&T repurchased 624,000 shares of common stock at an average cost of $102.21 per share. There are just under 2.4 million shares remaining on the repurchase authorization announced in December 2004.

Before we turn to questions, I'll also note some of the highlights related to the first half of 2005, most of these were covered in detail in the earnings release.

Diluted net operating earnings per share were $3.46, up 14% from 2004. Net operating income was 405 million, up 10%. Net operating return on average tangible assets was 1.61%, compared with 1.56% a year ago.

Diluted GAAP earnings per share, which include amortization of core deposit and other intangible assets, was $3.31 for the first half of 2005, up 17%. GAAP basis net income was 386 million, up 12%.

Average loans were up 7% to 38.9 billion. Net interest margin of 3.81% was down 11 basis points from last year.

Net charge-offs for the first half were 33 million, or annualized 17 basis points of average loan, compared with 39 million, or 22 basis points for the same period last year. Non-interest income was 480 million, up 4% from 2004.

Operating expenses, which exclude intangible amortization, was $718 million, up 2%. M&T's efficiency ratio for the first half of 2005 was 52.1%, improved from the 53.6% in the first half of 2004.

Finally, as we mentioned in our press release, our day to day results for the first six months of 2005 have generally been on track with our previous guidance. Our outlook is little changed but, of course, it remains subject to a number of future factors including changes in interest rate, credit performance, spreads on assets and liability, asset valuation, and local and national economic conditions.

The following are some of the assumptions that are implicit in our current outlook.

We are expecting to see continued pressure on the margin until the yield curve begins to steepen. Recall in that January, we gave you a margin range for 2005 of 3.65% to 3.85%.

Given the 3.81% margin we reported for the first half of this year, getting to the midpoint of that range indicates continued margin compression in the second half.

We are looking for loan growth that's not terribly different from what we saw in the first half. In addition, we'll continue to watch expenses very closely as we expect to continue to realize some of the benefits related to the five initiatives that were discussed in our annual report.

We'll now open up the call to questions before which Jackie will briefly review the instructions.

Thank you. The floor is now open for questions. [Operator instructions] Your first question is coming from Jason Goldberg of Lehman Brothers.

Thank you. Good morning. I guess just a follow-up question to your last comment with respect to guidance. I guess you weren't saying you'd be at the, you would expect to be at the midpoint of your range based on kind of your current expectations for the yield curve?

Good morning, Jason. I think what we're looking for is, if you think about our margin of 381 in the first half, essentially that margin has performed pretty much spot-on with what our expectations were back in January. Obviously the yield curve is flattened, you know, much more than anybody could have expected, but I think on the flip side, if you look at deposit rates, I think deposit pricing has been relatively rational over that period. So you've got a couple of offsetting forces.

I think with the recent steepening that we've seen in the last couple of months, it's fair to say that we would expect to see similar to maybe slightly more margin compression in the third quarter from what we saw from first to second, first to second we saw 5 basis points of compression. So clearly there's going to be downward pressure on the margin. Will we be in a spot in the middle of the range? I'm not sure, but we'll be somewhere within that range for the full year.

Okay. And then secondly, can you quantify, I guess, the gains that showed up in other income due to the sales?

Sure. For the quarter, we saw 4.7 million of gains on commercial lease equipment, and essentially that's primarily a business that we acquired from Alford. And unlike our discontinued portfolios, it's one that we continue to manage.

Essentially what we do there, Jason, is that as the leases get closer to their maturity, we take a look at one of three choices. We can terminate the lease and sell the remaining equipment for the residual value, we can sell off the entire lease to a third party, or we can actually, if circumstances warrant this, we could actually renew the lease with the customer.

So we're constant looking at the economic decisions on that business as we get closer to the maturity, as those leases start to mature. So $4.7 million was the gain.

Okay. And so the remaining increase in other fees was kind of core stuff?

Yeah. The -- what else did we have? Just give me one second.

Yeah, I think the only other thing that's probably worth mentioning in other fees is that we've seen very strong growth in our letter of credit and loan fees. Linked quarter letter of credit and loan fees were up $3 million, or 17%, and in fact, if you look at that over the, you know, over the second quarter of 2004 it's up something like 13%. So that's also a bright spot.

Both of those items, you really can't predict them in any given quarter, but that's one trend that seems to be turning out to be pretty strong.

Okay. And the lastly, your release highlighted kind of runoff of other second mortgage loans. Is that process essentially complete or is there kind of more runoff to go?

Okay? Just in terms of the decline that we've seen in consumer loans?

Uh-huh.

Essentially, as we said, most of the runoff in the consumer book has been on the auto side. And, you know, we're looking at spreads, we're looking at margins there that just are economically unattractive. If you think about that business, you really need to book things, business at somewhere around LIBOR plus 200 to make that business work.

Probably 18 months ago, we were looking at margins that were above 300, and this is pretty typical as rates begin to come up, that business starts to become unattractive, and what the trick is, is to sort of stay in it and maintain your relationships with your distribution channel and customers through the tough times.

The other thing that you're seeing though that's offsetting it is the growth in HELOC. That was up probably 14% from the end of March to the end of June.

Okay. Very helpful. Welcome to the new role.

Thank you.

Thank you. Your next question is from Ed Najarian of Merrill Lynch.

Good morning. Two questions. Could you just make some comments on the sustainability of this very low charge-off ratio that we're seeing, maybe some outlook on credit loss experience in the second half?

And then secondarily, could you make some comments on the strength that you're seeing right now in the mortgage origination pipeline and what we may expect for the second half there? Thanks.

Sure, Ed. With respect to charge-offs, as I mentioned, the charge-offs are really at historical lows, 14 basis points. I think if you go back five years ago, the last time we saw 14 basis points of charge-offs were in the third quarter of 2000. In the first quarter I think we saw, second quarter we saw something like 10 basis points.

I would suggest that, you know, we had been running before that in the 20 to 25 basis point range, and I think, you know, we tend to be a little bit conservative in our outlook going forward would be that we wouldn't be able to sustain this low levels of charge-offs. But I guess we'll have to wait and see. It's sort of anybody's guess. Credit quality has been very strong.

With respect to the mortgage what specifically were you looking at in terms of --

Well, just really some insight on mortgage origination volume and sort of the strength that you've been seeing in recent months and gain on sale spreads. Just kind of get some indication if mortgage origination revenue might be especially strong in the third quarter.

Yes. I think the way I think about it is that the decline in the long rates that we saw happened in the second half of May and in June. So we saw volume pick up. We saw volume pick up significantly at the end of the quarter.

If you just look at a couple of the metrics, if you take a look at closed loans, our closed loans were up from about 300 million from about a billion at the end of the first quarter. Okay?

However, our sold loans, the loans that we sold, which I don't have that number off the top of my head, the sold loans didn't change that much. So essentially what you're getting is that there's a lot of stuff in the pipeline that hasn't yet been delivered.

Last quarter we talked a little bit about the pipeline for application, and we said that the apps in the first quarter were about $2 billion. In the second quarter, that's actually up to $3.3 billion. So significant increase.

But of that, what you're getting is about 850 million from the Regions Financial activity that was acquired. So if you sort of strip that out, you saw about a half a billion dollar increase, pretty significant increase in the mortgage application volume, and I would expect that that's going to start to have some impact on the third quarter, at least get us off to a good start.

The other thing I would comment on, and it's sort of more of a caution, is that when you're bringing on a lot of wholesale volume, that stuff comes at much, much thinner spreads. So you can't sort of take a linear look at the numbers that I just gave you, that we're going to have a really big boost to the third quarter, because the wholesale business has very, very thin spreads.

Okay. Great. That's helpful.

Thank you. Your next question is from Jennifer Thompson of Oppenheimer.

Hi. Good morning. I had a couple of questions. First, on taking a look at the growth in the deposits clearly looks like it was skewed toward time deposits. It accounted for, it's looking like more than all the growth linked quarter. Can you just give us some color? Was there any additional marketing efforts there? And what are the trends that you're seeing in the transaction deposit side of the business?

I think, actually, if we look at those numbers, even excluding time, we were up. I think if you take the time category out, the annualized linked quarter growth was 2%.

But essentially, you're right, I mean we've seen significant growth in the time deposit category, and we've focused on that a bit as an alternative to wholesale funding because as rates have gotten a little bit more attractive on the short end.

I think when you look at transaction accounts, if I look at non-interest bearing as an example, what you see is, you see that we had annualized linked quarter growth of 1%, and year-over-year those are up at about 3%. Okay?

There's two different things going on here. Remember, you've got, for a long time we have had significant balance growth on the commercial side, and what we were saying two years ago and a year ago is that as we began to see loan growth come back, we probably wouldn't begin to see loan growth come back until we saw some of those deposits come down.

Embedded in our numbers are actually slight declines on the commercial side. And so I think over the past two quarters we've started to begin to see the beginnings of that lower balances on the commercial side. It's nothing dramatic, but I think it sort of corresponds with the good loan growth that we've been seeing in that sector.

So what that means is that there's really no signs on the consumer side of anything abating, but, you know, I would guess that the second factor that you're going to see is that as all this money starts to pour into time, chasing some of the higher rates, you would figure that some portion of that's going to be coming from people's excess cash that they've had in their checking accounts, but we've not really seen it yet.

Okay. So is that part of your thesis on the margin becoming, or how much of that is your thesis on the margin coming under more pressure? Is it really a function of the yield curve?

I think it's really a function of the yield curve. I mean if you, and with the deposit side actually mitigating some of the impact of the flatter yield curve, you've got today, you know, again, we use the forward curves when we look at our rate scenarios, and today I think fed funds to treasury is at about 85 basis points.

Beginning of the year last quarter we said that at the end of the year we'd get to that point, about 80 basis points. The forward curve today are saying that in December we're going to have a spread, fed funds to treasury, a ten-year treasury spread of 17 basis points. So that's going to have an impact on banks, and it has an impact on us as well.

Can you just give us some color on the net interest margin, the trend over the months of the quarter? Did it get worse over time? More pressure?

We didn't, I'm sort of cautious about that. We didn't notice anything significant in any one month. You've got a lot of things going on there. You've got obviously, you know, some months you'll get prepayment penalties and so, but we didn't see anything different in the trends.

Okay. Thanks very much.

Thanks, Jen.

Thank you. Your next question is from Brian Harvey of Fox-Pitt Kelton.

Thank you. Good morning. Just had a few questions. First, on the commercial loan growth, can you talk about spreads in the market and structure? Are you starting to see any weakening on that front, and tighter spreads in terms of what you're seeing?

And then secondarily, can you just talk about the buy back activity? It seemed to slow a little bit this quarter, and your tangible capital was up. Just wanted to see what your appetite is for buy back and the capital ratios.

Good morning, Brian. Yeah, in the first quarter we talked a little bit about this, I believe. We talked about the fact that we had seen some pricing pressure both on C&I and commercial real estate. On the real estate side we thought we had seen a bit of irrational pricing primarily in the large metropolitan areas, New York being included.

We really haven't heard much noise that's different from that in this quarter, so I would characterize it as no change. I think it's still a pretty competitive environment on that front, especially on the real estate side. In terms of -- so in terms of pricing, no change, somewhat competitive.

In terms of the buyback, as you know, we bought back 1.9 million shares in the first quarter, so pretty strong amount of buy back. And if you look at the end of the quarter, of the first quarter, our tangible ratio had gotten down to the 5.2 range or so. And as you know that's sort of the low end of the range that we look at.

So we slowed the buy back down a bit and brought the tangible capital ratio back up. I think it ended at 5.5 range so somewhere around there.

So our, you know, nothing has really changed. We're very consistent, we're targeting 5.4 for our tangible ratio, and we'll fluctuate between 5.2 and 5.6.

If you actually look at the two quarters together, Brian, we purchased 2.5 million shares, which is half of our authorization that we did back in December. So I wouldn't expect any change in the second half of the year, barring change in economic conditions or something like that.

Okay. Just one other question on the funding side. Any outlook in terms of possible securitizations for the back half of the year?

Nothing on the radar screen that we've been discussing.

Okay. Thank you.

Thank you. Your next question is from Adam Barkstrom of Legg Mason.

Hey, guys. Good morning. Can you hear me all right?

Hi, Adam.

Hi. Hey, I wanted to follow up on Ed's question, I didn't quite catch the answer to that. But gain on sale margins, what kind of trend have you seen there for 2Q?

I'm sorry. Could you be more specific, Adam?

Yeah, your gain on sale for mortgage loans, gain on sale margins. Have they gone up, gone down, remained the same?

I think the margins, I mean I would guess they've been roughly the same, just slightly down, and I think the real issue there is the mix of business. And so you know we've, as you know, before May we were in the wholesale business.

There's a fair amount of wholesale volume out there in the market, but when you then combine that with the Regions assumption, that business, essentially you're going to see margins on that whole business come down, just because of that mix. So no change, really, but definitely margins aren't any higher than they had been in the first quarter.

You said, let's see. Mortgage originations, or I'm sorry, application volume for first quarter was 2 billion?

Right.

For second quarter that was 3.3 billion?

Correct.

Of which 800 million was Regions?

850 million.

850 million. Okay.

So pretty big tick up if you normalize for the Regions pieces, about half a billion dollars. So that's a big plus.

Right. Just another trend, looking at sort of the balance sheet and curious if this is, if you anticipate this continuing, but looking at the investment portfolio and the borrowings, both went down on a linked quarter basis. On the earning asset side you guys were fortunate enough to have pretty nice loan growth linked quarter and then fairly nice deposit growth as well, although a good piece of that came from time deposits. But I guess my question is, do you anticipate this trend continuing the borrowing levels going down, any investment securities balance continuing to go down?

Well, I think what we saw, Adam, with the flattening of the yield curve and some of the changes in the rate environment, it became very, some of the securities out there became very unattractive, so, you know, if you look at this, I think today you can probably find securities at LIBOR plus 50 to 60, 60 if you're lucky. And at those spreads, that's pretty unattractive economically.

Obviously you can return some sort of a pretty decent spread when you look at regulatory capital, but we tend to look at our tangible ratio, and those rates are somewhat unattractive. So we slowed down because we couldn't find paper that made economic sense.

So I think the answer to your question is, you know, for the second half of the year, it will depend on whether those spreads become a more attractive or not, but we tend to look at that book and manage it economically, for one, as long as it doesn't do anything to change our interest rate risk profile for the overall bank.

Okay. Great. Thank you.

You're welcome.

Thank you. Your next question is from Chris Chouinard of Morgan Stanley.

Hi. Good morning.

Good morning, Chris.

Hi. I was just wondering if you could give us some color on competition in deposit pricing regionally? Specifically, you know, any, the differences between kind of your upstate New York markets to more rural markets in metro New York and Baltimore.

Sure. I guess I'd start off by saying that if there's any sort of competitive pressure on deposit pricing it's all been pretty much constrained to the time deposits, time deposit area.

What we have said in the past I think still holds is that on the whole, our Mid-Atlantic regions, which would include Pennsylvania, but more so Baltimore, you know, Maryland, D.C. areas, seem to be more competitive than in our upstate market. But if you look, bear with me, if you look at what we've seen, we've actually seen a fair amount of deposit growth in our Mid-Atlantic region.

So linked quarter growth we had deposit growth of, say, 15 to 16% in the areas that include Baltimore, Washington D.C., and Chesapeake region, and we also saw significant growth in Pennsylvania. So obviously, you know, I'm looking at total deposits, which would include both time and the other categories, but I don't think there's a significant differentiation across the region in terms of the product types.

So you're not seeing more competition, say, in New York metro area? How is competition there? I know you're still opening some branches down here.

Well, we have very few branches in the New York metropolitan area. And, in fact, you know, as long as I've been with M&T, we've sort of had a strategy that said, you know, we don't think that it makes sense for us to have significant distribution in New York City because it's a very competitive market.

So what we'll typically do is we'll focus on the New York City market with specific campaigns around CDs, because in those large metropolitan areas we can raise a fair amount of deposits, which are cheaper, or time deposits, which are cheaper than wholesale money, and actually we've been doing that over the past quarter.

Okay. Great. Thank you very much.

You're welcome.

Thank you. Your next question is from Jackie Reeves of Ryan Beck.

Good morning, Jackie.

Good morning. I wanted to get some additional color on your comments with respect to the outlook for the loan growth, saying that it will be similar to the first half, but then I just wanted to reconfirm that did you say the C&I pipeline at the end of quarter was 1.4 billion down from 3.3. Are those numbers accurate?

No, Jackie, those are not accurate. The pipeline at the end of March was 1.3 billion.

Okay. And at the end of June, as you said, was 1.4 billion. Okay.

The $3.3 billion number was our mortgage applications that we had done in the second quarter.

Okay.

And that is relative to the $2 billion of applications that we did in the first quarter.

Okay. So looking forward, are you looking more for continued improvement in the line usage as well as further pipeline development, or what maybe are you looking for for mix?

I mean, we're really just looking at current trends. You can't quite predict the line usage but it's been up for several quarters now and it's been moving upward.

If I go back in time to healthier economy, we've probably been above 50% in terms of our utilization. So I know we're not, we haven't topped out on that measure yet.

Could you give us some additional color with respect to your clients throughout your footprint in terms of how they, maybe how you perceive them to be positioned in investing in their own businesses and potentially moving that further upward? Any kind of color?

Yeah, we do the survey of our customer base on a periodic basis and generally the trend has been that they're more optimistic than not about the future.

Thank you.

Thank you. Your next question is from Salvatore DiMartino of Bear Stearns.

Hi, guys. Most of my questions have been asked and answered, but just if could I ask a question on, follow-up on Jackie on the commercial loans. Are you seeing any particular strengths in, regionally?

And also I had a question on the tax rate. It was down slightly. Should we assume about 33% going forward?

I guess from a tax rate, I would assume what the average was for the first half of the year, which is probably slightly higher than that, but, you know, depends on sort of the mix of your revenue streams that come in.

In terms of the regional loan growth, we've actually, very consistent with what we've seen in the past, we've seen very strong growth in our Mid-Atlantic region. Loan growth on a linked quarter basis was 16% in that region, and loan growth in Pennsylvania was 15.2 annualized linked quarter basis.

So very strong growth in our new markets, and I think that's pretty consistent with what we've seen in the differences in the economy. In fact, if you look at job growth in all of our core, in our, sort of all of our core market, there are about 130,000 jobs added over the last year, and of that job growth, three-quarters of that job growth took place in our new markets. So primarily in the Mid-Atlantic region, Washington D.C., Chesapeake, Baltimore, in those markets. So we're benefiting from that, from that healthier economy.

Thank you.

You're welcome.

Thank you. Once again, if you do have a question, please press star then one on your touch-tone telephone at this time. Your next question is from Steve Predisto from Satellite Asset.

Hi, guys. Good morning. You didn't quantify the gains you mentioned in the press release you had gains from property and lease equipment and trading. Could you just quantify that so we can get our hands around a core number?

Sure. The gains associated with our commercial equipment lease business were $4.7 million in the quarter.

And the property sales? Is that a branch sale gain?

No, that's, essentially if you go back to our annual, one of the projects that we talk about is our infrastructure project, and that's all about sort of rationalizing where we want to be, how many buildings, where's the most efficient way to operate. So from time to time, what you'll get is the disposition of a building or we'll get out of a lease, but it's very small.

Thanks.

Thank you. Your next question is from Cameron Hurst of Portales Partners.

Morning. Actually, two questions. One was on, there's been some speculation about the Allied Irish stake and that bank examining strategic options, what to do with that. And I was wondering if you could comment on that?

And the second would be on the M&A side of life, how you're seeing valuations? I know you'd commented in the past that they were pretty rich and that you would be comfortable waiting for something a bit better in the future. I'm just wondering where you're at there?

Good morning, Cameron. With respect to the sort of noise and stories out there on the AIB issue, we kind of view those more as rumors than not. I mean, first of all, we tend not to comment on the sort of decisions of other people's institutions essentially, but the way we view is it that we've got a great relationship with AIB, and until they let us know further, you know, we probably choose not to speculate about that.

In terms of the valuation situation, I assume you're talking about M&A, things had been quiet for a little while, you've seen some activity with the credit card to bank deals, and I hear this morning there was something else that sort of popped up.

Great Hudson United.

Yeah. So I think really the way we think about it is, we're very, very content running our core operations. We think we have a lot of work to do and a lot of opportunity in focusing on our day-to-day business. If something comes up that makes sense economically, we'll do it, but obviously that hasn't happened.

And how much longer in terms of a time line do you see your expense efficiencies taking to get to a run rate level?

To get to a run rate level? The first thing I'd say is that we have a long-term goal of always maintaining a 3 to 5% revenue expense spread so that means that our focus is on continually getting efficient over time. And if you look back you'll see that that's the case, so I think there's no change in that position.

If you're referring to sort of some of the five initiatives that we've got, as we said in the past, we think that it will take to us get to about the second mid 2006 to get to the full run rate of that impact. But clearly we've been seeing, you know, some of the impact of that today through the first two quarters.

And you're still on track for that time?

Absolutely. I mentioned in my comments, I believe, that for the first six months, our operating expenses are lower than they were in the first six months of last year.

All right. Thank you.

You're welcome.

Thank you. Your next question is from Ken Usdin of Banc of America.

Good morning, Rene. Two quick questions. First of all, did you have any VC results, either gains or losses in the quarter?

No, I don't believe we did. Nothing significant. Maybe 400 or $500,000 worth.

Okay. And the second question was, can you give us a breakdown of the loan growth in the different regions, Mid-Atlantic versus the kind of upstate, as you've done in the past?

Yeah. I think in our upstate markets, you know, loan growth was lower, somewhere in the, say, 2% range. In our Pennsylvania, it was an annualized growth over the linked quarter of 15.2%.

In our Buffalo and sort of Western New York regions, it was almost 10%, and it was 16% in the Mid-Atlantic regions which, again, are Baltimore, Washington D.C., and Chesapeake.

I thought you said that upstate was 2%.

Yeah, 1 to 2%, in that range, annualized linked quarter growth.

And then how is that different from the Buffalo? Isn't that upstate?

You can include all that. Actually what am I missing here? Yeah, I would assume low single-digit growth in upstate New York, which includes Buffalo.

Okay. Is that any of a difference in Pennsylvania? It seemed like a bit of a pickup there?

Yeah, I guess that's a slight pickup from what we've been seeing in the past but not different from what we expect.

Okay. Great. Thanks a lot. And were the deposit trends any different on those basis as well?

No. I mean, on the whole, what we refer to as our newer markets, the Mid-Atlantic regions were up I think as I said, pretty significantly. So again, just as a reference point, annualized growth in deposits over the linked quarter were about 16% in the Mid-Atlantic region.

Great. Thanks a lot.

You're welcome.

There are no further questions. I would like to hand the floor back over to management for any further or closing comments.

Again, I'd like to thank you all for participating today, and as always, if clarification of any of the items on the call or in the release is necessary please call our Investor Relations Department at 716-842-5138. Thank you. Good-bye.

Thank you. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.