M&T Bank Corp (MTB) 2009 Q2 法說會逐字稿

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Mr. Don MacLeod, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Julianne, and good morning. I'm Don MacLeod. I would like to thank everyone for participating in M&T's second quarter 2009 earnings conference call both by telephone and through the webcast. If you have not [received] the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules from our website, www.MTB.com, and by clicking on the Investor Relations link.

Also, before we start, I would like to mention that comments made during this call might 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, including those found on Forms 8-K, 10-K, and 10-Q for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and welcome, everyone. Thank you for joining us on the call today. Because we closed on the Provident Bank shares merger during this past quarter, there are some merger-related expenses, as well as the impact from purchase accounting, which affect our results. Hopefully I'll be able to provide you with some clarity on just how they impacted us.

Diluted earnings per share were $0.36 in the second quarter of 2009 compared with $0.49 earned in the first quarter of 2009. Net income for the recent quarter was $51 million compared with $64 million in the linked quarter. The amortization of core deposits and other intangible assets amounted to $0.08 per share in the second quarter of 2009 compared with $0.09 in the linked quarter. There were after-tax merger-related costs of $40 million or $0.35 per share in the recent quarter. Merger-related costs were $1 million or $0.01 per share in the linked quarter.

Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets as well as merger-related charges, were $0.79 for the recent quarter, up 34% from $0.59 in the linked quarter. M&T's net operating income for the quarter was $101 million compared with $75 million in the linked quarter. On the same operating basis -- that is, excluding intangible amortization and merger-related expenses -- we estimate that the Provident merger was in just its first five weeks accretive by $0.01 per share in the second quarter.

In addition to the merger-related expenses that I just mentioned, the recent quarter's results include three additional items that I would like to break out for you. First, the quarter's results included the impact from the special FDIC assessment, which amounted to $33 million on a pretax basis and $20 million or $0.17 per share on an after-tax basis. This only relates to the special so-called one-time assessment and does not include the higher run rate for the normal FDIC insurance expense. Second, we recorded pre-tax other than temporary impairment charges of $25 million for certain private mortgage-backed securities carried in our available for sale securities portfolio, as well as the TRUP CDOs we acquired in the Partners Trust merger. This came to $15 million or $0.13 per share on an after-tax basis. And finally, we recorded a $13 million partial reversal of the allowance for capitalized mortgage servicing rights. This equates to an after-tax benefit of $8 million or $0.06 per share. In the aggregate, these three items reduced the second quarter's net operating income by a net $27 million after-tax or $0.24 per diluted share.

Next, I would like to cover a few highlights from the balance and income statement. Tangible equivalent net interest income was $507 million for the second quarter compared with $453 million in the linked quarter and $492 million in the second quarter of 2008. The net interest margin was 3.43% compared with 3.19% that we reported in the first quarter of 2009. There was no material impact on the net interest margin from the Provident merger. As we indicated on the January and April earnings conference calls, the deposit base and a portion of our wholesale funding book is repriced in relation to the very sharp reduction in short-term rates last December. We continue to see a slightly positive bias in the net interest margin based on the current forward interest rate curve.

As for the balance sheet, average loans for the second quarter were $50.6 billion compared with $48.8 billion in the linked quarter. The entire increase came as a result of the Provident merger. On a core basis, M&T's loan portfolio was flat compared with the first quarter as customer demand for loans, particularly on the commercial side, remained sluggish.

Comparing the major sections of the core M&T portfolio to this year's first quarter, commercial and industrial loans declined by 2% or 7% annualized. This was driven by a 10%, 41% annualized, decline in auto floor plan lending as dealer inventories were reduced in response to the historically low levels of auto sales. Commercial real estate loans increased an annualized 4% and residential real estate loans increased an annualized 9%. This was largely due to the fact that a large portion of the applications taken and locked in the first quarter were actually funded in the second quarter. The originations warehouse peaked in May, as applications and funding flowed when mortgage rates rose later in the second quarter. Consumer loans declined by an annualized 2%, with lower indirect auto loans offsetting modest growth in home equity lines of credit.

If we view our lending activity from the perspective of our community bank regions, again -- on a core basis, excluding the impact from Provident, we experienced growth in average loans for each region. For example, average loans in upstate New York grew an annualized 6% as compared to the linked quarter. Our metro region, which includes New York City, grew an annualized 5%. Pennsylvania grew an annualized 3% and the Mid-Atlantic grew 4%. The declines came in our noncommunity portfolios, which in aggregate were down an annualized 10%. This includes the indirect consumer portfolio and the auto dealer portfolio I mentioned earlier.

We continue to see strong growth in core deposits. Average customer deposit, excluding the impact from Provident and which excludes foreign deposits and CDs over $100,000, increased by an annualized 24% from the first quarter. The quality of that growth is high. For example, relative to last year's second quarter, excluding the impact from acquisitions, demand deposits are up $2.5 billion, or 33%.

Turning to noninterest income, excluding securities gains and losses, noninterest income was $296 million for the recent quarter. This compares with $264 million in the linked quarter and $277 million in the second quarter of 2008. The former Provident franchise contributed $8 million of noninterest income for the quarter. Mortgage banking fees were $53 million for the quarter compared with $56 million in the linked quarter and $38 million in the second quarter of 2008. As I mentioned, refinancing activities slowed significantly later in the quarter after mortgage rates rose.

Service charges on deposit accounts were $112 million during the recent quarter, improved from $101 million in the linked quarter. In addition to the expected rebound from the seasonally low first quarter, Provident contributed $6 million to this line item. The other revenue was $77 million, compared with $59 million in the third quarter and $77 million in the second quarter of 2008. The improvement from the linked quarter was primarily due to higher commercial loans and letter of credit fees, advisory fees, and BOLI revenue.

Turning to expenses, operating expenses, which exclude merger-related charges and the amortization of intangible assets, were $482 million compared with $421 million in the first quarter of 2008 and $403 million in the second quarter of 2008. Provident contributed $21 million of the quarter's operating expenses. The quarter's results included the $33 million special FDIC assessment, as well as an additional $17 million for the regular FDIC insurance premium. FDIC expense was just $6 million in this year's first quarter. As I mentioned, the second quarter's results also included a $13 million partial reversal of the valuation allowance for capitalized residential mortgage servicing rights, compared with $5 million reversal in the first quarter of 2009 and a $9 million reversal in the second quarter of 2008.

As we noted -- let's turn to credits. As we noted in the press release, the Provident loan portfolio is being accounted for in accordance with Statement of Financial Accounting Standards 141-R and Statement of Position 03-3. What this means is that the Provident loan portfolio has been marked to fair value as of the acquisition date by analyzing the net present value of cash flows from these loans. The result is that the fair valuation process eliminates the need to carry over Provident's loan loss allowance, as was done in past acquisitions.

Nonaccrual loan increased to $1.1 billion or 2.11% of loans at the end of the recent quarter, compared with $1 billion or 2.05% at the end of the previous quarter. Through the second quarter, we continued our efforts to assist residential mortgage borrowers. As of June 30, 2009, modified loans totaled $259 million, of which $107 million were classified as nonaccrual. The modifications continue to be primarily attributable to our portfolio of Alt-A mortgages. Other nonperforming assets, consisting of assets taken in foreclosure of defaulted loans, were $90 million as of June 30 compared with $100 million as of March 31.

Net charge-offs for the second quarter were $138 million compared with $100 million in the first quarter of 2009. Annualized net charge-offs as a percentage of loans was 1.09% compared with 83 basis points in the linked quarter. The provision for credit losses was $147 million for the second quarter compared with $158 million in the linked quarter. The provision exceeded net charge-offs by $9 million.

Charge-offs included $33 million related to the partial sale of a loan taken to nonperforming in this year's first quarter. So in essence, our reserve build for future losses was larger than the $9 million figure would indicate. The allowance for credit losses at the end of the recent quarter was $855 million, which amounted to 1.62% of total loans. That ratio was reduced by the addition of the Provident loan portfolio, for which no allowance was carried over in accordance with the new accounting for acquisitions. For the foreseeable future, we will also report an allowance to M&T legacy loans. That ratio was 1.76% for the quarter, up three basis points from 1.73% as of March 31, 2009.

The loan loss allowance as of June 30, 2009 covered the year to date's annualized net charge-offs by 1.8 times. Loans past due 90 days but still accruing were $155 million at the end of the recent quarter compared with $143 million at the end of the sequential quarter. This included $144 million and $127 million respectively of loans that are guaranteed by government agencies.

M&T's tangible common equity ratio was 4.49% at the end of the second quarter compared with 4.86% at the end of the first quarter. The decline is attributable to the impact from the Provident merger. Net operating earnings for the quarter of $0.79 per share, which does not adjust for the impact of the OTTI charges and the FDIC special assessment, again exceeded our $0.70 per share quarterly dividend.

Turning to our outlook, as I mentioned earlier, our outlook for the net interest margin hasn't changed. We continue to expect credit costs to remain elevated throughout the year and we probably still haven't seen the peak. We also still expect a certain level of variability in charge-offs in any single quarter. Overall, net charge-offs continue to be in line with our internal expectations.

With the difficult credit environment, M&T remains very focused on expenses. There are concerns in some corners that special FDIC assessment announced this quarter won't be a one-time thing. Let's see. Over the long-term, the effective 56% tangible efficiency ratio for the quarter seems a bit high to me and suggests we have some work to do.

Finally, the Provident transaction is progressing well. As is our preferred practice, we converted the Provident franchise over to our systems simultaneously with the closing and the former Provident branches reopened with M&T signage. The task before us is to continue to realize the merger synergies that we outlined at the time of the acquisition while retaining and growing the customer base. Through the first half of 2009, we have recognized $69 million of Provident merger-related expenses through the income statement. An additional $22 million was recognized either through purchase accounting or by Provident prior to closing. Based on our original $99 million estimate from last December, this leaves $8 million. I would not expect additional merger-related charges to materially exceed this level.

If you adjust for the net charge-offs that Provident recognized on its loan portfolio and the OTTI charges taken against its securities portfolio prior to the closings of the transaction, the purchase accounting marks came in largely in line with our projections. All of these projections are, of course, subject to a number of uncertainties, various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future. We'll now open up the call to questions, before which Julianne will briefly review the instructions.

Thank you. (Operator Instructions). Your first question is from the line of Steven Alexopolous with JPMorgan.

Good morning.

Good morning, Steven.

Could you talk about what you saw on inflows into [criticized] and classified for commercial real estate loans during the second quarter?

For commercial real estate loans -- let me start, Steve, by talking about our focus on nonperforming and then I will get my way to your question.

I mean if you look at the quarter, we went from -- nonperforming went from 2.05% to 2.11%. But it was a very active quarter. So we had a number of credits that were actually paid out, say a number of auto dealers. We also saw a number of residential development properties, which we resolved because we sold down the notes. Remember, in a couple of cases, what you have is through the normal workout process, M&T's not going to become a builder of homes, right? So at some point, on particularly the raw land type of things, our exit would be to sort of sell the notes. What was encouraging about that is that there actually appears to be a lot more appetite, not only from financiers, but also from builders coming back into the space, particularly in the Mid-Atlantic looking to sort of step into projects. So through those types of things, we had a number of items that went out.

If you look at the items that went back into nonperforming -- and we had, for example, a provider of healthcare services which while still paying, is having difficulty in the retirement space where they are very dependent on people to sell their existing homes before they can actually buy into the new retirement communities. We had a continued migration of a number of builder-related type projects, which is the normal progression from what we've been talking about quarter in and quarter out on the residential development side. We had also other -- a various number of other things, a company focused on utilities and natural resources went into nonperforming. So a lot of ins and outs. I think on the whole what that tells you is the migration still continues.

But having said that, the market for assets has improved and we're also seeing some improvement as we've worked throughout portfolios that we spent time on over the past 18 months. I would say particularly in the commercial real estate space, most of the activity has still been around the residential development portfolios. We do see migration in the investor real estate portfolios, but as you can see, not a lot has gotten its way throughout process to sort of go into the nonperforming classifications. That will likely happen down the road, but we just haven't seen it today in getting it to those late stages. I think you've read a lot about commercial real estate, and so I would expect to see that there will be some migration there into nonperforming, but that will be later in the year -- early in 2010 is what we're thinking today.

Okay. Maybe just one other question. Rene, given where tangible common is now post-Provident, how should we think about your acquisition appetite? If a deal comes along, would you be willing to issue common to do it? Are you going to wait first to rebuild it organically?

We don't -- especially now that we've sort of gotten through the integration process of the Provident deal, we're open to things that would improve our franchise value and things that are, that probably stay particularly close to our existing market. And you would have to deal with the financing when you saw the transaction in front of you. But there's nothing that suggests to us that for the right transaction that we wouldn't be willing to do it and that the capital markets wouldn't be open to it.

Perfect, thanks.

Your next question is from the line of Matthew O'Connor with Deutsche Bank.

Hi, Matt.

Just a follow-up on the income-producing commercial real estate. I think a lot of people are concerned about it. Our CMBS research team is actually very negative on it in general, especially in New York City. I think you guys have been a lot more conservative than some, but if you could just remind us how your commercial real estate is different than maybe what we're seeing with the CMBS market?

Yes, I'll take it in a couple of parts. Remember, the first distinction is the CMBS markets versus traditional balance sheet lenders who were underwriting to put this stuff on their balance sheet and knew that they would have to contend with the credit risk going down the road. Clearly you have seen a lot -- the first thing is sort of the underwriting standards.

When you look at the difference in cap rates and then two other assumptions -- the difference in the turnover rate of particularly apartments in New York City, as well as the assumptions that were used in terms of an increase in the rent [rolls] -- there's a drastic difference between what we've seen in our portfolio, what in fact we've seen from some other portfolio type lenders versus what you saw on the CMBS market. Now, that's not to say that when you see a decline in the real estate market because the financing has dried up, that that won't affect portfolio lenders. What I would guess, though, is that what it comes back to is your original loan to value that the loans were made at is 1. And then two, how you structure those loans. So in a number of cases, for example, as we migrate through the process, it wouldn't surprise me down the road to see certain properties have to move through the credit cycle, credit process and maybe go into nonperforming.

But as I think about a number of those loans and the way they are structured with a fair amount of equity up front with also supported secondarily by mezzanine tranche of equity, the loss content on those loans is not what you would expect. So again, it gets back -- it's much lower. So it gets back to leverage.

And remember, you can see the leverage on our balance sheet. For the same two commercial real estate properties that were underwritten, one goes into a security and one goes onto our balance sheets. The leverage is much, much higher on that CMBS security, right? So by definition, you're back to the same sort of thing, which is the amount of leverage that you've got on the properties and the amount of leverage that you've got into the structure really dictates the type of loss that you're going to take.

So I think that's the fundamentals of it. We don't think that to the extent that there's a downturn in commercial real estate that we would escape a downturn. We just think that like every single one of our portfolios through the cycle, we would fare much better.

If you had to guess, let's just say CMBS losses on a cumulative basis will be X percent, everybody has their own estimate. If you had to guess relative to those losses, do you think yours would be two-thirds of that, one-third of that?

I'll be very honest with you. I don't know. I wouldn't have any sense of that. What we're focused on right now, Matt, is sort of getting in front of all the credits and making sure we're very aware of the portfolio so that to the extent that we see problems that come up on the horizon, we'll have already worked through solutions with those borrowers. But we're down looking at credit by credit and not really thinking too much about 10,000-foot estimate like that.

Okay, and then just separately, you mentioned the core efficiency ratio is too high for where you would like it to be. How much of that do you think is on the revenue side? I guess how much is on the expense side? And I've always thought you guys have done a very good job managing the expenses. Guess I'm a little surprised that there would be a lot of cost cuts available out there.

I mean, we've got -- in the cycle, we've got -- we're spending a lot of time on our loan portfolios. We've got a lot of credit costs, and quite frankly, the revenue is just slow. And I can't point to any particular place, but it's not unusual for us to feel confident that we can run the bank in the low 50s over the long-term. So I'm not talking about next quarter, but over the long-term, it's not a stretch for us to say that we would have an efficiency ratio in the low 50s. We'll have to get to the details.

Okay. So sounds like more on the revenue side than the expense side, just to be clear?

Probably both.

Okay. All right. Thank you very much.

Sure.

Your next question is from the line of Craig Siegenthaler with Credit Suisse.

Hello.

Thanks, and good morning, Rene.

Good morning.

First, on credit quality, just wondering if you can provide us an update on the modifications. Looks like the cumulative level is up pretty significantly this quarter, but I am also wondering how the bucket that went into nonaccruals -- that growth looked like it was a little slower.

So just on residential mortgage modification?

On the Alt-A. It's mostly Alt-A, I believe.

Yes, the -- what was the increase? There's really been -- I think there's been no change in the pace of what we've been doing on the modifications. It's been steady, but I'm just looking for the actual dollar increase that we have.

You have the increase on the nonaccrual level.

And so you're -- it's [1.4] on the nonaccrual level, but on the total, it -- the increase is [42]? [43.5] in total.

Okay. Got it. And then I'm just wondering, can you remind us how the M&T and the regulators decide if a loan actually goes into TDR or is modified and back on accrual?

Well, for our residential mortgage portfolio, we -- when something goes delinquent and if we modify that loan, it would be recorded as a TDR and it would be recorded as a nonperforming loan. And we would expect it to have I think at least six months of positive performance before it moved out of nonaccrual.

It would all go into nonaccrual first?

If we modified a loan that was current, it has never missed a payment and it would not be classified into nonaccrual.

As long as the assumptions are at the market, or the interest rate?

Yes, but it's still a modified loan and I think it still goes into TD -- still reported as a modified loan.

And then you've previously disclosed the redefault rate and it's been very low at M&T, like 25%, much lower than the industry. And I'm just wondering how does that trend in the second quarter?

It was up, but it's still well below the 40%, so we saw it uptick a bit.

And do you guys have that number?

Six-month redefault rate is 26%. Last quarter was 25%. So you're probably in the 30s for the quarter.

Got it. All right. Thanks a lot, Rene.

Your next question is from the line of Bob Ramsey with FBR Capital Markets.

Good morning.

Good morning.

Hey. Quick question on the charge-offs. I know you all mentioned in the press release that some of the growth year-over-year was largely attributable to the partial charge-off of one commercial credit. How much was that and could you just remind me what that credit was?

The amount was $33 million that we charged off, and it was the credit that we described on our first quarter conference call in which it was our largest unsecured credit. I think we disclosed that it was about $95 million. And we took the charge because we sold down half of our exposure.

So if you then look at the rest of the book, okay, if you were to adjust for that, the commercial side, including middle markets, CRE, residential development loans -- those were all down several million. If you look at our consumer book on a linked quarter basis, consumer charge-offs were down $5 million or 15%, and if you look to the residential portfolio, the core and all-day portfolios in that residential number were relatively flat.

What we did have is about our single one-close construction, our residential construction portfolio, went from about $1 million in charge-offs to $12 million from the quarter. And much of that was as the result of sort of getting in front of a number of properties, disposing of either the properties or the notes, taking possession of the homes and so forth. So with that increase in charge-offs, we've now sort of taken that portfolio down to a balance of $156 million. So we're doing -- there's a lot of reduction and exposure that's sort of gone on throughout that process.

Okay, and then you mentioned repossessing some of those properties. Looks like your REO was actually down in the quarter as well. Could you maybe -- you also mentioned I guess appetite for a lot of credits out there. What is the ultimate severity you're seeing on REO that you are disposing of?

Oh, it hasn't changed. Raw land is not very pretty. I don't know, Don, is 30%?

No, no, on some of the raw land in the Mid-Atlantic, it's over 50%.

Oh, yes, that's right. We're both in the same thing. We're realizing --

30%.

Taking a loss of 70%. That's probably the high end.

Yeah. From what Bob tells me, the severity on properties where there's more of a vertical component, where there's actual structures, loss content's been 30% to 40%.

But just to sort of break down the ORE, we started -- we ended last quarter with $100 million, and if you don't include Provident, we dropped to $78 million. Most of that is residential properties that are in there. And the drop comes from revaluing a couple of the development projects. And then you add another $12 million that came over from Provident and you get back to the $90 million.

And then I guess the last question for you, Bayview, obviously the losses there were much lower this quarter. Could you just give a little update on what's going on in that business?

Yes, I mean nothing has changed from what we said. We said this was a loss -- that they probably run with small operating losses for the foreseeable future. The numbers were a little bit better because they had some gains on marking loans and on I think Canadian exchange. So my sense is that not much has changed there. I would expect that to run at a small slight loss in our operating statement, as we go forward. Not unlike the first quarter. And the rest of the business, as we've mentioned before, is sort of tracking in a relatively positive fashion with their Bayview Asset Management business and with the residuals that they have on their balance sheet.

All right, thank you.

You're welcome.

Your next question is from the line of Matthew Clark with KBW Asset Management.

Hi, Matt.

Good morning, guys. Can you clarify the modified loans you had at the end of the quarter of $259 million? I know $107 million of that's on nonaccrual. Just reconcile that with the renegotiated loans of $171 million. I guess is that $171 million embedded in the nonaccrual number, or is that separate and is it separate and distinct from the $259 million?

Give me one second. I want to make sure I get that right. The renegotiated loans are $170 million and the $142 million is in that number. And it's all there. I'm just not quite sure what you're getting confused with.

The modified loans at $259 million. $107 million of that's in nonaccrual, but I'm just curious as to whether or not those are also considered renegotiated loans or not.

No.

You're using renegotiated as TDR and modified as not?

It's not a double count.

Okay. Okay. In terms of the losses that you took on the construction side, I think on the builders side you mentioned they increased to about $12 million this quarter. Can you give us a sense in terms of where those losses came from, whether or not it's solely Mid-Atlantic, and whether or not you're seeing anything else?

Yes, Matt, that was actually a different portfolio. That's a one-close residential construction loan where an individual is building a home, okay, and that portfolio is about $156 million in size. So they came from all over, some from the footprint, but a number of things that are left over from the work we had done, taken over those regions offices and they were in Florida. They were in different places.

On the residential builder development for the quarter, those losses were down. I think we had $22 million of losses in the first quarter. Actually, let me do it on the total. $22 million in the first quarter -- am I doing that right? $22 million in the first quarter and $15.5 million this quarter.

We've said before, I think we said in January that we had about $100 million of charge-offs in 2008 and I can't see any reason why it would be different. I would say same is true there, right? We're just sort of working through that portfolio. It's not getting worse. It's just the work that we have in front of us and I would guess you'll see a pretty consistent number there as you move forward.

Okay, and then just back on the criticized/classified list, can you give us a sense -- I don't know if you want to size it up at all, but at least the magnitude of the change you saw I guess first quarter to second quarter.

I don't think we saw any change. I mean it's very steady migration and I think that if you look at the nonperforming, you see it there. You see the trend and if we began to see that the classified loan book in those great 2010, 2011, 2012 actually start slowing, we'll probably tell you. We haven't seen that happen. We spent some time talking to a large sample of our customers in upstate New York, Pennsylvania, then down in Baltimore and Washington. And most of those clients are somewhat pessimistic about where the economy is. They are all working on lowering expenses in their businesses and trying to offset the lower demand.

There are some bright spots. The bright spots would be discount retailers, would be also in the packaged goods space. They seem to have -- to be a little bit more optimistic than others. I think the economy is still in somewhat of a malaise and I would expect the migration to continue as it has. If there's any good news, what we sort of understand is that the economy turns around a bit and begins to stabilize that a lot of those companies are going to be much, much stronger before they were before they went into the cycle. If there's a positive story, that's the positive story.

And then lastly, a small one, the tax rate looked a little light. Just I guess -- would you just tell us what that related to and I guess your expectations for the balance of the year?

Yes. The simplest way is that we have a lot of one-time expenses -- whether that be merger-related expenses, the FDIC charge, the OTTI charge, right. And I think you'll see some reflection of that in that the tax rate is lower. The tax rate will probably be low as long as you continue to have those one-time level charges. I tend to look at our earnings and have a much more normalized rate of somewhere in the low 30s on an ongoing basis.

Okay, thank you.

Yes.

Your next question is from the line of Ken Zerbe with Morgan Stanley.

Thanks. Now I generally understand what you did to put the Provident loans on your balance sheet by fair valuing them. But is there a point in the future, and how soon might this materialize, where you might need to take some charges or build reserves on that portfolio?

That's a great question, Ken. So how it works is that -- so we've marked the things to fair value. And to give you a number, we have a fair value mark, but underneath that fair value mark, which is interest and credit, we have about $320 million of credit-related marks on that $4 billion of loans. And what you're required to do is as you take those losses against that mark, as you go forward, to the extent that you don't or are not going to realize the full amount, you would then accrete the excess of that credit mark into your earnings over the life of the loan, right? If you assume that on average these loans -- they vary, but they have five years -- as you get to two years out, you probably have a pretty good sense of how well you did on the mark. To the extent that you came to a conclusion that the $320 million wasn't enough, you would then be required on a specific loan, for example, to add to your provision.

If you think about -- and I haven't done this work normalized, but if you look at where Provident losses were running all the way through this first six months, right, that's a pretty hefty number, $320 million. And so if we would know something, Ken, I would think it would be not -- at least 1.5 years out.

Okay.

Before we would get -- we would have any sense of whether we would, we were too much on that portfolio or if there's a different number.

Okay. That makes sense. And then the other question I have, given the large increase in [NIM] this quarter, what's your outlook going forward and do you think you could continue to reduce your deposit costs?

Well, I don't think, I don't think of it as actually -- think about the fact that we probably have -- you can see the average yield on the time deposit portfolio. Maybe it's [2.30], [2.60], somewhere in that range, [2.39]. And that will continue to roll off into the more normalized rates that we have. So that's the positive side of the margin that gives us a slight upward bias. The rest of -- I wouldn't -- deposit rates are already relatively low.

So relatively flat going forward?

Yes.

Okay.

And things have been very stable with the interest rate environment. So as long as that holds, I think we've got some positive momentum on the way up.

The other thing to keep in mind is the loan portfolio turns itself over and new stuff comes on in today's higher market spreads.

That's a steady positive.

Sorry. So just to clarify, though, if loans come in at higher spreads, which is pretty consistent across the industry, plus flat deposit costs, should -- how much of an increase in NIM should we be expecting?

Just a positive number.

Fair, fair enough. All right. Thanks a lot.

Your next question is from the line of Anand Krishnan with [Ford] Research and Management.

Hi. Couple of questions. First, on the mortgage banking, can you talk a little bit about the pipeline and how should we think about the second half of the year? Should we return to more normalized levels, based on what you are seeing?

Yes, let me give you a couple numbers first. In terms of -- I think the most important thing is because you recognize -- you recognize the revenue up front as the loans are lost. I'll give you the applications. And in the first quarter, our applications were $3.9 billion. In the second quarter, they were $2.8 billion. All right. So down a fair bit, as rates went up. I haven't yet checked where we are with -- rates actually have come back down some. So I would expect the volume to pick up a bit. If you look at the pipeline of mortgages that sit in our pipeline, last quarter, that was $2.3 billion. This quarter, it was $1.5 billion, right. So clearly slower. The question will be what happens with interest rates.

And then a question on your reserves and provisions. One of the metrics that I was looking was the reserves to nonaccruals and that came down from 85% or so to 77%. I'm not sure whether you go by one single metric, but this is certainly a metric that was interesting to look at. And so given some of your commentary about credit outlook and that near-term will continue to be elevated, how should we think about this current level of reserves? And a related question, what's the average carrying value of your non-accruals? Thanks.

Carrying value of our nonaccruals? I don't know. Let me try to answer.

So first of all, I've spent a lot of time thinking about this because we get asked that question a bit. The first thing you'll notice is we're kind of in line with the industry. And so that ratio is lower than it has been in past cycles. But when I look at our own book, about 25% of our nonperforming loans are residential real estate. So $260 million or something like that.

If you look at the portions, for example, that we mentioned of $107 million, I think we said, that was modified loans -- when we modify those loans, the net present value of the payment give-up is recorded as a FAS 114 reserve. That number at the beginning of the cycle, we were booking a reduction in the value of, say, 23%. Now it's much, much less, so maybe on average, that's at $0.15 on the dollar, right? So by definition, because it's a commercial, started as a commercial real estate cycle, your overall ratio, right, is very, very weighted down because you've taken a very -- lot of specific reserves on residential real estate, right? I think that's probably the biggest factor that you're seeing in the numbers. And as you kind of work your way through the other cycle, throughout portfolio and get to commercial real estate, I think you see sort of a completely different view.

That's the best I can explain for you, because our process is very focused and right now we seem to have a lot of specific reserves on credits and a lot of them tend to be residential real estate. So it drags that ratio down. We tend to look at our coverage ratio. So how many times is our current charge-offs, looking back last 12 months, how many times does that cover the reserve? We also internally look forward in our forward forecasting, and so today, as we said in the press release, we're at 1.8 times. I think last quarter the industry average was 1.1 or somewhere around that level. So we feel we're fairly adequately reserved.

And then do you have a sense of what's the average carrying value?

I don't know how to answer that because there's so many different types. I don't know how to --

Because some of the competitors make the argument that we charge off the nonaccruals aggressively, so the ratio -- you are in line with the industry averages what you say, but if others are charging off aggressively, then maybe we are comparing apples and oranges.

Well, if we were not charging off aggressively, then our nonperforming loan ratio would be much higher than everybody else because they would just sit around. The other place I would look is for the types of issues we've been talking about, think about residential construction or builder construction -- the fact that our ORE portfolio before Provident was $78 million and most of that is residential tells you how fast we get, I think. And if you go back to the auto industry three years ago, we told you there was a problem in auto floor plan. And today we don't have much of a problem, right, because we worked on it and we got through that cycle fast. I would say that what gives us comfort is the fact that we tend to get at things quickly, so we're not left with multiple issues at the same time. Think about commercial real estate -- people are talking about it as a 2010 issue. We have no interest in not getting through any problems we have quickly.

Thanks. That's helpful.

Your next question is from the line of Christopher Nolan with Maxim Group.

Hi. Can you tell -- given where the dividend is right now, can -- for the full year 2009, you anticipate you'll be able to have earnings cover the overall dividend?

Well, Chris, we don't forecast earnings, so I'll leave that to you. I mean, look, I think we said six months ago, our head of corporate finance said we would complete this transaction, six months would go by and we would be at 4.4% in tangible, and we're at 4.49%. So we're pretty pleased with how our forecasting process goes, both in terms of earnings, the deal, credits, right? We feel that we have a fairly decent handle on that. And when we think about capital and dividend policy, we're going to continue to focus on building that tangible ratio over time. So I think quite frankly when you look at our actions, it's pretty clear.

Right, and the second question I have, follow-up to an earlier question from Matt on commercial real estate and your reply in terms of increased equity in terms of your commercial real estate borrowers -- are you facing an issue in terms of many of your commercial real estate borrowers having to find additional equity as they seek to refinance the maturing loans?

I don't know that that's the case. I think the case is simply that there is no place for them to get refinancing as it comes up on the credit side, right? The deals are structured as they are. It's kind of hard to change that. But really the issue is as we move out for some credits, for example, if they don't find solutions, refinancing solutions, six to nine months out, then they could have a problem. And then you're left with -- in the worst case scenario, how is that deal structured? Don, you were going to say?

I guess the only other thing I would add is people who were financed elsewhere are finding it difficult to come to us to get refinanced because they don't have enough equity in their deals.

What sort of -- just a last question, what's the LTV in terms of looking at new commercial real estate deals?

Put it this way, if you look at many of our portfolios, New York City, they are at 60% loan to value, so we're not changing our tone and we're obviously considering the current market in those valuations, right.

Great, thank you.

Your next question is from the line of Michael Rogers with Conning Asset Management.

Yes, good afternoon. Good morning, I should say. My question actually was just answered by the gentleman who asked the prior question. So I'm all set. Thank you.

You're welcome.

Your next question is from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Hi, Jennifer.

Hi, how are you?

Good.

Good. Just calling, my question is about your TRUPS portfolio and what are you carrying that at now when you include the Provident deal?

Well, I think we had -- just go back in pieces, I think in the Partners thing we had maybe $5 million to $6 million left on our books of book value there. And then on the Provident portfolio, in due diligence, we said we would mark them at I think $0.195 on the dollar and we actually marked them to $0.15. And I think that whole -- all of the things combined, the bank piece of that is probably around $65 million. And then all of the bank, the REITs, and the insurance is probably at just at or just under $100 million on our books down -- [remember] the par value was almost $600 million.

Okay, okay. And going back to an earlier topic, the one-time close portfolio, you said is about $156 million today.

Yes.

What would that have been a quarter ago and say a year ago?

Quarter ago, I'm going to guess $196 million or high 190s. And a year ago, maybe as high as $400 million.

Okay. Thank you.

Your next question is from the line of Collyn Gilbert with Stifel Nicolaus.

How are you, Rene?

Great.

Good. Three quick questions. One, did you see a big differential in the individual loan sizes of your inflows and outflows in the NPL bucket?

Not really. Not really. I mean -- but there were a lot of credits, so I guess they were small, generally smaller, with the exception of one or two I think. So, no, I don't think there's a big change there.

Okay, okay. Second thing, can you give a little bit of color as to what you think the run rate on expenses are going to be over the next few quarters?

I think -- they have been pretty well controlled. I don't see any reason why they wouldn't stay well controlled. And then that's the core. And then of course, we've just -- we're five weeks into our owning the Provident franchise, so there's work to be done there, so I think that's a positive, right? Probably lower expenses from that.

Okay. You didn't want to quantify that with a number?

Well, I mean it's no different than what we said. I guess we said 45% expense saves on that transaction, and that we're probably -- the work is done on 29% or something like that.

Okay.

Something like that.

Okay.

But you haven't seen that yet, so you'll get a better sense in the third quarter, right, of what that looks like.

Okay. All right. Then just finally, on the M&A side, can you just give a little bit of color as to what specifically you would be interested in? I know in the past you had said -- you spoke to the success of the Partners Trust transaction, kind of an [in] market deal, over capitalized risks, low risk on the asset side of the balance sheet, good funding side. Has that changed at all? Or given the environment, has your investment or your M&A criteria changed? Or what are you thinking from a geographical perspective and business perspective?

Our criteria hasn't changed and it's almost identical to what we're doing in our core organic growth, right? Wherever we can focus on taking share in our existing communities, that's what we're going to do. It really works on the acquisition front because you're at a much lower risk transaction. So to the extent there are things in particularly and around our footprint, we would have a bias towards those types of things because it is a pretty risky environment out there, right, and we would only do things that make a lot of sense and that have a fair amount of synergies. But it's interesting. It's not different from what we're doing on an organic basis with our -- for example, our loan portfolio as you saw in those results, right?

Okay, and how about a size preferential? Is there a type of transaction that would just be too small that wouldn't be worth it to you all?

I don't know. Provident was a wonderful transaction. It was only $6 million in assets, but it was our third largest deal ever. Right?

Yes.

So that's who we are.

Okay. Okay. That was all I had. Thanks.

Your next question is from the line of Ken Usdin with Banc of America Securities.

Hi, Ken.

Hi, Rene and Don, how are you guys doing? Just one question on the credit quality and provisioning. So if we're to understand that NPAs are flat and the outlooks look pretty reasonable, but you're expecting some of the CRE stuff might not turn up until end of this year into next year, the amount of overprovisioning was rather tight -- you [overprovisioned] by just a little bit this quarter. How do we think about where provision expense goes from here, and if you're as confident as you are about the quality of the book from here, have we seen the peak in provisioning expense already?

Wow. It's good to know I sound confident. I think that there's nothing superoptimistic about the way -- the state of the economy. It's just not getting a lot worse, right? So I give you that as a backdrop.

Technically, we sold down a large credit that we had provided for, right? So you would think that if everything was neutral, that you would have actually underprovided. So really there's a fair amount of all of that that was released was reabsorbed by new credits and then we added $9 million on top of that. Right? So I kind of look at that as we sort of steadily added. It's just that we've resolved a number of credits as we've sort of taken new issues on.

I don't think it's going to change much. I think you saw -- from time to time when we've had large credits, we've had to provide an excess, like last quarter, like the fourth quarter of 2007. And we'll continue to do what we need to do, but I think what actually helps us is our consumer portfolio has fared very well, right. I think that's helped us a lot and we've not had some of the outside losses in our consumer portfolio that you're seeing in the industry. So that sort of helps us.

And then what are the types of things -- when you do mention the things that might potentially turn up either later in the year and into next, what are the most important factors for us to be watching from you as far as those migration patterns on the CRE side?

Nonperforming loans and what we say on the call. I mean we hate surprising people, so as we learn things, we'll share them with you. I can't point to anything else specific. But I mean it's just the simple, standard traditional credit metrics that are out there, and we'll try to give you color as we see them, as things change.

Okay. Actually, one more quick one if I can, Rene. A couple of the fee income line items were really strong this quarter, kind of follow-ons of the industry environment like the mortgage banking line. I would assume that's what drove really strong tradings revenue line. Should we expect those areas to moderate as we get to a little bit more of a normal environment?

Yes, I think that's, that might be true on the mortgage side. I think the trading income is essentially -- how do I say this -- it's all sort of tied to our deferred comp plans, many of which we inherited. So as the market goes up, the Dow, the S&P, you get higher valuations there.

Having said that, if you look at where the overall stock market is, our asset sensitive -- market sensitive fees, like trust, brokerage, those types of things -- they really have remained very, very weak, right. So I haven't seen an uptick there. But I guess the rest of the stuff, the commercial banking fees have done very well and I would think while it may be lumpy quarter to quarter, there's still going to be a fair amount of business out there for us.

Okay. Thanks a lot, guys.

Okay.

The your next question is from the line of Todd Hagerman with Collins Stewart.

Good morning, everybody. I had a similar question to Ken, just asked a little bit differently. In terms of credit, M&T has done a number of targeted reviews over the past year and then some -- on some of the more troubled portfolios. As I listen to your credit outlook, was there anything specific that may have been completed this quarter in addition to Provident or anything kind of pending as I think about, for example, the Mid-Atlantic homebuilder portfolio, the New York City portfolio and so forth?

I believe -- if you give me a second, I believe this quarter, we focused on a review of commercial real estate. Give me a second. We focused on review of commercial real estate. We said in the past that that's where we're heavily focused. Give me one second here. No, I think that's it. I don't have seem to have it exactly -- I'm sorry.

We've been focusing on our view of commercial real estate, but we did do a pretty deep dive into the auto floor plan business. And we did that because we were very focused on what our exposure was to GM and Chevy and those types of things. And that's actually came out faring pretty well. We had relatively low exposure to a lot of the impact of sort of reducing the size of those two institutions, right, and then actually the outcome has been a little bit better. So we spent a lot of time focusing on that in that area. And then we obviously have -- just finished obviously the annual shared national credit exam, but nothing to speak of really.

But on the shares of credit, that was in the numbers, I'm assuming, the second quarter. Any preliminary results there?

Anything that we know is in -- would be in the numbers, right. To the extent that we're the lead and, or that we've been --

Okay. And could you remind us, as you took a look at that auto-related exposure, where does that all-in net exposure stand at this time?

I'll try to get a total exposure number for you in a minute. But I would say that if you look at just the floor plan piece, that a year ago was probably at about $1.6 billion to $1.7 billion just in the floor plan piece, and it's actually dropped dramatically. Last I looked, it was maybe $1.2 billion or something in that range, because the remaining dealers that are left have very, very low inventories, right? So the whole thing a year ago was $2 billion. The inventories -- is that the inventories you got there?

The total floor plan outstanding balances were $1.1 billion.

Okay.

So the exposure there is way down. A lot of that has to do with just sort of the fact that inventories are low because car sales are down. But then also the work that we've done over time, we've really reduced our exposure to domestic dealers. I would guess -- I don't know. I'm going to guess we started at $2 billion of total exposure, including real estate and those things. Maybe it's $1.5 billion now.

Okay. And then if I could, just an update, in terms of New York City real estate portfolio -- you've talked about your comfort level there. Very little past due. Could you just update us where the past due numbers trended this quarter on New York City?

Past due numbers in New York City, I don't think we have any. There's nothing significant.

Nothing significant.

I don't believe we have anything in nonperforming.

There had been the one $5 million --

$5 million credit, but that's been there for a long time. So again, I'll just say that we are not saying that we're immune to losses in those portfolios. We're saying two things. Timing, right? And that as it comes, we'll be affected like everybody else. But we do think we will hold up, we'll hold our own, right, as we go through these types of things, just as we have in other areas.

Great. Thanks a lot. Appreciate it.

Your next question is from the line of Amanda Larson with Raymond James and Associates.

Hi, guys.

Hi, Amanda.

Just wanted to know what were your early stage delinquencies and then if there were any notable increases or decreases in any particular loan bucket?

As I look at total delinquencies for the whole -- it's an estimate now, as we are going to audit those numbers. But the total to 30 to 89 day ratio went from [1.03] last quarter to [0.97] this quarter.

Okay.

We'll have to check that and it will come out in our (inaudible).

Sure. Then also if you -- what do you think you would be more likely to do first, an accretive acquisition or pay back the TARP?

Two different things. I don't know that they really relate to each other.

All right. Well, thank you.

You're welcome.

Your next question is from the line of Bob Ramsey with FBR Capital Markets.

Hey, thanks for taking a quick follow-up. I couldn't find in the release the amount of preferred dividend expense for the end of period balance with Provident in there. Can you just give me those numbers?

Well, the total TARP would be $751.5 billion. And the dividend -- you can actually get the dividend because we have a line on Page 13 of the release that shows net income and then net income available to common shareholders. So the difference there is the dividend.

Okay.

So it looks to be about $10.5 million to $11 million.

And then was there any non-TARP preferred with Provident, or no?

They have $26 million of mandatory convertible that they issued in May -- I'm sorry, April of 2008 that's left. They issued $50 million, and we had a piece of it that got canceled out.

Okay. Thank you.

There are no further questions at this time. I'll now turn the conference back over to Mr. MacLeod for any closing remarks.

Again, I would like to thank you all for participating today. And as always, if clarification of any of the items on the call or the news release is necessary, please contact our Investor Relations department at 716-842-5138. Good-bye.

Thank you all for participating in today's M&T Bank second quarter 2009 earnings conference call. You may now disconnect.