M&T Bank Corp (MTB) 2011 Q2 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank second-quarter 2011 earnings conference call. (Operator Instructions). Thank you. I would now like to turn the conference over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Melissa, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's second-quarter 2011 earnings conference call, both by telephone and through the webcast.

If you've 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 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'd like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today.

As you know, the recent quarter was an eventful one for M&T. A few items worth noting specifically were the closing of the merger with Wilmington Trust, our purchase of Wilmington Trust TARP preferred stock from the U.S. treasury immediately prior to the closing, the future -- the further repositioning of M&T's balance sheet in connection with the merger, our issuance of $500 million of perpetual preferred stock, and our action to retire $370 million of M&T's own TARP preferred stock. I'll cover the highlights from the earnings release as well as the impact from these items, and then I'll take your questions.

Turning to the specific numbers, for the second quarter of 2011, diluted earnings per common share were $2.42, up from $1.59 in the prior quarter and up 66% from $1.46 in last year's second quarter. Net income for the recent quarter was $322 million, compared with $206 million in the linked quarter and $189 million in last year's second quarter.

Completion of the merger with Wilmington Trust during the quarter resulted in a net after-tax gain of $42 million, or $0.33 per common share. The net gain is comprised of a non-taxable gain of $65 million, which was partially offset by after-tax merger-related expenses of $23 million.

M&T's results for the first quarter of 2011 included $3 million of after-tax merger-related expenses, amounting to $0.02 per share. We expect additional merger-related expenses will be incurred in the third and fourth quarters of 2011. There were no merger-related expenses in the year-ago quarter.

Results for the recent quarter included $51 million of net after-tax securities gains, amounting to $0.41 per common share. These net gains were the result of our continued program to reposition the balance sheet so as to enhance both capital ratios and the liquidity profile of the combined M&T and Wilmington Trust.

During the second quarter, we sold securities with an aggregate book value of $1.2 billion, including just over $1 billion of agency MBS and some $200 million of credit-sensitive trust preferred securities and trust preferred CDOs. Gains from these sales were partially offset by other-than-temporary impairment charges in our portfolio of private-label MBS.

Net after-tax security gains in this year's first quarter were $14 million, or $0.12 per common share. To partially replace the securities that were sold, we purchased $1.2 billion of lower risk-weighted Ginnie Mae passthroughs during the recent quarter. While we have completed our sale of securities, the reinvestment into lower risk-weighted assets will likely extend into this year's third quarter.

Also included in our GAAP earnings for this year's second quarter was the after-tax expense from the amortization of intangible assets, amounting to $9 million, or $0.07 per common share. This compares with $7 million, or $0.06 per common share, in the linked quarter and $9 million, or $0.07 per common share, in the year-ago quarter.

Net operating income, which excludes the amortization of intangibles as well as merger-related items I mentioned, was $289 million, or $2.16 per common share, for the second quarter of 2011, compared with $216 million, or $1.67 per common share, in the linked quarter and $198 million, or $1.53 per common share, in last year's second quarter.

As previously noted, immediately prior to the closing of the merger, we purchased $330 million of Wilmington Trust TARP preferred stocks that had been issued to the U.S. Treasury Department. That stock was then retired through the consummation of the merger.

In addition, we retired $370 million of TARP preferred stock that M&T had issued to the Treasury Department. This purchase resulted in the partial acceleration of the amortization of the discount on that preferred stock, which was reflected as a net after-tax $9 million decrease to our net income available to common shareholders.

Lastly, we issued $500 million of non-cumulative perpetual preferred stock during this quarter. This issue has a fixed 6.875% non-cumulative dividend. It is callable at par in five years, and also has a regulatory event call at par as well, should it no longer qualify as Tier 1 capital. This issue also had a minimal impact on M&T's results for the recent quarter, as under GAAP, dividends for this stock are recorded when declared.

In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

The annualized return on average tangible assets and average tangible common shareholders' equity was 1.69% and 24.4% for the recent quarter, compared with 1.36% and 20.16% in the first quarter of 2011. Excluding the net securities gains from both periods, return on average -- on tangible assets was 1.39% and the return on tangible equity was 19.75% in the second quarter of 2011. Those ratios were 1.27% and 18.75%, respectively, in the prior quarter.

Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $593 million for the second quarter of 2011, up 3% from $575 million in the first quarter of 2011, primarily reflecting the impact from the Wilmington Trust merger.

While net interest income was in line with our expectations, the net interest margin was a bit lower due to higher amounts of cash held at the Fed or in resale agreements, which collateralized municipal deposits. The net interest margin was 3.75% during the second quarter, compared with 3.92% in the sequential quarter. Lower levels of prepayment penalties, cash basis, interest, and loan fees accounted for four basis points of the decline.

The high level of cash held at the Fed and invested in resale agreements accounted for some eight basis points of the decline. Our ability to deploy these balances into higher yielding investments over the near term could help mitigate this impact in the second half of 2011.

The remaining impact from the Wilmington Trust merger, excluding its contribution to the higher cash balances I just mentioned, was approximately four basis points.

Finally, the day count of 91 days in the second quarter versus 90 days in the linked quarter accounted for approximately one basis point of the decline.

As for the balance sheet, average loans for the second quarter increased by approximately $3.5 billion to $55.5 billion as compared with this year's first quarter, reflecting the partial-quarter impact of the Wilmington Trust acquisition.

Loan growth, excluding Wilmington Trust, was 2% annualized as compared to the first quarter. On that same basis, commercial and industrial loans grew by an annualized 9%. This reflects somewhat lower demand by auto dealers to finance inventory, but 10% annualized growth in all other C&I categories.

Commercial real estate loans declined an annualized 1% and consumer loans declined an annualized 4%, reflecting a lower level of indirect auto loans, as well as weak demand from for home-equity lines. Residential real estate loans grew an annualized 13%.

M&T continued to see strong growth in deposits during the second quarter. Average core deposits, excluding the impact from Wilmington Trust, were up $1.2 billion, or 10% annualized. About half of this increase was in non-interest-bearing demand deposits.

At June 30, 2011, M&T's as-at balance sheet included almost $2.7 billion of cash held at the Fed and -- or in other short-term assets.

Non-interest -- turning to non-interest income, non-interest income was $502 million for the second quarter of 2011, compared with $314 million in the linked quarter. Excluding net security gains and losses in both periods, the second quarter's $65 million -- and the second quarter's $65 million gain from Wilmington Trust acquisition, non-interest income was $353 million for the recent quarter, compared with $291 million in the first quarter.

Service charges on deposit accounts were $120 million during the recent quarter, compared with $110 million in the linked quarter. Just over half the improvement was a result of a return to normal levels of activity from the seasonal decline in debit card interchange and NSF fees experienced during the first quarter. The remainder of the improvement was attributable to the merger.

Trust income was $76 million during the recent quarter. The increase from $29 million in the linked quarter was substantially all attributable to the Wilmington Trust merger.

Mortgage banking fees were $42 million for the second quarter, down from $45 million in the linked quarter. The merger had no material impact on mortgage banking revenues in the second quarter. I should also note that as of July 1, we began to retain our in-footprint conforming mortgage production again.

Turning to expenses, excluding merger-related expenses and amortization of intangible assets, operating expenses were $525 million for the second quarter, compared with $483 million in the first quarter of 2011. The increase is attributable to the impact from the merger, partially offset by lower levels of compensation expense, which would return to more normal levels following the first quarter's seasonally high expenses relating to the annual incentive compensation cycle. In total, expenses were well controlled.

The efficiency ratio, which excludes securities gains and losses, as well as intangible amortization and merger-related gains or losses, was 55.6% for the second quarter, compared with 55.8% in the first quarter of 2011.

Next, let's turn to credit. Overall, credit trends continue to show improvement. Nonaccrual loans increased to $1.26 billion as of June 30, from $1.21 billion as of March 31. The increase entirely relates to some $77 million of nonaccrual Wilmington Trust loans acquired through the merger. These loans represent commercial revolving lines of credit to builders and developers, and -- which are being managed by our workout group at M&T.

Because of their structure as revolving loans, they are counted -- they are not counted for as purchased impaired loans under GAAP. However, because they are acquired loans, they do have fair-value marks applied to them.

Beyond these acquired loans, nonaccrual loans declined during the second quarter. Nonaccrual loans as a percentage of total loans were 2.15% at the end of the recent quarter, improved from 2.32% at the end of March. This reflects the addition of the Wilmington Trust loan portfolio, including fair-value marks, to total loans.

Other nonperforming assets, consisting of assets taken in foreclosure of defaulted loans, were $159 million as of the end of the second quarter, down from $218 million as of the end of the first quarter. The improvement reflects the sale of our largest ORE property with a carrying value of $99 million during the second quarter, partially offset by the addition of $57 million of ORE properties acquired through the merger and which were also recorded at fair value.

Net charge-offs for the second quarter were $59 million, improved from $74 million in the first quarter of 2011. Net charge-offs as a percentage of total loans were 43 basis points, down from 58 basis points in the linked quarter.

The provision for credit losses was $63 million in the second quarter, compared with $75 million in the linked quarter, and the provision exceeded charge-offs by $4 million, and as a result, the allowance for loan losses increased to $908 million as of the end of the second quarter. The ratio of allowance to credit losses to legacy M&T loans, which excludes acquired loans, was 1.80%, down slightly from 1.81% at the end of the linked quarter.

The loan-loss allowance as of June 30, 2011, was 3.8 times annualized net charge-offs for the recent quarter.

Loans past due 90 days or more but still accruing were $373 million at the end of the recent quarter. Of these loans, 207 are guaranteed by government-related -- $207 million are guaranteed by government-related entities. Included in past-due loans were $130 million of loans obtained in the Wilmington Trust merger.

Loans past due 90 days or more were $264 million at the end of the linked quarter, of which $215 million were guaranteed by government-related entities.

Finally, while we will publish the final level of criticized loans in our 10-Q filing, we anticipate that we'll report an improvement from the levels at the end -- that existed at the end of the first quarter.

Turning to capital, as we targeted at the time of the merger announcement last fall, M&T's capital ratios at the end of the second quarter met or exceeded those that existed at September 30, 2010, before the Wilmington Trust merger was announced.

M&T's tangible common equity ratio was 6.28% at the end of the second quarter, down from 6.44% at the end of the linked quarter, as a result of the merger. The ratio was up nine basis points from 6.19% as of the end of 2010 and up 53 basis points from 5.75% at June 30, 2010.

Our estimate of Tier 1 -- of the Tier 1 common ratio as of June 30 is 6.66%, also down from 6.78% as of March 31, but up 15 basis points from the end of last year and up 51 basis points from the 6.15% at the end of last year's second quarter.

Tangible book value per share was $37 per share at the end of the recent quarter, up 8% from $34.38 at the end of the linked quarter and up 19% from $31.15 at the end of the year-earlier quarter.

Turning to our outlook, despite all the noise in the quarter relating to the merger, the balance-sheet repositioning, and the capital actions, we were encouraged by most of the underlying trends. Credit continues to improve, as evidenced by the declines in nonperforming assets and charge-offs. Commercial loan demand is good, considering all -- the overall state of the economy.

That said, consumers continue to delever, as reflected in the continued tepid demand for home-equity products and by flows into deposit products. I'd also note that following the merger, we now have a larger portfolio of loans, primarily construction loans, that will be considered in a runoff portfolio.

As I noted earlier, the decline in the printed net interest margin doesn't reflect lower levels of income so much as the expected margin pressure from Wilmington Trust's loan portfolio, in addition to the excess liquidity that we have to deploy. As we invest some portion of the cash held at the Fed into additional investment securities over the coming quarters, it should serve to somewhat -- serve somewhat as a means of offset to the expected full-quarter impact from Wilmington Trust.

All in, we'd expect our net interest margin for the coming quarters to be slightly lower than the second-quarter margin of 3.75%.

The bulk of the expense synergies arising from the merger are still to be realized with our loan and deposit conversions yet to have occurred. However, the merger was still slightly accretive to net operating earnings per share in the second quarter.

Of course, all of these projections are subject to a number of uncertainties and various assumptions regarding national, 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 Melissa will briefly review the instructions.

(Operator Instructions). Erika Penala, Bank of America Merrill Lynch.

Are you still targeting about $80 million in cost saves for Wilmington Trust? I apologize if you mentioned this in your prepared remarks.

We haven't changed anything from our initial announcement. I think we said that we were targeting 15% cost saves and we would get the full run rate of those saves by the end of 2012. So we're still -- still have the same assumption.

And I just wanted to clarify what you were mentioning with regards to the purchase impaired loans. You couldn't put that through purchase accounting, but the fair-value mark is the credit mark and you couldn't put it through purchase accounting because of the revolver structure, so there isn't an interest-rate mark. Is that what that was?

Well, a couple of things. There is an interest-rate mark. So the way you think about it is you take a look at the loan portfolio and all of the exposure, and you determine what the fair value is.

And then, for those loans that are classified as nonperforming, in today's vernacular, they would be purchased impaired loans and they would be put into a separate category. The only exception that we have there is that for revolving lines of credit tied to a loan in workout, you're not allowed to include those in those categories, so the treatment is exactly the same. So, there's -- they're just not eligible for SOP 03-3.

Got it. I appreciate the guidance on the overall NIM, but could you give us a sense in terms of what you're seeing with regards to potential pricing competition in your -- in C&I and term commercial real estate?

You know, so, when you -- the short answer is not much has changed. If I look at the volume of what came to our committee this quarter, interestingly enough it was at slightly higher margins than last quarter, but that probably doesn't change the overall trend that we've seen over the past quarter. As institutions have gotten healthy and as loan demand has remained weak, pricing is pretty competitive.

So when you look sort of a time series of the margins we're booking over time, you definitely see sort of a downward pressure.

You know, early on that we'd say that was banks that had a lot of liquidity that were smaller, but today I think you see it across just most of the competition. I'm thinking in Pennsylvania. We seem to see some interesting pricing from two different types of banks, those that have a lot of liquidity and actually those that normally don't but I think today -- in today's position, like us now, are carrying large amounts of cash that are uninvested, because people keep not investing and actually are building up cash balances.

Ken Zerbe, Morgan Stanley.

Great, thanks. I guess, probably, just the easy one for you is just on TARP. Can you just address what your plans or how you're thinking about the remaining piece versus the partial repayment you've already done, and how those reconcile? Thanks.

Yes, our thought was that from a transaction we did in the second quarter, obviously a lot of moving pieces, but what I thought is that we would pay the remaining part in due course, and generally the way we think about it is that we wanted to be able to generate -- use our earnings generation and over a period of time we'll be able to pay it off.

We don't have a long time horizon for it, but we'd have to go back and go through that process to make the remaining payment. So, I can't really articulate on timeframe, but it's -- we're not looking way out there. Our intention is to retire the TARP in the near.

Okay, understood. And then, just a question on the resi mortgage portfolio that you're retaining, your originated portfolio again. Can you just maybe walk us through what kind of spread you're getting on that? I guess I'm just thinking, comparing -- or looking at some of the thrifts, which are still not willing to write resi. Why are you guys more willing to do so when -- just given where mortgage rates are right now?

Yes, sure. Well, it's a good question, I guess. If you just -- it's a really fundamental thing for us, right?

So if you look at all the securities that we could buy, we're very low in securities. In fact, I think if you look at securities across our peer banks, we might be among if not the lowest in terms of securities as a percentage of assets.

So we're very asset-sensitive, and it's our intention to not let that asset sensitivity to expand a lot more. Maybe we want to reduce it a little bit, and if you think about what we could buy, most of the securities have a mortgage component to them. So at the end of the day, our thought process is it's just much more efficient to buy -- to retain our own rather than paying a transaction fee for somebody else's fixed-rate assets. It's just as simple as that.

Intuitively, they're all coming from the market, so they should be priced appropriately, minus the guarantees.

And do you guys have any targets for how much you want to retain this round?

You know, no. We'll retain a fair amount of our production. Think about it this way, Ken. I think we had $300 million of core loan growth this quarter, and we had $1.1 billion or $1.2 billion of deposit growth. So if I gave you a number, I'd have to give you a new number, right? There is a need for fixed-rate assets just to [demanage] the risk position.

Ken Usdin, Jefferies.

Rene, could you possibly break out, like you did for the fees, the added expenses from the Wilmington side?

I wish I could. The fees are a lot easier because you're just pulling over their GL.

But I can tell you what, I can give you an estimate of what I think M&T's core expenses did. It's probably the easier thing. But remember, a lot of Wilmington expense is associated with people that we've hired to do the operations and all the things that are in M&T's cost centers, but give me a second and I can probably give you a view. Hang on one second. It's pretty hard to do.

I would guess, if I looked at it -- I would say if you look at overall expenses for M&T, they were down about $10 million quarter over quarter.

Okay. And that's typical for M&T because you usually have that high FICO bounced in the first?

Right, on the compensation side.

Because, I mean, if I just look at it, it looks like the Wilmington expense base is already coming on at a much lower run rate than it was pre-merger, and I just don't -- I wanted to make sure that I'm not double-counting expense saves versus what is already kind of gone from the company.

No, M&T expenses are down. M&T expenses are down linked quarter, and it's a little difficult to tell exactly how much. For example, the comp? The comp is down $21 million on a linked-quarter basis just -- excluding Wilmington.

Okay, right, so what I'm asking you is it seems like the Wilmington -- then, if I just do that math and exclude the merger charges, the Wilmington add run rate looks to be a lot smaller than it was a couple of quarters ago, pre-merger, and would you consider that as part of cost saves when you think about that 15% total?

No. We haven't gotten much, if any, cost saves to date, and remember it also gets confusing because we bought it on May 16, right? So, what they took on their books in the first 45 days versus what we took, it's just -- it's a hard estimate to make.

So I think the best way to think about it is we have very little cost saves in the numbers today. (Multiple speakers). All we've done is in a legal merger.

Okay, so whatever you -- so from today's base, the cost saves would still come from here?

Yes.

Okay, great. And then, my second question is just about, can you walk us through -- you got the re-capture, the DTA, in GAAP, so that helped on the TCE side. Were you able to recapture any of the Wilmington DTA in Tier 1 common, and can you just kind of talk us through how that will roll in over time?

Yes, sure. So, at the deal, we have, I don't know, about $180 million to $200 million when we announced our deal that Wilmington had of deferred tax that they couldn't use, and that expanded up to about $292 million by the time we closed the deal.

We could use all of that for GAAP purposes, as you kind of mentioned, because M&T's earnings were so strong, we were able to use it. We disallowed about -- a little more than $130 million related to deferred taxes created by Wilmington, also created by the deal. So that amount would be something that, to the extent that we remain profitable over the course of the year, as you roll you would be able to eventually to realize that. But you just can't do it out of the gate because the regulators limit you to a one-year -- 12-month look forward.

Steven Alexopoulos, JPMorgan.

Maybe I'll start, what the amount of discount accretion included in the second-quarter net interest income from Wilmington, and how should we think about a run rate there?

Discount accretion. This is the accretable yield issue, I think?

Yes. Yes.

Okay. I'll tell you the way I think about it. So, you've always had this issue, right? You mark the assets and then you have to take the mark back into the yield.

The way we think about it at M&T and in the way we've been doing our marks is that we try to keep our very conservative -- consistent conservative culture on the credit side, right? So we think when we give the credit mark, we're focusing on keeping that solely around credit. We think it's a pretty conservative way to do it, and it's actually -- the people doing it are the same people who are underwriting M&T loans.

So then, when we come back to looking at the yields on those acquired assets, essentially they should be pretty close to what we could -- what M&T could generate a yield on any particular asset category today, right? The only adjustment would be that if it's -- depending on the credit nature, the credit grade of the loan.

So, for us, you're not getting a lot of yield inflation, right, beyond what it would cost you to have booked an M&T loan in a particular category on May 16. And I kind of give it to you that way because when I look at the yields, I look at them almost as pure M&T yields. Said another way, what we do is we exclude all the cash flows that are not going to get collected, and then we treat the remainder of the loan as close to cash as -- cash payments as we can.

Rene, when you brought over the Wilmington book, you brought it over below book value, right? And there is a discount there that's getting added to the margin every quarter. You're just saying it's not a material amount?

Yes, we're only accreting what we expect to collect, though, right? So the big adjustment on the mark was a credit mark on uncollectible funds, right? So when you look at the yields (multiple speakers)

(Multiple speakers) loans paid off, right, you're going to have gains running through the margin (multiple speakers)

If the loan were to pay off -- no, no, no. If the loan were to pay off because of credit -- on the credit portion, that's an adjustment to the -- we don't -- so we don't (multiple speakers)

You don't expect their loans to pay off?

Well, the ones that we marked down, we don't expect, but we've made that adjustment. Then we take the remainder, right? And what we are using as a yield is basically as if it's a cleansed loan, right? A loan that M&T would be willing to generate that has been stripped of its known credit risks, right?

So you're accreting it back in, but it's -- you're asking me -- it's almost like asking me what's the yield on an M&T loan that I made yesterday.

Okay. I guess maybe we'll readdress it in coming quarters.

If you -- how do I say this? It would matter a lot -- it's not a bad question. It's a good question, Steve.

If you were to -- say that you were putting in a really large discount rate when you marked it -- an interest rate mark on the loan, right, you would have a yield that would be significantly higher, right? What I'm saying is that on the way that we're looking at it, we're not insulating our yields significantly beyond what you could make the loan for today.

Got you. Okay. Rene, on the expenses, I just want to make sure I have the dollars right. Can you just point out what the dollars of cost saves you're looking for from this point forward out of Wilmington, and I know you said you expect to realize it by the end of 2012, but do you expect any of that to get saved this year?

Yes, I'll say -- before we end the call, I'll give you that number.

Okay, and maybe just one final one. Do you have an estimate of merger costs, what they're going to look like for the rest of the year?

Yes, you know, the total -- it's hard to see -- what we said in the upfront thing isn't changed. We said $159 million, but that's kind of mixed between marks, I think. Some of the stuff was marked and some is in merger.

I can tell you that I would guess that the second -- the first quarter -- I'm sorry, the third quarter would look a lot like the second, and that we would have an amount in the fourth quarter. I'm not quite so sure about that, right? So I mean, in my mind, it's going to be equal portions as we work our way through this year.

John Pancari, Evercore Partners.

In terms of the timing of the reinvestment of liquidity into the securities portfolio, just wanted to see if we can get an idea about -- if you could talk about your plans there and how we should think about that reinvestment over the next few quarters.

And then, also, are you factoring in retention of 1-to-4 family and funneling some of that liquidity into that effort there when you're talking about that reinvestment?

Sure, John, we said that we were going to be -- we look at all the whole discretionary portfolio. We're going to be retaining mortgages. It's hard for me right now to tell you what that volume might be, but $400 million a quarter, $500 million, somewhere in that range.

And then, on the securities purchases, you're not going to see anything drastic, but I do think that we probably would have more of a consistent purchase of securities over time, each quarter, than we'd see in the past, right? So I think, on average, our securities book was down $1 billion from the first to the second quarter. I would expect that to change a bit and head in the other direction.

So we won't do anything drastic, but we'll probably do it fairly consistently, and you'll see that. As you look at the Q, you'll see our interest-rate profile just keeps moving to the asset sensitivity, and we need to sort of slow that down.

Right, and on that note, can you give us the updated duration for your securities portfolio post the deal?

Yes, the securities portfolio is 2.7, I believe, is the duration, and that's just slightly higher than maybe what it is historically, 2.5. And then, if you bring in the -- we look at it by putting in the mortgages as well. So if you -- that 2.7 goes up to 3.5 if you include the $5 billion of resi mortgages that we have.

Okay. And then, lastly, can you just talk a little bit about loan demand, what you're seeing by way of commitments growth, and then line utilization on the commercial side?

Yes, I can. You know, we've seen, as you've seen in the numbers, the C&I growth has been respectable. And as we kind of look back to the pipeline over the last -- since February, so the last five months, there has been an uptick in four out of those five months in the sort of -- the pipeline of loans that are going to come to committee are going to go through committee and be booked.

So it's pretty steady in terms of C&I growth. I think that real estate is -- it seems slow. But I would caution you on that because there's still a lot of paydowns, right? And we've got loans that we're working out. Also in the quarter, we had a number of participation outs, you know, so sort of credits that were in the process of being participated or syndicated.

So, you know, there's probably very modest growth in C&I and the underlying trends in our numbers. And then as you flip to the consumer side, it's just steady. I can't tell you how many quarters; it's probably eight or more where we've had a steady decline with the consumer deleveraging.

And as I look around the footprint, the mid-Atlantic this quarter was a little -- it was actually down. I think it had to do with syndications and maybe a little bit weaker loan growth. But other than that, the trend is pretty consistent across the board. Actually, one of the best performers for us, I think, in loan growth I believe was Western New York, which tells you a lot.

Great. Thank you.

Marty Mosby, Guggenheim Partners.

I wanted to ask you about the capital ratios. And we have improved and gotten to the goals that we were looking for. And you can almost look at these unusual items, the net gain from the acquisition, as well as the security gains, as almost like a $100 million capital issuance.

Do we need to -- I mean, at this point, we've probably accumulated enough capital. What's your thoughts in the sense of now getting out of what's left of TARP without any incremental capital issuance?

Thanks, Marty. I mean, I like what we've been able to do. You mentioned the two items, obviously, that makes a difference -- the gain on Wilmington. And I'd point out that even without the securities gains, we still would've been on target to what we assumed. We were actually some 20-some -- 22 basis points or more over.

So, what that is attributed to is just sort of the health of M&T. So I think I like where we are. We'll probably -- it won't take us long to sort of get up to 7%. And I think that's important, because as you can see, where the economy is, there's just not a lot of appetite for loan growth. So it's nice not to have a tremendous amount of excess liquidity -- I'm sorry, excess equity sitting around.

So we're going to have to use it for something. And as I said before with respect to the TARP, the TARP is actually over time a drain on our tangible capital. And so I think it probably puts us in good position to sort of meet all our target ratios and to move out of TARP on schedule. That's probably as much as I can say about it, Marty, but I think your instincts are good.

Okay. The only other question that I wanted to kind of ask you about was the allowance for loan coverage is [1.75], kind of in that range where you would think, well, maybe there's not a lot of recapture. And you haven't really been doing any recapture. But your net charge-offs are so low; you're 4 times net charge-offs. Can you see a point when you might, now that you've gotten the acquisition all consolidated, that you might begin to recapture some of the allowance?

Well, if I could have, I would've had to recapture. You know, I think -- I still think that the nonperforming loan book is high by historical standards. And we think that there's been some improvement in trends.

But on a relative basis, I don't think we're yet ready to say that the loss content in the book is down. If you look at a couple of things, if you look at unemployment still high, a lot of uncertainty around the housing market. You know, liquidations and the liquidation prices of homes are up. Oil prices are up. So in our minds, we'll wait until we see some better sign.

Todd Hagerman, Sterne, Agee.

Good morning, everybody. Rene, I was just hoping -- I don't think you've mentioned it on the call. I was just hoping to get an update in terms of your best estimate on the Durbin impact, now that the Fed has come out with its latest guidance.

Yes, let me tell you what I think, but I'm not sure how good it is.

So, we got -- they come up with the guidance. We obviously have to wait until October 1 to be able to get -- to get the specific rules. So, you'd have to put a range around it, and what I'd say is that we've not been that great at coming up with speculating on these ranges before around NSF.

We waited till the final to give you a number there, and we got to the quarter we did, and what we've been seeing over time is even with the NSF, it's actually not been as bad as we initially saw, in part because of the way consumer behavior has changed and the number of people opting in and so forth.

But I would say that if you just take just the fourth quarter, we're talking somewhere between, on a gross number with us doing nothing to sort of offset it, $15 million to $20 million, and then if you start to think out, it's really hard to give you a number beyond that quarter because you don't know what the customer behavior is and then we've not necessarily been able to sort of quantify our reaction to it. So, that's what I know.

Okay. Have you done anything -- a number of institutions have started to kind of rollout over the course of this year some new product suites and so forth. For M&T, you historically have been kind of more commercial oriented. Is there any update there that you can provide in terms of anything that you've already kind of rolled out in anticipation of some of the number of kind of Dodd-Frank changes that are about to be introduced?

You know, we are in the process of doing that. We're in the process of designing checking accounts. I don't expect them to come out real soon. But we've got a whole host of things that we'll roll out over time.

But one of the things that I would tell you about is that, you know, everybody was concerned about the whole free checking model, and at a time when competitors were sort of publicly moving away from free checking, we kind of continued to offer it. And it's been really interesting in the sense that when you look at our checking-account balances on the retail side, they're probably, I don't know, $300 million or so higher than we would've expected them to be at this point in time.

And that's two things. People are keeping more deposit -- more balances in those accounts. Relative to the first half of last year, the average account balance is up 8%. And then, on top of that, what we're seeing is that we've got very, very strong sales over that period, and that's not just within free checking, it's in all checking products over time.

If you compound that with the fact that we're opening significantly more accounts than last year, we're closing less, and then you compound that with the fact that what we're noticing is a net positive trend of people opting back in as they sort of look to find where their convenience spot is around dealing with the NSF thing, right? What you kind of see is that introducing the new products seems to make sense, but going slow with your change, you learn a tremendous amount, right?

So we'll do some of these things. You saw that we introduced the credit reports that you can get, which is the type of thing we would like to do. Why? Because it's a real service to someone with all the fraud that's going on, right? So you'll see more and more of that over time but it's not going to be sort of a Big Bang.

That's helpful. And if I could just do a quick follow-up on the credit side, just again kind of following up on the SOP 03 accounting in the credit portfolio. The nonperforming number was a little smaller than what I was anticipating from the merger.

How should I think about, in particular -- like I think there was $130 million of past-due 90 days associated with the Wilmington. I mean, as you talk about those revolvers and so forth, and your outlook for ongoing improvement in credit, how should we kind of think about the SOP 03 accounting and that residual portfolio of Wilmington on a go-forward basis?

Just say it again. How should I think about going forward with what?

With the SOP 03 accounting, and as you mentioned the revolving credit before, I'm just -- the thing that catches my eye in the release is the $130 million past-due 90 days from Wilmington.

Yes, okay. Just to try to go from the start, so what you would expect to see is zero nonperforming loans, right, when you brought it over because they would all be in SOP 03-3.

And what you're seeing is that, first off, is that $77 million that I explained around revolving lines that we keep open because it makes sense to do so in the workout process. Then you got the $130 million, and essentially what that is, is if you look at what we do at the end of each quarter, we've -- we're looking at loans that are past due maturity but are current and are actually in the process of collection -- in the process of collection or in the process of being renewed.

So, given that we are right at the first part of the Wilmington merger, we're six weeks in, we really haven't yet had a chance to sort of extend our process to Wilmington. What we've been able to do is we see that all of those loans are current and fit the category. But what I would expect to happen over time is that that number would go down as we begin to put in the M&T standard process of making sure that we've -- we've sort of taken action on those before the 90 days is out.

But that's really what that is. It's not a different category, but it is a reflection of the fact that we're only six weeks into the merger.

Matthew Clark, KBW.

Most of my questions have been answered, but one just relates to Basel III, I guess. Can you -- does that 666 contemplate the additional adjustments you will need to make under Basel III? I guess said another way, do you already adjust for your non-investment grade securities in your risk-weighted assets? The higher risk weighting required.

(Multiple speakers) we do. Yes, to the extent that they're subordinate securities, we do.

So there may be some adjustments, depending on how that sort of rule finally gets played out. But I think the biggest adjustment that we would have under what's been published in Basel III would be the unrealized gains or losses in the securities book, and I think maybe we were, after tax, $100 million or something like that at the end of the quarter.

So, I haven't really thought too much about it in the sense that things -- we don't have much of an effect -- we're not over 10% on the MSR, right? So it's clearly not all that significant for us, I guess, is how I would say it.

I also am not sure how those final rules are going to come out. So rather than speculate on it, we just keep building our capital (multiple speakers)

Okay, great. And the OREO that was sold, that $199 million property, was there a gain or loss on that in the quarter?

Yes, there was a gain, and if you think about the whole thing, the way we think about it is is that when I look at the charge-off we took and then the gain, and if I look at the carrying costs over time, we maybe took a slight loss on the whole thing. If you include the cost -- the interest cost to carry in the OREO over that period of time, maybe a year or so, if you don't include that, we didn't take a loss, in total.

Okay, [with] the magnitude of that gain in the quarter, then?

We haven't talked about it.

Bob Ramsey, FBR.

Most of my questions have been answered. Only one I'll ask you is if you think about the pace of loan demand over the second quarter, would it be fair to say it was relatively constant, or was there any sense of it picking up or vice versa? With the uncertainty in Europe, did it drop off at all in the back half of the quarter?

You know, the actual loan growth itself did taper down, as you kind of work from the first to the second and you look at the average to as-at balances. But I'd be careful with that because the pipeline was actually growing. So if there is a little bit of a lull, I think it might be temporary.

All right. Thank you.

Sure. If I could just get back to Steve's question on -- it's about $80 million in total that we had as expense saves -- full expense saves at Wilmington.

John Fox, Fenimore Asset Management.

I had two questions. First one on the fee income or non-interest income. I just wanted to make sure I have this correct. The $42 million, which is the net of the gain in the merger expenses, is that in the other fee income line?

The gain is. The gain portion -- the $65 million gain would be, and then the expenses on a GAAP income statement would be in the expense line, and we kind of spelled that out, right? So, do you need the amounts?

No, no, I have them. I just wanted to know if it was the gross or the net in there. So you answered that. Thank you.

The second question is, with the TARP repayments and all that, going forward at this point, understanding there's future TARP repayment to come, what's kind of the preferred dividend below the line, or the difference between net income and net income to the common shareholders kind of for the third quarter?

Yes, I haven't even began to thought about that.

I could call Don later.

No, give me one second and I'll answer your question.

It should drop -- okay, if we had not issued the preferred, let me answer this -- the new preferred that we had (multiple speakers), it would drop pretty substantially, so maybe from -- I don't know, we were running at $12 million, $13 million. If you take out the one-time acceleration of the amortization (multiple speakers) cut in half, it would go down to about $6.5 million.

But what we've got to think about is how we declare dividends on the new preferred and how we book that. So if I were you looking at it, I'd take that number I just gave you, and then I'd take an interest rate on the preferred.

And add the two together?

Add the two together.

Okay, thank you.

Collyn Gilbert, Stifel Nicolaus.

Just quickly, and just kind of following up to some of the questions on the credit front. So, reconciling the relationship between the provision, you know, are you seeing it more as a direct correlation with net charge-offs or is it going to reflect more of the larger overall trend in the credit?

I think you've got to look to -- what we actually do is you're looking at classified loan books, nonperforming loans, and at any given time, it's possible to see like a decline in classified loans, but sort of the underlying model of -- the amount might not change, but where they sit in the grade structure might change.

So we're just looking fundamentally at classified loans, including nonperforming loans, and what we think the loss content is.

The other piece, obviously, would be that there is some portion of the provision for non-classified loans, and that's more about the outlook we talked about, sort of where oil prices are and unemployment and the likelihood that things that we don't see today will come in. So it's more the classified loan book, I guess, is probably the answer.

Okay, that's helpful. And then, just quickly, just to make sure -- when we're thinking about expenses and projecting forward, we should assume still in the third quarter we're going to see roughly half of another quarter of Wilmington's expenses in there, right?

We haven't done -- I can't tell you -- I obviously don't know the amount, but we obviously have to get through the convergence, right? And we've got a couple of them. We've got one on the deposit side somewhere toward maybe the end of the summer, beginning of fall, and then we've got another one which is -- would come later, which would be the trust conversion, right? So, it's a little staggered.

So you're probably thinking about it the right way, where the fourth quarter you'd see an impact.

An impact lower, you mean?

Yes.

Gary Paul, private investor.

First, applauds for adding footnote five to your reports. It helps a lot.

Three questions. First, in any merger you have some runoff of business, and most bank mergers we think in terms of deposits, but in Wilmington, it would be the trust business, especially since some of their business was dependent on their bad loans. From announcement date, about what retention rate have you had in their business? And it can be a crude number.

So I'll give it to you -- you said it well. So there's a bunch of businesses here.

On the loan side, there was a fair amount of runoff from the acquisition -- from the announcement to acquisition, and total loans were down $1 billion. On the deposit side, though, deposits remain really, really sticky and have actually grown. So -- and we think our account retention with the 48 branches and the overall deposits has been -- I'll go so far as to say abnormally good, right, relative to past acquisitions that we've done.

I'm more thinking of the trust fee businesses.

Yes, I know that you like complete answers. So then, if you kind of look at the CCS business, right, so if you started there, of the two sort of wealth businesses or, I should say fee businesses, what's interesting there is that the most important positive that we got, from the closing of the merger, was that we had the equalization of the Wilmington Trust credit ratings, and so that was really important because up to the merger, they had been shut out of certain activities like being securitization trustees and certain businesses like -- in that nature.

And so, we were actually able to recapture a lot of business that -- with people that couldn't do business with Wilmington before because of their credit rating. Mostly on the other side. The CCS business has actually been really, really very stable.

If you kind of look at the early fallout from -- on the wealth side, the answer on the wealth side has a lot to do with how well we've been able to retain the employees. And I think we've done a pretty good job. Early on, we had a publicized event around the wealth -- a couple of the -- part of the wealth team leaving, a few people, and I think we lost one client from that. And outside of that, we've done a pretty good job, and again I think that's directly related to, so far, our efforts to retain the employees and make sure that they're part of the M&T team.

So the news is pretty good on all fronts, and I guess we don't worry too much on the other side. I know you're not asking about it, but on the loan side, we're not too worried about that. We think we can -- once we get in place our structure, that will be able to make up for that.

No, it was strictly the wealth management, and it sounds like you're probably retaining more than you thought you would.

That's true.

My two other questions relate to the only two items that I keep wondering whether they're conservative enough while everything else is very conservative. One is Bayview, and you did add the description about a year ago as to how you were valuing these residual servicing rights, but the more I thought about it, I have this logic problem that you can probably explain.

If Bayview, which, unless I have misunderstood your statement, is essentially no longer in the origination business and they're losing $25 million a year on M&T's portion, that wouldn't happen unless they either have a bunch of servicing where they actually own the loan or are taking charge-offs, or they are getting a lot of putbacks for covenant violations, I would assume. Because otherwise the servicing business, I wouldn't think, would lose money on just that.

So that causes me to say, if the servicing is losing money now, how can the residual value possibly be great enough to justify an equity rate of return on your remaining recorded investment?

A couple of things. So again, from the beginning. There are three parts. The part that you see that this quarter had a $5 million loss to M&T has to do with the business that's not shut down, but we're not -- but they're not originating anymore. But there are still loans and securities that need to be managed from that business over time, and so, while there is not revenue from that piece of business coming in, there are still expenses, right? And that's purely related to Bayview Lending Group.

(Multiple speakers). Can I just interrupt for one second?

Yes, sure.

Would they not, however, minus an issue of putbacks or losses, have a revenue flow on the servicing instead of just the expenses? Wouldn't they be recognizing servicing income?

We subbed out the -- in that particular business, it's the servicing subbed out to another party. So it's all expense related (multiple speakers) to servicing the securities that they issued over time. So that's the first piece.

The residual, we've talked about, and it has all of the sort of estimate issues that you've got to deal with in terms of cash flows on residuals. But almost 100% at this point of the valuation, or the biggest part of our reliance on the valuation, has a lot to do with Bayview Asset Management. So there is some portion of the residual, and then the remainder of it is Bayview asset management.

And as you look at that particular business, their ability to kind of flip back between asset purchases and more -- maybe even more importantly in the future, servicing portfolios, right, that's where the value is created.

Just as a follow-up to that, how many years in the future before -- assuming your assumptions are right and therefore the value is justified, when do you start seeing that hit M&T? It sounds like it's still years away.

I don't have a timeframe for you.

You don't, but you do agree it's years away?

I don't have a timeframe for you. No disrespect intended.

Okay. My other question relates solely to the residential builder area where your total -- at year end, your total -- I wasn't on the first quarter live call, I heard it on tape -- had about $100 million more in allocated to total residential real estate than the nonperformers in the residential builders.

So one, it still seems a little bit odd because you still have a lot of residential builder loans, especially in the Midwest and Pennsylvania -- sorry, mid-Atlantic and Pennsylvania. And I'm surprised more of them don't go nonperforming. I can think of one possible reason not, and you can probably tell me what the real reason is, because if you were dealing with local builders, they probably wouldn't be able to keep the loans current if the houses aren't selling or maybe not even complete.

But are a lot of those loans to the big national names, such as, without saying that they are a customer, Toll Brothers, et cetera, that mean they are standing behind those loans and have the financial resources to do it?

No. I think it's a whole different space. But I mean, when we had our portfolio, early on when we talked about this in the mid-Atlantic and northern Virginia areas, that was the case. That was the case where we had large national builders, and their decision -- forget about their financial wherewithal, their decision whether they were going to follow through on their contracts to build or not really had a big influence on the viability of the project.

The issue for us is we've gotten through all that stuff, right? So we've cleansed it. We've taken charge-offs, which I don't have in front of me, over a long period of time, and quite frankly, if you look back, we were talking about that business and the fact that we were cleaning it up before -- for anybody else, the storm really hit.

Right. Absolutely agreed.

I think that's what it is. It's just more of the portfolio today is clean, and then the other thing you've got to remember is we have in that category now loans that were acquired.

(Multiple speakers). Yes.

Some of which are carrying FDIC guarantees. So it's hard to look at the raw numbers.

I guess that's as best I can get on that one. I thank you. You had a slam-bang quarter.

Gerard Cassidy, RBC Capital Markets.

You may have said this in the early part of your prepared remarks, and I didn't hear it. The mark that you guys announced on the Wilmington deal at the time of the acquisition, I think was about 12%. Cumulative loss was 17%. Where did they come in at when you actually did the closing? Do they come in right onto those numbers or was something higher or lower?

It is a little bit lower. Let me walk you through how you do that.

When we announced that deal, we had a mark of $1.016 billion on loans of $8.1 billion. And then, so the first thing that happens is that they -- first thing that happens is that the loans have run down $1 billion, right, so the base is lower.

And then, the next thing that happens is they took charge-offs of that portfolio, which I think were down by -- I'm sorry, reductions in payoffs and those things and charge-offs of like $280 million, I want to say, something like that. Yes, $288 million from the time we announced the deal to the end of April.

So by just doing that, that $1.016 billion in marks drops down to about $730 million, and then when we reevaluated it, we reduced that $730 million by about $76 million from looking at the credit marks. So, when all is said and done, on the remaining loans out there we ended up with about a 9% mark versus, say, 10.3% if you just account for the fact that there was a lot of cleanup work that happened before we got the loans.

Sure, which is great, since you priced it off of a higher mark, so that obviously worked in your favor.

Second was, I think you said that the one-time charges, merger charges at the time, were going to be $159 million, if I heard you correctly. In your press release you took, I believe, about $23 million of the $156 million. Are we going to see the $23 million again in the third quarter and then the rest in the fourth quarter, or will it spread out into 2012 as well?

You know, I would -- all I can say is a couple of things. I haven't reconciled how much of that $159 million is coming up front and was in the March versus out in the one-time expenses.

But I think that most of the expenses should happen in 2011. The one exception is there may be some trust stuff that happens as we get closer to the first quarter of 2012, because the conversion is sort of set around that timeframe. But the majority, 75% of them, are going to be this year, I would guess.

Okay, and would you say the majority (multiple speakers). I'm sorry?

I said the majority would happen this year.

Would you say that the majority of the $159 million is merger-related and not mark-related?

I just don't have the number in front of me. So I -- it's hard for me to answer that question.

What I can tell you is if I look at the one-time expenses, and I'll give you my numbers, my thinking is that on a pretax basis, I wouldn't be surprised to see, you know, I don't know, $90 million to $100 million happen this year.

Okay, good. Do you -- the 15% cost savings that you announced at the time of the deal of Wilmington's operating costs, which I think you already gave us. The $80 million number is what you think you're going to achieve in cost savings? That seems on the low side, considering it's somewhat of an in-market deal for you. Do you think there is potential for that cost savings to be greater than the $80 million?

Well, you know, how do I say it? It's very close to our market, but it's not exactly in market. So there is no overlap in our branches and all of that, so that's fine.

But remember, that's a smaller part of it, anyway, and from our perspective, from M&T's perspective, most of what we've purchased are the -- a lot of what we've purchased are those fee-income businesses, which are incremental and are about revenue and gearing up revenue for us, right?

So, I think if you kind of think about it that way, the 15%, maybe we're slightly higher, but we'd have to see. But that probably makes sense, right? 48 branches with no overlap, and then two fee-income businesses that you're planning on growing.

Thank you very much.

Marty Mosby, Guggenheim Partners.

Sorry to circle back, but something jumped out at me which I thought -- I wanted to make sure we clarified. If you look at the preferred cost, typically it was running $13 million and you talked about it going down to $6.5 million. This quarter, however, wasn't it around $25 million?

It was higher. It was -- you could probably just [write] the number. It was $20 million. And that was due to -- at the beginning of the call, we mentioned there was a $9 million accelerated amortization related with -- to the TARP repayment.

The only other thing I was getting at is that $9 million would be and should be considered like the security gains and other positives that we've got in these other places. So, if we're kind of trying to get to an operating number, we should add that $9 million back as well. We have in all other corporate payments (multiple speakers)

Yes, you can if you like. Just be careful that -- remember it doesn't affect net income. It affects net income available to common shareholders, right? (Multiple speakers) dividend.

Right. That's correct. And so, when you start looking at EPS kind of numbers, it's incorporated into those numbers.

Yes.

And so, in the EPS number -- operating number should adjust for that $9 million like we've adjusted for the $0.33 and the $0.41.

As long as you've -- I guess you're thinking about it the right way, Marty. As long as you've got, which you can't quite see yet, the new preferred.

Right. And that will roll in next quarter, but then, what you'll get from that also is some -- there will be some funding related to it, so you get kind of a net effect of that happening, but I just wanted to make sure as we looked at this quarter's earnings that we would be able to back out the acceleration like we have in the other types of impacts for other folks that have paid their TARP off.

Yes, that's right. That's right, Marty.

[Gary Liu], [First Investors].

Can you comment on your appetite for future acquisitions? There is some press report about your interest in the [actsway] DC branches.

Well, we are always sort of around, to the extent that somebody is interested in doing something and we tend to look at everything. But today, we're very focused on Wilmington and doing what's at hand, and if good things come along, we'll take a look at them.

It seems to be a pretty large, in terms of the scale. Do you think -- first, do you think you have enough capital to do that? And second, do you think -- there is some sellside research report talking about you potentially need to divest 40% because of the market concentration issue. Can you give us some thoughts on that?

We don't talk (multiple speakers). Hello?

(Multiple speakers) so what's the benefit of doing the acquisition?

Look, we don't speculate about future stuff. We don't do future earnings. We don't speculate about acquisitions.

What we do is we talk about our history, and our history sort of speaks for itself, whether it's doing M&A transactions or whether it's managing our capital. The way we think about it is pretty plain vanilla, but forecasting the future and talking about speculating about things doesn't make much sense to us.

And also, on the tax rate, it seems like a little bit lower this quarter. Is it because of the merger gain, and what's the -- can you give us an idea what's the effective tax rate after Wilmington Trust is fully integrated?

Yes, you've got it. What you'd have to do is you take the merger gain, which is nontaxable but up in fee income, right? Pull that out, and you'll get a better estimate of what the tax rate was for the quarter.

At this time, there are no further questions. I'll turn the call back to management 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 area code 716-842-5138.

Thank you for participating in today's conference call. You may now disconnect.