M&T Bank Corp (MTB) 2011 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 2011 earnings 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 McLeod, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Paula, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's third-quarter 2011 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued this point 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, M&T's results this quarter reflect Wilmington Trust for the entire quarter, as opposed to a partial period during the second quarter. In some ways this is a baseline from which you can understand where M&T is prior to any synergies realized from the merger and also where we're headed.

Let's cover the highlights from the earnings release and then I'll take your questions. Turning to the specific numbers, for the third quarter of 2011 net income was $183 million, or $1.32 per diluted common share, compared with $192 million, or $1.48 per share in last year's third quarter. Net income for the linked-quarter was $322 million or $2.42 per common share.

Recall that the second quarter's results included $51 million of after-tax securities gains amounting to $0.41 per common share. These gains were the result of our program to reposition the balance sheet so as to enhance both capital ratios and the liquidity profile for the combined M&T/Wilmington Trust.

M&T's results for the recent quarter included $16 million or $0.13 per common share of after-tax merger-related expenses arising from the acquisition of Wilmington Trust. Recall that M&T's second-quarter results included the net after-tax gain of $42 million or $0.33 per common share related to the merger.

That gain was comprised of a nontaxable gain of $65 million which was partially offset by after-tax merger-related expenses of $23 million. There were no merger-related expenses in the third quarter of 2010.

Also included in our GAAP earnings for this year's third quarter was after-tax expenses from the amortization of intangible assets amounting to $11 million or $0.08 per common share. This compares with $9 million or $0.07 per common share in the linked-quarter and $8 million or $0.07 per common share in the year-ago quarter.

Net operating income, which excludes the amortization of intangibles as well as the merger-related items I mentioned, was $210 million in this year's third quarter, up 5% from $200 million in last year's third quarter. Diluted net operating earnings per common share were $1.53 for the recent quarter, down 1% from $1.55 in last year's third quarter. Net operating income was $289 million or $2.16 per diluted share in the previous quarter.

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 rate of return on tangible assets and average tangible common equity was 1.14% and 16.26% for the recent quarter compared with 1.69% and 24.4% in the second quarter of 2011. Those figures were 1.24% and 19.58% respectively in last year's third quarter.

Next I'd like to cover a few highlights from the balance sheet and income statement. Taxable equivalent net interest income was $623 million for the third quarter of 2011, up 5% from $593 million in the second quarter of 2011, primarily reflecting the impact of the Wilmington Trust merger.

Excluding the impact from that merger we estimate that net interest income for legacy M&T increased by about 1% unannualized driven by a 1% linked-quarter increase in average earning assets which is also not annualized.

The net interest margin was 3.68% during the quarter compared with 3.75% in the sequential quarter. We estimate that 3 basis points of the decline are attributable to the full quarter impact of the merger. This excludes the impact from high levels of excess liquidity that we've held since the acquisition date back on May 16.

The higher combined levels of cash held at the Fed and resale agreements resulted in a net negative impact of about 2 basis points. Those balances rose from $1.4 billion on average in the second quarter to $1.9 billion in the third quarter. The day count of 92 days in the third quarter versus 91 days in the linked-quarter accounted for an approximate 1 basis point of the decline and the remaining 1 basis point decline is attributable to core margin compression.

At this point in time we believe the balance sheet is positioned for very slight downward pressure on the margin based on the forward curve. However, our ability to deploy cash into loan growth or additional purchase of investment securities should tend to mitigate that pressure.

As for the balance sheet, average loans for the third quarter increased by approximately $2.7 billion to $58.2 billion as compared with this year's second quarter, reflecting the remaining impact of the Wilmington Trust acquisition. Average loans, excluding Wilmington Trust, were down about 1% annualized as compared to the second quarter on that same basis.

Commercial and industrial loans declined by $126 million or an annualized 4%. This includes a $174 million decline in loans to auto dealers which is something that we expect in the third quarter of every year as inventories deplete in advance of a new model year. Other C&I loans grew an annualized 2%.

Average commercial real estate loans declined an annualized 1%; consumer loans declined an annualized 2% reflecting a lower level of indirect auto loans and continued soft demand for home equity loans. Residential real estate loans grew an annualized 5%, largely due to the levels of mortgage loans retained for our portfolio.

On an end of period basis, also excluding Wilmington Trust, we experienced annualized growth in loans of about 1% reflecting a rebound in activity late in the quarter, particularly on the commercial side. For example, C&I lending grew stronger as the quarter progressed reflecting 10% annualized growth on an end-of-period basis.

It is also worth noting that we began to retain the bulk of our mortgage production again on July 1 when we logged just under $800 million of new loan volume for delivery to our discretionary portfolio during the third quarter. We won't see the majority of the impact from those loans coming onto the balance sheet until the fourth quarter.

As you might expect from my comments on excess liquidity and cash held at the Fed, M&T continued to see growth in deposits during the third quarter. Average core deposits excluding the impact of Wilmington Trust were up $1.1 billion or an annualized 9%. Substantially all of this growth was in non-interest-bearing demand deposits.

Finally, M&T purchased approximately [$880] million of investment securities during the quarter. However, despite these purchases we still had some $2.2 billion of cash held at the Fed at the end of the quarter.

Turning to non-interest income, non-interest income was $368 million for the third quarter of 2011 compared with $502 million in the linked-quarter. As I mentioned, the second-quarter's results included the $65 million nontaxable gain arising from the Wilmington Trust merger.

In addition, the third-quarter results included $10 million of net securities losses, primarily due to other than temporary impairment charges relating to our portfolio of private label MBS, while the second quarter included $84 million of net pre-tax securities gains.

Excluding those items non-interest income was $378 million for the quarter compared with $353 million in the linked-quarter. That increase was largely due to the full-quarter impact of Wilmington Trust compared to the partial quarter effect in the prior period.

Also excluding those items, non-interest income from legacy M&T was down about $20 million from the linked-quarter reflecting a bit of softness in most of our fee income categories which was linked to the disruption in the capital markets back in July and August and a general slowdown in activity. Overall, service charges on deposit accounts were $122 million during the recent quarter compared with $120 million in the linked-quarter, largely attributable to the merger.

On the legacy M&T side the results were somewhat soft as a result of the lower debit card volumes than the higher levels that we saw in the second quarter. Trust income was $114 million during the recent quarter, up from $76 million in the second quarter. The increase from the linked-quarter was substantially all attributable to the full quarter impact of Wilmington Trust. Trust fees, particularly on the Wilmington side, were weaker due to the lower valuations in the equity markets and the general slower pace of activity in the capital markets.

Mortgage banking fees were $38 million for the third quarter, down from $42 million in the linked-quarter. This largely reflects our plans to retain the majority of our residential mortgage production. We estimate that our decision to retain the mortgages caused us to forego some $14 million of gain on sale revenue during the recent quarter to instead be realized over time as interest income.

The other non-interest income category was down about $6 million from the linked-quarter on the legacy M&T side, and this category was negatively impacted by lower levels of loan syndications and other credit-related fees as well as lower levels of gain on leasing residuals.

Turning to expenses, excluding merger-related expenses and the amortization of intangible assets, operating expenses were $619 million for the third quarter compared with $525 million in the second quarter of 2011. The increase again largely reflects the full-quarter impact of the merger and does not include the benefit of any merger-related cost savings which will begin to materialize next quarter.

The conversion of the Wilmington Trust branch platform in the core banking systems occurred over the last weekend of August. While we've added staff positions to potential operations areas, savings arising from those conversions and the elimination of certain back office and headquarter positions won't become apparent until the fourth quarter.

During the third quarter M&T recorded an addition to our impairment allowance for capitalized residential mortgage servicing rights of $1 million. There was no change to the allowance in the second quarter of 2011. The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and merger-related gains or losses, was 61.8% for the third quarter compared with 55.6% in the second quarter of 2011.

Next let me turn to credit -- credit trends, while continuing to show improvement, reflected some impact from the merger. As we discussed in the press release, as of the third quarter we've begun to separately report other acquired impaired loans. These are acquired loans that were not impaired as of the date of the acquisition but which are no longer performing in accordance with their contractual terms.

In accordance with GAAP these loans are included in pools of loans which accrue interest -- which continue to accrue interest based on estimated cash flows. Nevertheless, we've always felt that despite the technical accounting rule it's important for investors to have a clear picture of how the underlying loans are actually performing.

Following our latest acquisition we further segregated these loans to make that picture even clearer. We believe that breaking these loans out separately will help investors better understand M&T's accounting for acquired loans.

As presented in the table on page 12 of the press release, these loans aggregated $218 million as of September 30 compared with $141 million at the end of the second quarter and had previously been included in the non-accrual loan figures that we reported. We would expect the level of other acquired impaired loans to continue to increase over the near to immediate term before leveling off.

Non-accrual loans, which exclude other acquired impaired loans were $1.1 billion as of the end of the quarter, little change from the end of the prior quarter. The ratio of non-accrual loans as a percentage of total loans was also unchanged at 1.91% as compared to the second quarter.

Other non-performing assets consisting of assets taken into foreclosure of defaulted loans were $150 million at the end of the third quarter, down from $159 million at the end of the second quarter. Net charge-offs for the third quarter were $57 million, improved from $59 million in the second quarter of 2011. Annualized net charge-offs as a percentage of loans were 39 basis points, down from 43 basis points in the linked-quarter.

Provision for credit losses was $58 million for the third quarter compared with $63 million in linked-quarter. The provision exceeded charge-offs buy $1 million and as a result the allowance for credit losses increased to $909 million as of the end of the third quarter of 2011.

The ratio of allowance to credit losses for legacy loans, which excludes acquired loans, was 1.79%, down slightly from 1.80% at the end of the linked-quarter. The loan loss allowance as of September 30 was 3.6 times annualized year-to-date net charge-offs. Loans past due 90 days or more but still accruing were $310 million at the end of the recent quarter, improved from $373 million as of June 30.

The improvement largely reflects the acquired Wilmington Trust loans which were in the process of being re-documented at maturity. Of the loans 90 days past due and still accruing at the end of the third quarter $212 million are guaranteed by government-related entities. This figure was $207 million as of June 30.

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

Turning to capital, M&T's capital ratios at the end of the third quarter continued to improve reflecting earnings that comfortably exceed -- reflecting earnings comfortably in excess of our dividend. M&T's tangible common equity ratio was 6.46% at the end of the third quarter, up 18 basis points from 6.28% at the end of the linked-quarter.

Our estimate of Tier 1 common ratio as of September 30 is 6.89%, improved by 22 basis points from 6.67% at June 30. And our tangible book value per share was $38.11 at the end of the recent quarter, up 3% from $37 at the end of the linked-quarter and up 18% from $32.23 at the end of the earlier quarter.

Turning to our outlook, it appears to us based on feedback from customers that the news headlines over the Federal debt ceiling and the US credit rating downgrade, the Eurozone uncertainty and the Fed's comments about the necessity of keeping rates low for another two years all had the effect of slowing down the level of commercial and capital markets activity early in the third quarter.

As the quarter progressed activity seemed to pick up somewhat. And at this point we don't see anything to suggest that commercial loan trends will be much different from what we've seen throughout most of 2011, that is to say steady activity on the C&I side with pipelines continuing to build. Also, auto floor plan activity should pick up as dealers build inventory of the new model year.

On the CRE side, modest growth in commercial mortgage activity will continue to be masked by the net contraction in construction lending, particularly residential construction from our acquired portfolios. We expect consumer loan growth to remain tepid.

The benefit of our program to retain residential mortgage originations will become more apparent in the fourth quarter as mortgages originated in the third quarter are funded and come onto the balance sheet. We believe the net interest margin should be relatively stable at the current level.

As I noted, the balance sheet is positioned for slight near-term market compression. However, I'd note that growth in loans and securities is being funded by the cash we're holding which is serving to limit margin compression.

As we noted on the last quarter's call, with the so-called Durbin amendment becoming effective on October 1 we expect loan debit card interchange fees to negatively impact service charges by some $15 million to $20 million in the coming quarter. At this point in time we expect that the lost revenue will be outpaced by expense reductions particularly as the impact of synergies from the merger begin to materialize.

Of course all these projections are subject to a number of certainties, various assumptions regarding national regional economic growth, changes in interest rates, political events and all other -- 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 briefly review the instructions.

(Operator Instructions). Todd Hagerman, Sterne, Agee.

Rene, I guess certainly the one item that really stands out in the quarter is the expense levels, particularly, as you mentioned, the August conversion. I believe, if memory serves, I think you realized about $80 million of cost saves when the deal closed in Q2. If you could just kind of walk us through some of the moving parts this quarter on the expense that, particularly between legacy M&T versus Wilmington, the impact and, again, kind of reconcile that with your outlook of the 15% cost savings goal for 2012?

Let me just -- I'm not sure if I just interpreted what you said wrong, but we actually through the third quarter and realized no expense saves. So at the close of the deal we had half of the quarter because we closed the deal on May 16. And then what is a little atypical of this transaction versus all of the habits we've created over time is that we didn't do a simultaneous merger conversion.

And so because the Bank was running on its own all the way through the last quarter of August, we won't begin to see any of the expense savings of the $80 million that you mentioned starting until next quarter. But beyond that, really if you think about it what happened is we've added to our staff to be able to have positions in the back office that will ultimately help us run the institution.

But because we haven't begun to get the savings, the run rate that you need to come down from where you are today is probably greater than $80 million, right, because that's a net number of a total impact from the merger. So it's just -- you're really kind of seeing I'm going to call it a baseline at least with the Wilmington being in our numbers and now you're going to begin to see us do what we typically do.

Okay. And again, just could you reconcile just in terms of the -- on the linked-quarter basis just in terms of core M&T relative to Wilmington, just the relative contributions? It just seems like (multiple speakers), it seems like M&T seems to be higher.

It is, it is higher. I'd say a couple of things that -- let me say it again. So the M&T piece is higher and there are a couple of things there. We had a swing in ORE expenses from a net gain last quarter because of our -- our New York City property that we talked about to actual costs this quarter. And quite frankly that is -- how do I say -- it may be even a little high in the current quarter.

And then we also had an extra day or so, right. So the salaries are up I don't know $4 million or $5 million higher than the second quarter. And then just in general with gearing up and preparing for the transaction, I'd say some of the expenses at the M&T side are really geared around dealing with the transaction. So, you're right, the M&T piece is up as well as just having the impact of the merger.

Can you share, just order of magnitude, how much it was up?

We're over $20 million; the swing in ORE was probably $18 million. And the way I think about it is just look at the efficiency ratio, it's 61.8%, last year it was 53%. 53% looks more like M&T.

That's correct. That's why the question. And then if I could just follow up. The comments that you made in terms of the excess liquidity, excess cash at the Fed, I think you mentioned in access of $2 billion. Can you just talk about as I think about the 2012 balance sheet, the loan growth momentum that you talked about? That liquidity specifically -- I mean, how much is deliberate versus how much is kind of regulatory market driven just kind of given all that uncertainty that you talked about?

I guess the way I talk about it anecdotally in terms of the cash is that we did -- we were not in an excess cash position before we brought on Wilmington. So really we're trying to catch up a little bit from that I guess in hindsight. Maybe we could have put on a few more investment securities before the deal closed, but we didn't so that's where you start from.

And then what's happened is the growth in deposits has pretty much kept pace with the amount of investments that we've been doing on the security side. So if you -- hence the position that we're still around $2 billion.

The final thing is that while I think we'll be able to utilize those funds, particularly because if you look at M&T, the one thing that's a little different in our profile is we're way, way below the industry average, both in mortgages and in investment securities where we've held off for a very long time on growing those portfolios. So if you kind of think about that, that can give you some picture of how we're thinking about absorbing some of that excess cash.

The one other thing I would say is that we also now have -- when you bring in Wilmington Trust we are going to see lumpiness in that, and it might be big lumpiness. It's not unusual to get a customer on the corporate trust side that plants $1 billion with us for 30 to 60 days, right. But if you just put that aside for a minute you kind of get a sense of what our plan is and sort of what's happening with the cash.

Okay. So if I could just follow up on that. Again, when you talked about the expectations for loan growth, securities growth going forward funded by cash, I'm assuming of the securities -- and a stable margin, if you will -- I'm assuming then that with that cash funding again your -- effectively margin accretive, even though you're purchasing presumably lower yielding securities?

Yes, I think so. It's just sort of a rule of thumb and we're being very cautious about how we put securities on. But if some securities are going on, plain vanilla securities at the say 3.20% to 3.40% and then residential mortgages are going on at -- just neighborhood of 4%, right.

You kind of get very little impact on your margin. All right. If we were starting from a place where we had those two books were large and we were having runoff you'd see a lot of churn and you'd get -- the dilutive effect of the old stuff rolling off. But we're not -- we don't have that position, right, so this is net new stuff coming on.

Terrific, that was real helpful. Thank you.

Bob Ramsey, FBR.

Just to touch a little more on expenses, have you looked at where you guys are this quarter at $619 million, taking out the intangibles and merger costs and looking at Wilmington cost saves of about $20 million a quarter once fully implemented. Is it fair then to say that that means that M&T by the end of next year will be closer to a $600 million number -- excluding amortization?

How did you get from $619 million to $600 million?

I went to $619 million and then take out $20 million a quarter for Wilmington cost savings, which is about 15% of Wilmington's cost saves or Wilmington's cost base.

I think, one, you've got to probably center around the way you're doing that, the $80 million. And then you've got to remember that the expenses are probably net a little high right now, right. So we're probably starting from a higher point, so it's probably $80 million plus. And then -- so that's the expense answer.

The other thing is as you look at M&T, right, we've got the whole issue of the general efficiency ratio which is the changing dynamic of where our fees are coming from with regulation and those types of things. And I guess the way I'd say it is as you look out as far as you're looking out at one full year, our focus will be to drive the efficiency ratio back to normal spaces for M&T.

And some that means that we're going to have to be cautious on expenses and looking at expenses but it also means that we're going to be looking at both sides, fees and expenses, to drive the efficiency ratio, right.

And then when you say something that's more normal for M&T, given all the changes, as you say, in fees that we've seen, is something 54% or 55% where you all are hoping to get it? Is that the right range?

I think -- I can't tell you about timing on that, but I think that just makes sense, right. Because if you think of what our operating model is, it's very, very plain vanilla, right, and we've always held that in the long-term in a consolidating industry where you're offering commodities you have to have a strong efficiency ratio. So we haven't changed our view that we run the Company down in those levels. Again, I point you to last year we were at 53% and that's where our work is.

And then maybe last question if I shift gears, I know you all did highlight that you were now portfolioing more of the resi mortgage reduction. Can you just review how you all think about the sale versus portfolio decision? I know there have been many times when you all didn't like resi mortgages or didn't like to portfolio resi mortgages. Is it because you've got the cash on the balance sheet now that it's a more attractive option?

I think there are three things. I think one is because our profile is very asset sensitive, right, which I guess is nice if you've got non-interest rates that are going up. But we tend to be neutral so because of the lack of general growth or the slowness in the economy, with deposits coming on we just need fixed rated assets. So rather than buy them from somebody else you just save on the transactions costs by just keeping your own, that would be one.

Two would be that there's kind of a change that's gone on, right. There's a lot of uncertainty in the mortgage market, every loan you book has got some sort of repurchase risk and quite frankly that repurchase risk is a selection bias because there's never anybody calling you up to say I'd like you to buy back this loan that's performing really well.

So when you look at that, the dynamics have changed, the value of those mortgages has gone up relative to treasuries, right? And so the spreads are higher. So it just makes a little bit more sense for us to put those on today.

The third thing is that we do get a risk weighting benefit from it, which is not something that M&T, we ever really think about very much. But the regulatory constraint that's put on us has not been intangible, but it's been something called Tier 1 common. So we have to think down the road whether we want to optimize the balance sheet by putting on more of those lower risk weighted assets. So that's a change -- but it was a change brought on by regulation. So all those three things are kind of pointing us in the direction of retaining our mortgages.

Okay, great. Thank you.

Ken Usdin, Jefferies.

Just a follow-up on the mortgage thing. So when you think about the continued trade-off between keeping mortgages and not selling, and you mentioned that looks more out to the fourth quarter. So do we assume that we see more via net interest income in the loan growth side as those come on? And does that mean that mortgage banking naturally just comes off? Or has the mortgage banking effect already been felt because you've decided to hold them?

Let me just see if I can get -- so this (inaudible) as we said, we think our income was -- our fee income was about $14 million lower because we locked those loans for our own portfolio. And then you should see the lion's share of that impact -- of this quarter's less than $800 million of volume -- hit in the fourth quarter and obviously it should improve net interest income.

The one thing I would say is that, like many of the other banks you saw this quarter, I mean the mortgage volume was really, really high, right. So it's hard to predict whether we have the same amount every quarter but sure the net effect should be that we're building our balance sheet side. And if you're thinking about -- if all the volume productivity was the same you wouldn't then see another drop in mortgage banking income going to the fourth quarter. But that's sort of volume dependent.

That's definitely part of what I was getting at. But I guess the other part of it is just the time disconnect, right, where you take all of the absence of the gain on sale in one quarter, but then the NII will be more layered out over time, is that a fair way to think about it?

Yes, fair way to think about it, yes.

Okay, cool.

It's also exacerbated by the fact that you record gain on sale when you lock the loan, but you -- right -- so that it's early and you don't get interest income until you actually own the loan.

Of course, right, okay, great. And the second thing is just on a couple other broader fee questions. We got the full quarter of Wilmington this quarter and I just wanted to understand if you can give us some color on the underlying trends within service charges. As that deal has come on have you changed anything with regards to the fees that you're assessing on Wilmington customers as a welcome on board type of thing even though you haven't converted?

Yes -- I don't have a real specific detailed answer for you. But generally speaking we've been very cautious in that space. And so we are waiving fees across different product types, some of it is for convenience, some of it is just because of the nature of the conversion.

So there's probable -- I haven't thought about this yet -- but there is probably a little bit of an effect of that in this quarter's results. And if we were going to change that on any particular area, say service charges or something else, that would work its way out over time because our big issue is retaining customers. We're very focused on that.

I'm trying to think if there's anything else. And then the other thing I would say is that we've got market sensitive fees and we were sort of batting it around. I guess the idea here is that over time you guys are going to ask us how sensitive we are to a move in the S&P.

I don't really know the answer yet, but I know that if it had not been for the market disruptions I guess I was expecting that we were to make $5 million to $8 million more in fee income this quarter out of the combined trust businesses. So it gives you some sense that the downturn in the S&P has probably had an impact on the quarter's fee income.

Yes, that was actually going to be my last question. And maybe you can answer it a different way in saying do you the mechanism by which those fees are priced? Whether they're done on averages or periods ends or some type of lag, because that could help partially answer that question.

The short answer is no. But let me just explain that (inaudible). The wonderful thing about Wilmington Trust as you learn about it, it's a very robust business. And so as you walk down the different things that they do, some of them, yes, are based on fees off of assets, but in the wealth business there's also a significant portion that are actually not based on fees of a managed asset.

You've got businesses like the retirement business which are sensitive to it, but then again you've got businesses that are simply based on services we perform like being the agent on successor loan agency services, so where you've got a conflict between a lender and the borrower and then the shared national credit.

When you look at it in total it's really hard to point to one thing and say, this is how it works. It's actually much more of a diverse base. So that's where as I look through all of those and I saw the quarter, I said geez, maybe it's somewhere in that $5 million to $8 million that we're down. But it's hard to really give you a formula on how to get there.

Got it. Okay, thanks for the color, Rene, appreciate it.

Kevin St. Pierre, Sanford Bernstein.

I have a question for you on capital. With Tier 1 common sort of inching towards 7% here could you update us on how you're thinking about ultimate TARP repayment and where those ratios will be beyond that?

I dispute the word inching.

Okay, charging.

As we charge with our capital, you're right, we're sort of on target to be somewhere in the 7% range at the end of the year and on the Tier 1 common. I think obviously within a month probably the capital rules will be out. Obviously we probably have to have some cushion over that, but the way I think about it is a portion of that probably could come from changing the mix of the balance sheet by having the lower risk weighted asset.

So that's kind of what I was talking about before. I don't know that -- I can't tell you what the level of our tangible common equity will be. I like the fact that right now at 646 it's sitting about 1% above our normal long-term target, right. And from there I think we'll just figure that mix out. I don't have an exact number for you. I think we'll focus on the risk in the balance sheet more than anything else.

Okay. And separate unrelated. As we look quarter to quarter we sort of get used to the negative contribution from Bayview here. Do you still feel good about future positive contributions there?

Yes, I do. It's the nature of the business where the revenue streams or the cash will come from is different than when we originally made the investment. But you kind of see through that line that that piece of the original business is very predictable. And now you've got an operating -- most of the valuation is coming from this Bayview asset management, which is an operating unit that does a lot of either mortgage purchases or mortgage servicing.

And from time to time we flip back and forth between it being a good time to purchase assets and accumulate assets. Now it's actually a better time to be doing mortgage servicing. But we like their capabilities and we feel good about the way we valued the investment.

Okay, thanks very much.

John Pancari, Evercore Partners.

In terms of the retention of Wilmington Trust customers on the wealth management side, can you just talk a little bit about that, how that's gone and how the trend in the AUM has gone as well?

We've been -- let's just say very simply we've been extremely pleased with both the retention of the customers and the retention probably most important of the employees, which they're directly linked. Nothing has really changed since I answered the question on the last call. It's been above our expectation.

The other thing I guess I would say is when I look at the asset management -- the assets under management, most of the decline is simply the -- it seems to be simply the market decline in the numbers. I think -- these are rough numbers so bear with me, but I think we went from somewhere around $80 billion to $72 billion, right, which is very, very commensurate with what you saw happen in the markets -- in the capital markets and equity markets I should say.

Right, no, that's exactly what I was getting at just to see that mainly there's no other -- there's no loss of business that's impacting that trust line.

Things have gone very well. I'm knocking on my table here.

Okay. And then separately on the margin side, I know you had indicated that you expect a stable 4Q and then there's a downward bias just given how the balance sheet is structured. Can you talk a little bit more about the components of the margin? Like what are you seeing right now in terms of loan pricing? And then also do you have some incremental ability to lower deposit costs?

Well, the first thing that sort of underpins those comments is the fact that I was just looking at the forwards, (inaudible). The forwards are flat for the next 15 months. You never really see that in any sort of rate when you look at the spread between LIBOR and two year or just any one of the absolute rates, nothing is predicted to change out there.

So if you hold that there in that environment you've got the role effect that everybody else is likely to see. But it's smaller for us because our lower yielding securities in residential mortgages are smaller, right. So that's what's behind it. Assuming if you had any sort of a change upward in that the answer would be different. Can you repeat the last part of your question again?

Yes, I was just wondering if you still have some ability to lower your funding costs as well.

Yes, I don't know that that's the case. So I think that generally speaking maybe there's places to tweak it here or there, but that's probably not a big lever that we have. And if you go back to the other part of the question on the loan side, we seem to be doing pretty well at generating decent yields.

In fact, if I look at the commercial loan book where we sort of track like a full P&L on every deal that we do -- we've done in the quarter, you can kind of see that after a number of quarters of coming down in the margin that we're able to get by booking the loans, we've now seen two or three consecutive increases -- and actually one, two, three -- three consecutive increases in the margin that we're getting on the loans, right. So that's been pretty stable. And you know the history of how we think about pricing.

Okay, thank you.

Matt O'Connor, Deutsche Bank.

(Inaudible) probably asked somewhere back there. A couple of independent questions, just first -- as we think about the sensitivity to the trust fees from the market, is there any good rule of thumb there in terms of S&P changes by 10%, impacts revenues by X?

I just don't have it yet, not that I feel comfortable with. And this maybe is a bad answer, but I'll talk about it every quarter. I gave you the $5 million to $8 million and maybe we can form our opinion as we move along.

Okay, and remind us, for those of us that didn't cover Wilmington, the mix of equities versus fixed income?

Okay, that really differs by business. Let me see if I can get something here. If you look at the end of the quarter, assets under management may be -- so 21% cash, 36% equities, fixed assets or fixed income is 34% and then other -- I'm not sure what other is, probably alternative -- was 9%. So pretty evenly distributed. And quite frankly quite a bit of cash which is -- if you look at the revenue streams today they're really, really muted by the fact that interest rates are low on the money markets and the waving of fees.

Okay, that's helpful. And then just switching gears to your thinking about the underlying loan growth at M&T legacy. On a period end basis which I think should get rid of some of the noise, loans were relatively flat. Mortgage was up just a little bit even though you're retaining. The commercial piece I think is impacted by some of the auto floor plan. I don't know if you can give us a sense of the auto floor plan drag and just generally speaking we're seeing loan growth for the industry overall, it seems like a little bit less for you guys.

Yes, I think I had in my comments, I think -- I may have to double check this, but I think the number was like $179 million or $176 million down in the floor plan lending, which will come down a little bit more in the next month or so before it begins to rebound as you work your way into the beginning of the year.

But then the C&I loan growth was pretty consistent with what it's been all the other stuff. And then as I said, even including floor plan the end of period growth was 10%, if you take out floor plan the end of period growth in the other categories of C&I loan were almost 12% annualized growth.

The other thing I can tell you is that on the commercial side we've now seen somewhere between eight to 10 consecutive months of buildup in our commercial pipeline. So there's a lot of activity there. I do think that as we come along maybe we'll try to do a better job of this.

But for us to be down 1% annualized on commercial real estate, having brought on K Bank, Bradford and Wilmington with all of their residential mortgage stuff that we're working out really tells you that that business is actually moving as well, right, on the real estate side.

The one thing I would say a little bit of anecdote, while there has not been a change in the rate of runoff in our consumer book, it does seem logical that that's going to begin to moderate, right. Because for example, we've been doing $100 million of auto loans a month for a long time now and that book is hovering around $2.5 billion, right. And so it seems pretty logical that the runoff we've been seeing steadily should start to abate in the next couple of quarters, right. So I think loan growth actually looks pretty decent.

And then just lastly, the change in the TDR accounting, was that meaningful? Have you disclosed what your TDR's are and what they -- remind us what they were last quarter?

Real quick, I don't have a number for you because it will be and the call report when it comes out. But there really wasn't much of any change maybe one or two loans but really the way to think about it is that the new TDR guidance was in our minds more of a clarification of an existing standard. And so we did go through and we reviewed some ungodly sum of loans and really there was no change to us. But you'll see that -- those numbers in the call report when it comes out.

Okay, thank you very much.

Steven Alexopoulos, JPMorgan.

The reinvestment rate on securities you referenced earlier seems to be higher than a lot of other banks out there. Even Comerica this morning said they were investing in like a [1.80%] to [2.40%] range. I know you said you were at 3.20% to 3.40%. Can you talk about, one, what duration securities you're buying to get that kind of yield? And two, are you taking the view that if rates stay lower for longer it's a window here to take more duration risk?

I think you must be -- I mean, I think to get a rate where you're talking about they're buying treasuries. The other parties must be buying something like treasuries or something. But they're just mortgage-related Fannie and Freddie securities. So the duration, which I'm going to get for you now, but I mean in our securities book has always been around 2%, maybe 2.30% -- I'm just thinking off the top of my head. And I wouldn't expect that that's going to change significantly.

We are buying -- the mortgages we're retaining, if you just bring in mortgages into that number -- some 15, some 30. But again, the position can take it, because overall the position in terms of duration is pretty small. I'll find that for you in a minute.

So really we should think about bottom in the security's yield in that 3.20%, 3.40% range from the 3.65% this quarter?

Well, our treasurer is very -- a very cautious guy in the sense that he doesn't like to book stuff at really, really low yields. So we've been waiting. And unfortunately the rates just keep going lower and lower, so anytime we see an opportunity where something steps up a little bit we'll get into the market a bit. But it's why we've been so cautious and we really haven't made a dent in the level of securities versus earning assets today.

So while you're looking for that, how much of the -- were you going to say something?

Yes, the duration of our securities portfolio is 2.23% and I think that might go up to something like 2.80% when you bring in the mortgages as well, or 2.8% I should say.

For now the $80 million of Wilmington cost saves, how much of that should we expect to be realized in 4Q and how much is 2012?

I think you'll see a meaningful impact next quarter and then I think it will come down a bit and then you'll see another impact post the second quarter because of the trust conversions that are taking place somewhere in that time frame. So it will be two levels, but I think a lot of the -- you'll see meaningful impact probably this coming quarter (multiple speakers) basis.

(Multiple speakers) too aggressive to assume you get half the cost saves in the fourth quarter?

No, it's not too aggressive to assume that we -- whether you see it or not, but sitting there at the end of the 12-31 you should see a meaningful -- we should have done a lot of meaningful work by 12-31.

And just one final question. Are you now originating loans out of the Wilmington footprint or is that portfolio a bit of a drag here?

We definitely are originating loans and we've spent a little bit of time talking to investors on the road with Woody Collins. And we spent most of our time in the first part of the deal just engaging the employees and the RMs and getting them out -- getting out with them to the client base.

So I think we've done a very, very nice job of that. We were sort of -- the loan book was in a bit of runoff mode for a fairly long time and we think we see signs of that particular thing slowing. It's just going to take a little bit of time, but they're out there in the M&T way which tends to be in front of the clients quite a bit and from everything I hear that's going pretty well.

Thanks for taking my questions.

Matthew Clark, KBW.

Actually I guess a lot of my questions have been answered. On the -- a quick question about the Basel III, Tier 1 common. Can you give us your estimate of the Tier 1 common post-Basel III adjustments and whether or not that number considers your non-investment grade securitizations?

Non-investment -- no, I mean, I assume when they come out with the actual rule -- the US rule then we'll go through the calculation. But we haven't spent much time on it at all. Because if you think about it, yes, maybe you get a little bit of it on the resi's, but that's sort of fixable. And if anything is non-investment grade you're already getting taxed for it, right, and dollar for dollar in most cases. So that's in there.

And then the other issues that are worth bantering around are the whole unrealized losses. And in my sense, we'll have to wait and see what comes out with that. We're not above the mortgage servicing rights piece. We're probably right about the limit when you take -- if it turns out that the rule ends up being with the MSRs, the equity and the mortgage -- and the deferred taxes we're probably right about at the limit. So we haven't done much with it today and I can't see it being an issue for us.

Are you kinds -- I guess can you quantify your non-investment grade securitizations and whether or not you guys are trying to work down that exposure in the meantime?

Well, somewhere we might have that number for you, but we probably do have it somewhere here in the securities book. It is in the queue so it hasn't changed much. Remember, as we went through and thought about repositioning our balance sheet, it didn't make any economic sense to sell those securities because there's just too much of a liquidity difference in there.

So we went out and looked at places where we were modeling our securities and the market was willing to give us more than our models actually suggested was valued there. In the case of those securities it doesn't make economic sense for us to move them. So if something comes up that suggests in the new capital rules that it makes sense to do it I'd be surprised if there is something. But then we'd think about it then.

Okay, and then just lastly in terms of the First Niagara HSBC branch deal in upstate New York and I guess along those lines, you talked about the growth by product type. But just curious about some of your sub markets where you saw maybe more of the outsized growth and maybe some shrinkage. And again, any follow-up commentary about the HSBC deal that's going down.

Yes, sure, sure, I mean we -- the two strongest -- if you think about loans for a minute, the two strongest markets that we saw on loans in upstate New York and the Metro area, which is anything from Perry Town to New York City down to Philadelphia, those were the two strongest. Upstate New York was 4% annualized growth and Metro was the same.

And what was really nice about upstate New York, and this sort of stretches from Buffalo all the way through to Albany -- is there was just a lot of -- there was a lot of activity and a lot of activity in different industries. So we seem to be doing very well in being able to pick up customers. I'm presuming that maybe some of it is also a general pickup within general activity, but that's fared very well.

If you've got to just move away for a second -- I'm kind of indirectly answering your question around the upstate market. We were down about 7% in the Mid Atlantic. Most of that was the fact that in the second quarter we did a number of syndications. So you saw high commercial fees in the second quarter. So a lot of that came from syndication of loans and so the average balance (inaudible) kind of in here today.

And then if you flip over to the deposit side, we had 2% annualized growth in upstate New York, but more importantly we had almost 22% annualized growth in demand deposits in upstate New York. And that came from every area -- we were growing consumer accounts in upstate New York, we've taken on a number of commercial accounts, so we feel pretty good about that.

Metro was flat, PA was up 8% annualized, Mid Atlantic was up at 3%. And if you look at just demand deposits, we seem to be doing a very nice job in Western Europe there. So we're pretty optimistic about what's going on, we've been here for a very long time and we've been very consistent in the way we operate. So we think that should be a nice benefit to us from all that's going on there.

Okay, thank you.

Gerard Cassidy, RBC.

Coming back to the efficiency ratio that you talked about where you guys were last year and having a goal of getting back to the mid-50s. Is the efficiency ratio maybe permanently changed now that you have a higher component of trust business which historically has run at higher efficiency ratios?

A couple of things. One, I don't know that it's all that meaningful. So it's a nice big business but it's still not the biggest part of where our income comes from. And I think over time what I like about that business is that we've just -- if you think of it from the Wilmington side. We've taken what they've been able to do really, really well in the Delaware footprint and some parts of Philly and Pennsylvania and we now are actually able to extend that to our existing footprint.

So the way in which that actually will happen, I think over time we'll find some ways to be -- so the Wilmington folks will now have an opportunity to maybe be a little more efficient than they were just because you're doing all of that -- you're extending those services to existing clients. So that's one.

But generally speaking, Gerard, the big issue is that our business model has now been changed, it's changing or it's been changed for us, either way you want to look at it. And so our task is to kind of go out there and figure out exactly how we're going to deal with the fee issues that we've all seen and some part of that issue is going to be focusing on the revenue side. But it also means that a lot of the way we think about our expenses and our distribution are going to have to change over time.

So that's sort of a long way to say that -- like, no, I don't think it's permanently changed. And I think there's going to be a lot of energy around keeping that efficiency ratio close or near to where we've been historically simply because in the broader context of things it's a relatively consolidating industry and we think if you can't run very efficiently then that's probably not a good thing down the road.

No, I totally agree with you. Do you think once you get the cost savings out of Wilmington, of course, that you guys are expecting, and obviously if my math was correct I don't think you get down into that mid-50% efficiency ratio? So to get there will it come more from revenue enhancements or just a continued focus on the cost controls?

Yes, I think you're right. If you can do some math ,which you guys can do, and you come up with where you end up with Wilmington, you don't get down to 54 or 55 (multiple speakers) discussion. Because a lot of things have gone, right. But that doesn't mean that we won't over time figure out ways to get some of those back so that we can get our -- so our customers will pay for the services or that we'll right size. It just takes some time for the industry to do that.

The way I think about it is we focused for a very long time on trying to be the best bank we can for our investors, but also for our communities. And to the extent that we continue to offer services and products that they value, then we should be able to operate the bank the way we always have. We're in a little bit of a period of disruption, but I think there were banks 1,000 years ago, there will be banks 1,000 years from now, hopefully we'll be one of them.

Sure. On the assets under management, I think you gave a breakout on the answering to a question about the Wilmington percentages. And I think if I heard correctly you said about 21% of their business was in cash, money market mutual funds.

Some of your -- the bigger trust banks have given us the dollar amount of fee waivers of what they're losing today because of the low rate environment. And of course once rates start to rise at some point in the future those fees will come right to the bottom line. Do you guys have an estimate of what you're giving up in fees -- for fee waivers on that money market mutual fund side of the business?

Someone's handing me a copy of our Q right now, I'm being told that it's in there. Why don't we just do that and we'll make sure we keep publishing that in our Q and if you'd like Don can tell you where it is, just give him a ring.

Sure. And then finally on the increase on the credit issue for the acquired on the impaired -- acquired loans that you broke out this quarter, where did it come from, what types of loans and was it a surprise that it jumped up the way it did? And is it mostly Wilmington loans or were there other loans that drove it from prior acquisitions?

Yes, I think the numbers are something like -- the increase in that category is something like $76 million -- $79 million was from Wilmington. And so the way you'd think about that is there were some loans in our system -- it's a 15 grade system, so when you get to 13 you're non-performing if you're not an acquired loan. And so anything that was deemed to be 13 or an impaired loan on acquisition we'd put in the SOP.

Then we assume as we kind of look at all those other loans that we're going to -- some percentage of it was going to migrate to worse, right, and that's how we come up with our mark. So, no surprises. And in fact, what you would see is as long as loans are rolling into that category what it means is that the total pool that the loan is is still accruing according to the cash flows that we originally thought.

And that's why it can't go into the non-accrual loans because, even though it's impaired, it's being viewed as accruing because it's in a pool where the cash flows are exactly as we expected.

I see. And you mentioned that this loan number could -- or this portion could rise further in the near-term -- near-term meaning just next quarter or next two quarters?

Yes, I mean I guess -- I wouldn't be surprised to see it rise next quarter and maybe into the first quarter before it starts leveling off. Just in terms of you think about what that book is, right, and you should see a little bit of migration continue to happen for a couple quarters.

Great, thank you very much, Rene (multiple speakers). Go ahead.

The same thing happened in Provident, if you kind of look back at your notes, but it was much smaller, right.

Okay, good. Thank you.

Collyn Gilbert, Stifel Nicolaus.

Just a question -- I know you've been beaten to death on this expense issue, but maybe not a minutia question but kind of bigger picture, and you sort of touched on it in your comments about as the business change is sort of thinking, rethinking about distribution stuff.

What -- are there ways or do you see definitive opportunities within your business, Wilmington Trust's business, whether its processes or systems or the branch network where over a longer term if we see revenue pressure continue at this level that you guys would be able to bring costs down or change the way you're doing business?

Well, I definitely think we have a lot of ability to change it. And again, you think about it, Collyn, it's almost 62% efficiency ratio, it's a bit of an aberration, right. So I'm pretty confident that in the things that we're talking about doing and testing out. We've gone slower than most other individuals, other banks I should say, in the sense because we like to watch and see, we're very focused on the customer and what matters to them. But over time, yes, absolutely. I don't see any reason why we shouldn't be able to adapt our business model to the new rules and the new environment.

Okay. But there's nothing that's being discussed specifically right now within the Board room at the executive level that you can see implemented over the next six to 12 months?

Oh yes, I mean what you'll see over the next six to 12 months is you'll see new product lunches, you'll see new versions of our checking account, you'll see all of that stuff. So, yes, absolutely. Just talking about -- speculating about the details today over that doesn't make much sense. But we're talking about it all the time, right. So stay tuned I guess is what I'd say.

Okay, okay. That's all I had, thanks.

John Fox, Fenimore Asset Management.

You'll be happy to know my questions have been answered. So, thank you.

Erika Penala, Bank of America-Merrill Lynch.

Same here; thanks. My questions have been answered as well. Thank you.

I'll now turn the floor back over to Mr. Don McLeod for any closing remarks.

Thank you, everybody, for participating in today's call and if there are any questions or any further clarifications of the news release is necessary, please contact our Investor Relations Department at 716-842-5138.

Thank you.

Thank you. This concludes your conference. You may now disconnect.