M&T Bank Corp (MTB) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the M&T Bank Corporation third 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. Sir, you may begin your conference.

Thank you, Paula, and good afternoon. This is Don MacLeod. I'd like to thank everyone for participating in M&T's third quarter 2009 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued 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'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and 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'd like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and welcome, everyone. Thank you for joining us on the call today. Unavoidable conflicts made it necessary to schedule today's call for the afternoon, so I'd also like to thank you for your patience. Let's turn right to the results.

Diluted earnings per common share were $0.97 in the third quarter of 2009, compared with $0.36 earned in the second quarter of 2009. Net income for the recent quarter was $128 million, compared with $51 million in the linked quarter. After-tax, merger-related expenses relating to both Providence and Bradford Bank acquisitions were $9 million or $0.07 per common share in the recent quarter. This compares with after-tax merger related expenses of $40 million or $0.35 per common share in the second quarter of 2009. Future merger related expenses resulting from these two acquisitions should be quite modest.

The purchase agreement related to Bradford Bank, which included a loss sharing agreement with the FDIC on the loan portfolio, lead to an after-tax gain of $18 million or $0.15 per common share, which more than offset merger-related expenses incurred during the quarter. These two items aggregate to a net after-tax benefit of $9 million or $0.08 per common share. Amortization of core deposit and other intangible assets amounted to $0.09 per common share in the third quarter of 2009, compared to $0.08 in the linked quarter. Diluted net operating earnings per common share, which exclude the amortization of core deposits and other intangible assets, as well as each of the merger related items I just mentioned, were $0.98 per common share for the recent quarter, up 24% from $0.79 in the linked quarter. The net operating income for the quarter was $129 million, compared with $101 million in the linked quarter.

There were two noteworthy, two other noteworthy items reflected in M&T's results for the recent quarter. First, we recorded pre-tax other than temporary impairment charges of $47 million for certain private mortgage-backed securities carried in our available for sale securities portfolio, as well as for truck CDOs we acquired in 2007 Partners Trust merger. This reduced earnings by $29 million or $0.24 per common share on an after-tax basis. Second, we recorded a $10 million or $0.08 per common share reversal of income taxes previously accrued for uncertain tax positions in various jurisdictions.

Next I'd like to cover a few highlights from the balance sheet and income statement. Taxable equivalent net interest income was $553 million for the third quarter, an increase of 9% from $507 million in the linked quarter and an increase of 12% from $493 million in the third quarter of 2008. The net interest margin was 3.61%, expanding from 3.43% in the second quarter of 2009.

There were two primary drivers of the margin expansion. The first was a decline in the rates tied to our wholesale borrowings. The average rates for three months and six months LIBOR declined by 46 and 59 basis points respectively in the second quarter, essentially catching up to the declines in short-term rates that we witnessed in the first half of 2009. Roughly half of the 18 basis points of margin expansion related to the repricing of our wholesale borrowings. The second factor was deposit repricing. A combination of lower rates on money-market deposit accounts combined with the maturity of high rate times deposits accounted for substantially all of the remainder of the margin expansion.

In January, we speculated that the full year margins for 2009 following a decline in the third quarter would be in line with the full year 2008 margins of 3.83%. With the margin of 3.41% for the first nine months of 2009, we appear to have realized much of the anticipated benefit of lower interest rates a bit earlier than expected. Although it's difficult to predict the net interest margin over the short-term, our outlook for the remainder of 2009 is for the margin to be stable to modestly wider, assuming the interest rate environment remains unchanged. Average loans for the third quarter were $52.3 billion compared to $50.6 billion in the linked quarter. The entire increase came as a result of the impact from Provident and Bradford mergers.

On a core basis, excluding those transactions we would estimate the changes to the M&T loan portfolio were as follows. Average total loans declined an annualized 4% in comparison to this year's second quarter. Average commercial and industrial loans declined by 4.4% or 18% annualized. This included a $218 million decline in auto floor plan lending. While we normally expect to see a seasonal decline in dealer inventories in advance of the new model year there's no question that auto inventories overall are lower than we've seen for some time. To give you some perspective, average floor plan loans were under $900 million in September compared with $1.4 billion during last year's third quarter.

Excluding loans to finance dealer inventories, average commercial industrial loans declined by $394 million. Commercial customers have generally lowered their line utilization. Of course, the flip side of this is the fact that these same customers are holding more cash as evidenced by the strong deposit growth that we'll discuss in a moment. Average commercial real estate loans increased an annualized 3%. Average residential Real Estate loans decreased an annualized 2% and consumer longs declined an annualized 2% with modest growth in home equity lines of credit being offset by lower indirect auto loans.

We experienced some softening of commercial loan demand in our community banking regions as well as in our non-community bank based portfolios. For example, the upstate New York and Pennsylvania regions experienced low single digit declines. The Mid Atlantic region was essentially flat while the metro New York region experienced mid single digit growth. We continue to see strong growth in core deposits. Average core customer deposits in the third quarter. excluding any impact from Provident and Bradford, and which excludes foreign deposits and CDs over 100,000, increased by an annualized 11% from the second quarter. Compared with last year's third quarter, excluding the impact from acquisitions, average non-interest bearing deposits were up 46%.

Turning to non-interest income, excluding securities gains and losses the gain from the Bradford acquisition, non-interest income was $296 million for the recent quarter, unchanged from the link quarter. Non-interest income from the former Provident franchise was $25 million, an increase of $17 million from the linked quarter. reflecting full impact of the acquisition. M&T's share of operating results from Bayview Lending Group or BLG was a loss of $11 million compared with a $207,000 loss in the linked quarter. BLG's recent quarters performance was largely attributable to a loss on sale of a small portfolio of loans as well as a currency hedging loss on the portfolio of Canadian loans.

Mortgage banking fees were $48 million for the quarter compared with $53 million in the linked quarter and $38 million in the third quarter of 2008. This reflects the impact from rising mortgage rates late in the second quarter which carried through to most of the third quarter. Service charges on deposit counts were $129 million during the recent quarter, an increase of $16 million from the link quarter. $13 million of the increase was due to the full quarter impact of the Provident acquisition.

Turning to expenses, operating expenses, which exclude the merger related expenses and amortization of intangible assets were $469 million, compared with $482 million in the second quarter of 2009. Recall that the second quarter's results included the $33 million special FDIC assessment. Excluding that item, operating expenses for the third quarter increased by $20 million from the linked quarter. As we move further along in the consolidation process, it becomes difficult to break out Provident-only operating expenses, however that $20 million increase was largely due to the full quarter impact of the acquisition. Core M&T expenses were well controlled. The third quarter's results included no adjustments for the valuation allowance for capitalized residential mortgage servicing rights, compared with a $13 million reversal of the allowance in the second quarter of 2009.

Now let's turn to credit. Non-accrual loans increased to 1.2 billion or 2.35% of loans at the end of the recent quarter compared with $1.1 billion or 2.11% at the end of the previous quarter, an increase of about 10%. The increase in non-accrual loans included about $42 million of loans acquired in the Provident transaction, for which a fair value adjustment was made at the acquisition date. The remaining loans newly classified as non-accrual in the third quarter included two commercial industrial loans and a residential developer credit. These three loans accounted for substantially all of the remaining increase in non-accrual loans as compared with the linked quarter.

Other non-performing assets consisting of assets taken into foreclosure of defaulted loans were $85 million as of September 30, down from $90 million as of June 30th. Net charge-offs for the quarter were $141 million compared with $138 million in the second quarter of 2009. Annualized net charge-offs as a percentage of loans was 1.07%, down from 1.09% in the linked quarter. Included in net charge-offs was a $42 million charge off on a loan to an operator of retirement communities which was moved to non-accrual status in the second quarter. The provision for credit losses was $154 million for the third quarter compared with $147 million in the linked quarter, the provision exceeded charge-offs by $13 million.

As we've previously noted, the Provident loan portfolios are being accounted for in accordance with the new accounting rules that took place at the beginning of the year. What this means is that those loan portfolios were marked to fair value as of the acquisition date, by analyzing the net present value of cash flows from those loans. The result is that this fair valuation process under the new rules prohibits the carryover of the loan loss allowance from the acquired entities. Put another way, M&T's allowance for loan losses exists to absorb only in M&T's legacy portfolio and not for loans acquired in the Provident and Bradford transaction. The ratio of the allowance for credit losses to legacy M&T loans was 1.81%, up from 1.76% in the link quarter. As of September 30, 2008, that ratio was 1.60%.

The loan loss allowance as of September 30, 2009 covered year-to-date annualized charge-offs by 1.7 times. Loans past due 90 days but still accruing were $183 million at the end of the recent quarter and included $173 million of loans guaranteed by government-related entities. Those figures were $155 million and $144 million respectively at the end of the sequential quarter. M&T's tangible common equity ratio was 4.89% at the end of the quarter, an increase of 40 basis points from 4.49% at the end of the second quarter. Approximately half of the increase was attributable to a lower level of unrealized losses on our available for sale investment portfolio. The other half is primarily attributable to earnings retention and the slightly smaller balance sheet.

Turning to our outlook, as I mentioned earlier, our near term outlook for the net interest margin is that it should be relatively stable to modestly wider. We'll share our view of the longer term on the January earnings call. While credit costs remain elevated as the current credit cycle continues to play out, our in flows of loans into non-accrual status and our loss experience continues to be very manageable. What gives us the most comfort is our strong pre-tax, pre-provision profitability, which creates an ability to deal with issues that arise.

We also believe that we have been early in addressing those issues that have a risen so far. Also as we've said before, you should expect a certain level of variability in both the non-accrual loans and the charge-offs in any single quarter, as we've seen a single large loan can skew the overall numbers. Overall, net charge-offs continue to be in line with our expectations. The efficiency ratio calculated on the net operating basis was 55.2% for the third quarter unchanged from the third quarter of 2008. The 60% efficiency ratio in the second quarter of this year reflected the impact of the one-time FDIC assessment. Excluding that assessment the ratio for the second quarter was 56.0. As a continued integration of the Provident franchise should contribute to improvement in the efficiency ratio, we estimate that the Provident acquisition added $0.08 to diluted net operating earnings per share in the first full quarter following the closing of the transaction. This pace is ahead of our original projection.

All of these projections are of course subject to a number of uncertainties and 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 Paula will review the instructions.

(Operator Instructions). We'll pause for just a moment to compile the Q & A roster. Your first question comes from Heather Wolf with UBS.

Good afternoon, Heather.

Heather, your line is open.

I'm sorry. Are you guys there?

Yes, we're here.

Sorry about that. Forgot to unmute. Just a couple of questions on the OTTI marks. First of all can you give us a little bit more color what piece of that was the private MBS and what piece of it was TRUPS, and also can you just outline how much is remaining in the TRUPS portfolio that was not marked on the PPKS deal?

Yes, sure. On the Partners Trust piece was $2 million out of the $47 million, and just the amount that is all written down to today is $10 million.

So it sounds like the majority of it was from private MBS. Was that from the hybrid arms book?

Yes, it's from the private label mortgage backed securities book, and as you kind of look in the Q, we sort of outlined that portfolio by sort of saying well how much is senior and how much is subordinate and how much is investment grade and how much is not. Most of this came from the more subordinate portion of the portfolio and we sort of the went through our standard process that we see that we've used every quarter and wrote down the $45 million.

Okay, great. Thanks so much.

Sure.

Your next question comes from Craig Siegenthaler with Credit Suisse.

Hi, Craig.

Thanks and good afternoon. First, just on the reserve level, can you talk about where you expect to build reserve levels over the next year and are you having any discussions with your regulators around reserving?

Well, I'll take that in reverse, as far as our regulators are concerned, and all of the other parties that review us, our reserving process is very much an open book and I think when you take into consideration things like shared national credit and those things that probably should make an investor feel that much better, that a lot of people are looking at those processes. And to get to the first part of your question, I would say that we still see increases in the overall classified loan book, albeit they have seemed to have the pace that those increases have seemed to slow down but given that you're going to continue to see, we continue to see that migration, our reserving process will follow that migration, to the extent that we see some large credit that we think has loss content that we haven't identified, we would provide for that, but generally I think our process is very consistent and you can kind of seen that over the last several quarters.

Got it and then just a quick question on charge-offs. From what you just said, it sounds like the NPL growth all came from three large loans, $42 million of charge-offs came from one large loan, if you kind of put down the numbers and your delinquencies went up seasonally do you think charge-offs could improve sequentially? Third quarter to fourth quarter?

It's too hard to predict. I think you described it very well. If you set aside one large credit we were just under $100 million. The primary reason for that is two or three things. One, our consumer book has performed, continues to perform very well.

The charge-offs in the consumer book were about equal, so what they were the prior quarter and if you look at 30 day plus delinquencies, we were at 1.66% which was up 14 basis points from last quarter but equal to where we were at the end of 2008, so it's pretty stellar performance on that part and the other thing is that contributing to our losses last year and throughout this year have been our residential mortgage book and particularly our Alt A portfolio but because we've been on that for so long and because we were early in the intervention, those losses again have been pretty stable and they were down something like last quarter they were $31 million and this quarter they were 19 or $20 million somewhere in that range. So we've been able to get a big portion of that portfolio by sort of getting at it early and the fact that it was also very well underwritten has been pretty stable. We've seen for some time the items that we've been talking about over the last three or four quarters on the C&I side and I think that will continue but you can kind of get some sense that we seem to have a fair amount of room to be able to absorb those types of things in our overall credit outlook.

Those are my thoughts and can I predict what's next quarter? Not possible.

Thanks for the color.

Sure.

Your next question comes from Bob Ramsey of FBR Capital Markets.

Good afternoon.

Good afternoon.

Could you, I know we've talked around it a little bit but could you break out with the $141 million in charge-offs which portfolios, how much was in each one?

Yes I think I can. With the caveat that as we file our reports I'm looking at might be slightly different from where we end up on the regulatory basis but give me one second.

Sure, and maybe while you dig that up, with the renegotiated residential ones that you all have, are all of those initially placed in a non-accrual status until they've demonstrated performance? Or if they're performing at the time of modification do some of them stay in accrual buckets?

Well, one of the things that's different about our modification program, I think it is one of the reasons why it's doing so well is that for a long time now we've been modifying loans that are current, so to the extent that we modify loans before someone gets into trouble and it hasn't missed a payment, it doesn't go into non-performing. If they had missed the payment one or two or three payments before we did the modification, then after the modification they have to be, they have to make six months worth of payments before we would remove it out of the non-accrual status.

I think about it a little differently, but if I just start with consumer loans to make sure that I have the right columns here, so on the consumer book, the charge-offs this quarter were $30 million and the charge-offs last quarter were $31 million and when we look at C & I, the charge-offs were $71 million versus last month being 48 with I believe that $42 million credit included in those numbers. And then if we go to residential, this quarter we had $20 million of residential mortgage charge-offs and last quarter we had 31 and if you'll remember in the 31 was a fair amount of sort of the remaining portion of our one closed construction portfolio and I think that portfolio is down to about $90 million now so it's pretty much off the table.

And then our commercial real estate went from $28 million last quarter to $20 million this quarter, and the large portion of that if not most of that is residential builders, the same story we've been talking about for some time and that's actually a little bit lower than we had anticipated when we were sitting at the beginning of the year, but I won't say that we're done on the builder and developer space but I will say that we know the portfolio well, a couple years into that work.

Okay, that's very helpful and then maybe if I jump back to the renegotiated loans, could you just talk a little bit about the redefault rates that you all have seen or maybe six months from the time of modification?

Yes, so if you look at six months from the time of modification, that number is 27% and I think last quarter it was 25 or 26 so it's up a little bit, still pretty good and that redefault rate is 60 days or greater, delinquent. If we were to go 30 plus days it would be roughly 35%. So somebody missing one payment.

Okay.

It would be 35.

Okay, that's very helpful, thank you.

Sure.

Your next question comes from Matthew O'Connor of Deutsche Bank.

Hi, everybody.

How you doing?

Good. Maybe I'll ask the customary quarterly question on BLG, continued to report some losses I think they've totaled about $45 million or so since you bought it, still feel confident you won't have to take an impairment on that investment?

Well, I think today, we feel that we've addressed it appropriately, and you've saw the losses this quarter were a little higher than we had been last quarter. Part of that as we said was a sales from loans but then also sort of swing in the sort of hedging of the Canadian exchange on their Canadian portfolio moved against us this quarter, moved for us last quarter, so the projections are really not different than we had been thinking about over the course of this year. All the lines have been sort of on track with what our plan is, particularly on the Bayview Asset Management front as well as the paydown of the cash flows coming from the residuals.

Okay, and then as you think about 2010, is there, does the business need to start being profitable? Do you expect it to be? Is there some, I guess I feel like an investment that's made eventually if it keeps kicking off losses there's risk of impairment and I know we always ask the same question every quarter.

I guess I don't expect the long term cash flow type losses to be significant in that originations business because there's not much business going on in that piece. Much of the valuation of our basis has to do with cash flows from residuals. I don't know that as you receive those cash flows that's not necessarily from an accounting term income because it's a fixed set of cash flows that I would define in my old days many years ago when I was in school we used to call that a dying asset so typically that type of asset just writes down the basis so I don't think of it as income. I think of it as cash flow. I wouldn't expect to have any significant losses from that as we kind of move forward.

Okay, and then just separately, not a big deal but you mentioned indirect auto, I guess that's auto on the consumer side was down a little bit quarter to quarter and I was wondering why I thought spreads were pretty good in that business and there's pick up in volume and maybe an opportunity to make some good loans there.

You're talking about the indirect auto business?

Yes, on the consumer side.

Yes, I think that we're still relatively cautious. Volumes are good, but more importantly when we said I think it was in January of 2008 that what we were going to do was we were going to focus on our in footprint business and we were going to make loans specifically in the community and try to take share. We meant that. So the fact that we have a legacy portfolio there that might have been slightly outside of the footprint or not to relationship driven and we're not doing that portion anymore creates the run-off in the books. We're still generating probably something like $100 million maybe slightly north of that a month in new business there, so what you're getting if you were to look at a P & L is the whole row of portfolio margin is widening, the old stuff is running off.

Okay, that's helpful, thank you.

Your next question comes from Ken Zerbe of Morgan Stanley.

Hi, Ken.

If I heard correctly on the call you mentioned your loan balances excluding recent acquisitions may have been slightly negative this quarter. I was just wondering what you're seeing given your pipeline about further loan balance contraction from here and really how much visibility do you have on that, is it one quarter, two quarter, et cetera.

Well, it a very good question. First of all when you look at the pipeline for business, it's not down. As I look at it I've got a slight adjustment to make for the acquisitions but I think the pipeline seems to be slightly up, but the utilization is the big issue and utilization has been down maybe 1% over the quarter, and I think that it seems to be consistent with people who are sort of pulling back not making Capital Expenditures and one of the things that you definitely see Ken is not because the companies are unhealthy, because they're producing significant profits and significant amount of cash, and you are seeing that on the other side of our balance sheets. So I think that the business bankers, small businesses and middle-market businesses in our footprint seem to be very cautious to make new capital investments. We're willing to lend so we're out there. So I guess that continues for some time. When I look at the Federal Reserve data, our data mirrors this.

Okay, that's great, and then the other question I had was on your I guess New York commercial real estate portfolio. Obviously with credit losses down the credit quality is holding in very well but just commenting on sort of what you're seeing in the underlying credit trends, are we seeing higher LTVs? Are you checking I guess the appraisals or getting new appraisals? How are cash flows holding in and supporting the underlying loans?

Yes, sure, and Ken, this is I think I beg your patience a little bit. I'll start off by saying our normal process is that we review every loan every year as it comes up for renewal and we look at all of that. And then on top of that, we don't talk about it that much but we review any loan that's in our classified loan book that is greater than $350,000 every single quarter. We do a write up on the loan, it goes to committee and they determine whether they need to look at it or not. It's a pretty exhaustive review, and then as you've seen over the last three years, we then do specific reviews on portfolios and so now, this quarter, this past quarter I should say, we completed our second formal review of the New York City book and the short answer is theres not much change there.

A couple things I can kind of point you to is that if you look at our largest 10 loans in that portfolio, our largest 10 relationships at the end of July, there were only two that had worked their way into the criticized loan book and as I look at those two, there hasn't been much change from last quarter. What we've seen is I'll take one for a larger loan is that there is some probability that down the road, if the owners are those people who have the equity stake or the mezzanine stake and they decide they don't want to continue to participate we could see ourselves having a non-performing loan. We got appraisals on that particular building I believe in the last 10 days, and we're money good on that loan as the valuations stand today. Much of that has to do with the structure of how we under wrote that loan, and the second is probably further out and is very similar, and I think overall, when you go from review to review, we've seen a continued downward migration, and if we were to look at the top level statistics outside of M&T when we begin the review, they're exactly what you've been reading about and hearing about in terms of vacancies and delinquencies.

It helps us that we're not in the Class A space a lot, but overall for our portfolio, while we've seen a continuation of the migration, there's been a slower rate of down grades and most of those down grades are from market conditions versus surprises, like we didn't understand the structure of our particular loan. The things I think that seem to be separating us from the pack are that we really have a limited true construction and development risk. We've got low condo exposure, and to give you some sense of that, if you were to look in that New York City book of $5.6 billion, there's $601 million of commitments that you could classify as construction, $461 million is outstanding. 62% of that is completed. The remainder is in sort of residential and sort of condo, that's roughly outstanding of $153 million and when you look at that space of all of the projects, I've got a list in front of me of all of the projects, there's only two of those projects that the sales price of the units are greater than $1 million, the highest is a million two, every other one has average unit sales prices of below $1 million,and that's the space that's moving in New York, so if you go from our last review, which was February to this review, the condo co-op construction exposure has actually dropped 60% since February because we're in that sort of low end space relative to New York City, and those are moving, so when I kind of look at the whole thing and I classify it as no change and for example, we won't do less work here, we'll continue to get appraisals and focus on our watch list, but we still feel pretty good about our underwriting, but we still feel that we like everybody else will focus on commercial real estate.

Okay, great. Thank you.

Your next question comes from Steven Alexopolous of JPMorgan.

Hi. Could you start by commenting on the impact to your shared national credit book from the quarter in the exam?

I can make the general statement that any increase in our classified loan book and non-performing loans as well as charge-offs this quarter fully reflect anything that came out of the shared national credit exam. Everything, where we were the lead agent held up well and we actually had a net, one of the credits upgraded, and for the most part, I think we saw some of the same things that you are probably seeing at other institutions, we just have a smaller number of those credits and so anything that you see in our numbers this quarter and last quarter reflected what we knew at the time.

And the SNIK exam focused on high risk activities like leverage finance and media and telecom and obviously the real estate component and from leverage finance perspective and media and telecom perspective it's not areas where we really play.

Rene, I just had one other question, a peer bank of yours has been fairly vocal recently they're planning to deploy capital in your core markets. Just wondering how competitive you might get given where your capital levels are in a non-FDIC deal. Are you essentially just targeting FDIC deals now?

It's hard to change our DNA. I mean, we tend to think about things as very long term if there was an opportunity in the space where that entity had a lot of core customers where we think that could add value we would be interested but we're not in any sort of arms race out there. We're very content with growing the business in a very consistent fashion that we have and you kind of see our decision, so we don't really think about what other people are thinking about.

Maybe as a follow-up on your NIM outlook, does this imply essentially the cost benefit you've seen on the funding side as done and there's been a benefit coming from this mix shift into non-interest bearing? Is that essentially played out as well?

I think we describe it pretty well and the half that came from the deposit side there's a nice benefit coming there and some of the benefit on the deposit side hurts you in the service charge category because it's covering fees on your commercial side but that's really what we've seen. I look at the yield on the time deposit book. It's not fully repriced yet. I'd be surprised to see an 18 basis point expansion so again, that's where we get our guidance.

Thanks, Rene.

Your next question comes from John Fox of Fenimore Asset Management.

Hello, everyone. I have a couple questions. The first is you mentioned in the NPLs that some of those came from Provident, I believe you said, $42 million in the quarter.

Yes.

So I'm trying to figure out is that consistent with the original accounting that you wrote all of the loans down to fair value or there's something going on with the Provident loans?

Well if you think about it sort of a three step process we project forward all of the cash flows and the loans and in the embedded in that, there's an expectation we won't get paid on from credit losses and as we said in the transaction, I think that our credit mark at the time we closed the deal was about $320 million. Some portion of that went to loans on the day we acquired it, we felt were already impaired, and that's where we set up our SOP 3-3 loans and we disclosed that in our Q. What happens from there as the loan sort of has a downturn, it also then just goes through your normal process and so even though you have got set up a mark on that loan, it's still has stopped paying so it can go into non-accrual so what I was pointing out is that the migration of things to non-accrual and to loss for Provident if we had done our job should be covered in that original 320 mark.

So they won't result in charge-offs in future quarters.

That's a good way to put it if our estimates are proper they shouldn't result in charge-offs in future quarters.

Did you mention the amount of subordinated MBS that you have left, what the fair value of that is at this point?

I did not. The pure subordinate number, I don't want to get it wrong. I'm going to come back to you on this but I thought it was around $116 million or $120 million.

Okay, and then two quick ones. In terms of Bayview, are you suggesting because of these unusual items in the quarter that the loss going forward should be less?

Oh, I don't know. I'm just sort of trying to give you quarter to quarter the run rate. Last quarter was there was no loss, and we benefited from a swing in the foreign exchange, and this quarter it was kind of high because we had those types of items, right? So I'm just trying to give you a sense of what's in the numbers and why they swing a little bit.

And the service charges line which you mentioned the increase, do you feel that's a sustainable level at this point?

Well, the trends are pretty consistent. I'd say that this has been a flat to slight decline in service charges in the industry overall, I think where you see some decline in that line is particularly on the commercial side as commercial businesses continue to hold more cash it reduces that line, because they get credit for that for the services they use. So that should have a direct offset in the margin.

But to pick up from Provident seems it would continue on an ongoing basis.

What would continue?

You said you had an increase in service fees because of the acquisitions.

That's just bringing the two together and now you got the full quarter of Provident.

Exactly. Right.

Yes.

Okay, thank you.

Your next question comes from Jason Goldberg of Barclays Capital.

Sorry if I missed this but did the Bradford deal impact the SOP-3 loans and can you just give us more color with respect to what impact I guess Provident had on net interest income if it determines kind of accretable yield and advertising some of the fair value marks back into net interest income and just whether dollars or NIM impact and your outlook for that going forward?

On the second question, I think it was one basis point negative Provident, but it was one basis point negative to our overall margin. And then I'm being told that the Bradford is about of the SOP is a difference? So the Bradford added about $20 million to the SOP, so took it from 88.7 to 108.

Okay, that explains it. Super, thank you.

Your next question comes from Todd Hagerman of Collins Stuart.

Just had a question in terms of the pre-provision profit. You had a nice rebound this quarter and I'm just wondering how we should think about it as we look out into 2010 if I think about maybe a balance sheet that's flattish if you will given kind of where loan demand is and just kind of mortgage banking that's been obviously having a terrific year this year, how do you put those pieces together as you think about possibly growing the revenue growth or revenue base in kind of a tough environment into 2010?

Well, I think that the way I think about it is that when you look at the overall economy it's probably going to be slow, and so I wouldn't expect our balance sheet to grow more than the overall economy, so if you think that it's sort of flat to slightly positive we should benefit from that. I still think that we have sort of some portfolios of assets that in my mind are transactional, a little bit transactional and will continue to run-off, so while our overall earnings asset growth might be modest next year, I would think that our end market share might be higher. And so that tends to focus on sort of the profitability aspect of things rather than pure balance sheet growth. Mortgage is hard to predict, it's a very volatile business.

I do think that remember that today throughout 2009, ours and other fee income businesses have been muted a bit by the fact that the market is in the first half of the year performed so poorly so any sort of rebound in the market helps us a little bit and then I think we have work to do on cross-selling some of the new customers that we've gotten and that should help us a bit. I think more than anything, I think that the thing I look at was last time we were in 360s in the third quarter of 2007 in terms of our margin, we had a 51.5% efficiency ratio roughly back then and now we're at 55. We would like to explore ways to sort of get back to our normal level of efficiency over time.

Just in that regard can you give us any update on the efficiency initiatives you've talked about in the past about trying to balance the two between the revenue side as well as the cost side and as you know the cost is the hallmark of the Company, any additional detail or color you can give us there?

Not a lot of specifics because I would say that unlike the project work that we've done in the past, this is really each of the individual business units segments and regions kind of looking at what the opportunities are in their space and clearly the opportunity in the Mid Atlantic where we've just done two deals is very different from what it might be in New York City and what it might be for some of our pure fee income businesses, so everybody is sort of taking a look at that and at some point maybe next quarter or shortly thereafter we would probably have a little bit more color but we just call it basic blocking and tackling and kind of set a goal, and we're pretty good at executing, and as we learn more we'll talk to you more about it.

Terrific, thank you.

Your next question comes from Amanda Larsen of Raymond James.

Hi, Don. I just wanted to know, did you mention why other revenues from operations went up? It's the line item below BLG on your non-interest income.

That might be where the Bradford gain is recorded.

Okay.

Which is $29 million pre-tax.

Bradford gain of 29 million pre-tax? Additionally you said that merger charges could be modest from here. Could you give us a range between the two transactions?

I mean I think that we're substantially done. I mean, maybe here or there we've got a couple of work on some branches and so fourth, but single digits.

Very good, thank you. And then if another Bradford came along this quarter, is that something you'd be willing to look at and another FDIC assisted deal like immediately?

Well we look at everything, so it would have to be attractive and it would have to be in our probably core footprint whether a lot of customers that we could engage, and I think right now though, we're heavily focused on sort of understanding the process with an FDIC assistive deal and beyond announcing the transaction, there's always a lot of work around getting your systems configured to handle that type of reporting and those types of things, so that's what we're focused on now. We really continue to focus on Bradford to understand how to do it well but all of that as we move forward month after month makes us probably that much more proficient at being able to handle another.

Okay, sounds good. Thanks very much.

You're welcome.

Your next question comes from [Gary Fall] a Private Investor.

Hi, Rene.

Afternoon, Gary.

The fact that you recorded a gain on Barnard, does that imply all exposed assets meaning assets other than the loss component for which the government will cover you on losses were written to zero and you still had enough assistance to record the gain?

Well, we didn't take all of the securities book and the other securities books were written down to market, right? And I believe most of those were government related investments.

The rules have changed because they used to have to write everything down before you got to a gain. That's been changed?

That's exactly right. The rules have changed, so what ends up happening Gary other than the wonderful days of the early 90s you don't take that to the balance sheet, directly to the balance sheet and goodwill. What ends up happening is you mark the loans as if you own them and then you also record a receivable from the FDIC and that's actually what creates the gain that goes through your Income Statement.

Well that's different than what I did deals in the 90s. Okay, my second question is Bayview. I was a little confused by your answer on cash flows. Does your answer mean that you're getting cash flows from Bayview in addition to what you're recording from the loss?

Well if you look at the one business which is BLG, what we're doing is we record the basis and if we have gains through the income statement and writes the basis up and if we have losses it writes the basis down and then we have two other assets which flow to M&T, and one is a subset of over $1 billion dollars of residuals of which we receive 20% of the payments on, and those cash flows go to, think of them as balance sheet items.

So you have those recorded separately from Bayview?

No, you'd see it all in the basis, right? But if we think of the overall relationship the way it's structured is first residuals go off to pay their loans and lines and then as those get fully paid down, in part in January of 2010 and finally in May of 2010 then you'll begin to see those cash flows reduce the basis of the investment.

What is the basis for today?

$256.2 million. Thank you. I hope you can do more FDIC deals.

Thank you, Gary.

Your next question comes from Collyn Gilbert of Stifel Nicolaus.

Thanks, good afternoon Rene.

Afternoon.

Just a couple things. What were the geographic location of the three large non-accruals that came on this quarter?

Good question. Let's see. Why don't you ask the second one and I'll see if I can get it answered for you.

The second one is just sort of what's your expectation on run rate on expenses?

Yes, I think that we've done a pretty good job of containing expenses so far. I don't think that will change. I think we'll probably have to contain core expenses but we haven't yet fully integrated the Provident acquisition so we have work there and I would say expenses going forward next year would be pretty contained, and then we'll receive some benefit from also receive some benefit from fully integrating the branch network of Provident.

Can you remind us what the dollar amount was then of the expense save you had anticipated with Provident?

I don't know, what did we say? 45%? Well of the pre-merger cost base. So you may have to take a look at say their first quarter take a look at where they were and if they do a run rate on that.

And the timeline for integrating those would be?

And I also said on the last call if our goal was 45, we probably gotten to 26-27 already. Okay, all right what percent of the C & I book is tied to LIBOR? Oh, most of it. The lion's share is tied to LIBOR. The lion's share of that is tied to one month LIBOR. Some is three but most of it is one month LIBOR. Which is why you saw it reprice so fast at the beginning of the year.

Right. Yes.

And then to your earlier question was in sort of Hudson Valley, another was in the Mid Atlantic and third was in our national portfolio.

Okay, and then without giving specifics on the net charge-off of the retirement community, was that by chance a Company that filed for bankruptcy today?

We wouldn't talk about any specific customer relationships, so I think what's most important is that it was probably one of our larger lower secured credits we had in the book and we dealt with it.

Let me ask the question differently. Do you have much large credit exposure left to any kind of retirement community borrower?

If you think about it we have a healthcare portfolio, so other than the credit that we talked about, there are others where that we're financing either retirement communities or those types of things typically in Upstate New York and really throughout our footprint but I wouldn't think that any of that's notable in terms of size relative to the rest of our portfolio. So again, not a lot of share, these are things we would under write ourselves.

So I would assume you're not seeing unusual weakness in that portfolio, or you would have discussed it, or are you?

No, the only, well the only thing we said is that where those folks are having difficulty, particularly as you get to the retirement community space is early on. A little bit less so now because the stock market has rebounded and I think that has probably helped a little bit in terms of moving units but early on when folks couldn't sell their homes, that would delay them in terms of going into purchasing units within the retirement community, and that sort of slowed the cash flows of those and put a little stress on them but there's probably some of that I would guess still going on but I also think that I read from the folks the work that our credit guys had done is the rebound in the stock market has helped people push them over the edge there.

Okay. And just one last thing. On the net charge off that you had indicated was part of the retirement committee you said that went on non-accrual. Was that the first or second quarter?

Second quarter.

Okay. And then just one final question. Would you mind breaking out the loan balances per segment for the quarter? It was helpful the way you did it on the NPL front but could you just do it on the straight front?

Like loan growth you mean?

No. You could just give us the balances this quarter for each loan segment.

Yes, I can.

You can always put it in the press release too if you wanted going forward.

Thank you for the suggestion.

Sure.

Isn't it in the press release?

No.

You're saying as at or average? Well I'll give it to you.

Oh, wait my mistake. Never mind, it is. Forget it. Forget it. My fault.

It was still a good suggestion.

Never mind. Okay that's all I had. Thanks.

You're welcome.

Your next question comes from Jennifer Demba of SunTrust.

Good afternoon.

Jennifer your line is open. Okay, we'll proceed to the next question your next question comes from David George with Robert W. Baird.

Good afternoon Rene, thanks for taking the question.

Sure.

I had a quick question about consumer legislation and impact on NSF overdraft fees. Do you care and try to quantify the impact that it would have for you guys longer term, obviously I know it was a meaningful driver for Provident historically just wondered if you had a comment on that. Thanks.

I'm not sure that it is a quantifiable thing in part because you're not quite sure where we'll end up, right? And I tend to think of not necessarily fees but I think of the value of the deposit account but having said that, there's a lot of folks that came out with the sort of pre-announcement of some of the things that they were going to do. We haven't really said anything about it but that's in part because there's a number of things that we were already doing that seems to be either talked about in legislation or announced by some of the institutions. I'll give you a couple of them. We had capped the number of insufficient fund fees per day since 2005 so we had a maximum of six per day already. As you know, we also had on the first occurrence we did not charge the full fee. We actually charged a fee of $18 or something like that per item which was among the lowest of any of the banks that were out there and with the thought process that clearly anybody can sort of make a mistake and when that happens to you it's a bit of a reminder as opposed to sort of charging the full penalty.

And then a couple of other things, when you think about it coming to an M&T ATM, in places where we have the technology, where we don't have the technology we simply don't allow it to overdraw, but where we do have the technology, we provide the customer with a notice saying they are about to overdraw their account, just as if they had just walked up to a teller and asked the same question, right? So now to the extent they choose to proceed forward, then they can actually do the transaction, so I think we've been very conscious of the stuff for a very long time. It doesn't mean that we won't make changes but this is something that we think about all the time. We'll be competitive but I think it's really early to tell what the financial impact will be. Not even quite sure what legislation will look like.

Okay, appreciate it Rene, thanks.

You're welcome.

This concludes the Q & A portion of today's conference. I will now turn the call back over to Mr. MacLeod for closing remarks.

Again thank you all for participating today and as always if clarification of any of the items in the call or news release is necessary, please contact our Investor Relations department at 716-842-5138.

Thank you for your participation in today's call. This concludes your conference. You may now disconnect.