M&T Bank Corp (MTB) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter 2012 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 MacLeod, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Paula, and good morning, everyone. This is Don MacLeod. I'd like to thank everyone for participating in M&T's first-quarter 2012 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules from our website, www.MTB.com and by clicking on the Investor Relations link.

Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements related 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. Good morning, everyone. Thank you for joining us on the call today to discuss the first-quarter results. Let me begin by reviewing the highlights, after which Don and I will take your questions.

Turning to the specific numbers -- diluted GAAP earnings per common share were $1.50 in the first quarter of 2012, compared with a $1.04 earned in the fourth quarter of 2011. Net interest income for the recent quarter was $206 million, up from $148 million in the linked quarter. Other than our normal seasonal uptick in compensation expense, there was very little in the way of unusual items in our first-quarter results.

However, there were a number of items from prior periods that I'd like to remind you of, which impact the comparison to the linked quarter and the year-ago quarter. Last year's fourth quarter included a write-down of our investment in Bayview Lending Group, settlement of a lawsuit, and the contribution to the M&T Charitable Foundation, which reduced earnings for the quarter by a net $33 million after tax, or $0.26 per common share. Also, in last year's first quarter, we recorded $39 million of securities gains as a result of the repositioning of our securities portfolio in advance of last May's completion of the Wilmington Trust acquisition. Those gains amounted to $24 million after tax, or $0.20 per common share. Excluding those gains, diluted earnings per share increased by 8% year-over-year.

Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions. Included in GAAP earnings for the first quarter of 2012 were merger-related expenses related to the Wilmington Trust acquisition amounting to $2 million after tax, or $0.01 per common share. This compares with $10 million after tax, or $0.08 per common share in the prior quarter. After-tax expense from the amortization of intangible assets was $10 million, or $0.08 per common share in the recent quarter, unchanged from the fourth quarter.

M&T's net operating income for the quarter, which excludes those items, was $218 million, up from $168 million in the linked quarter. Diluted net operating earnings per common share were $1.59 for the recent quarter, compared with $1.20 in the linked quarter. Net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders' equity was 1.18% and 16.79% for the recent quarter, improved from 0.89% and 12.36% in the fourth quarter of 2011. 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.

Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $627 million for the first quarter of 2012, up an annualized 2% from the linked quarter. The net interest margin expanded during the first quarter, averaging 3.69%, up 9 basis points from 3.60% in the first quarter. All of the increase can be attributable -- excuse me, all of the increase can be attributed to a sizable change in the mix of average earnings assets. The interest-bearing deposits at the Federal Reserve Bank, which had been in place for most of the third and fourth quarters, declined by $1.7 billion on a linked-quarter basis, and was largely offset by $1.4 billion of linked-quarter increase in average loans.

Aside from the benefit of replacing the cash at the Fed with loan growth, there was approximately 3 to 4 basis points of margin compression as a result of new loans coming on the books at lower yields than those of maturing loans. This pressure was offset by lower funding costs, and a 1-basis point benefit from one less day in the first quarter. In other words, we still believe that we are positioned for slight downward pressure on loan yields, with some modest offset on the funding side.

As for the balance sheet, average loan growth for the first quarter was strong, increasing by approximately $1.4 billion, or an annualized 10%, to $60.5 billion. On that same basis, compared with 2011's fourth quarter, changes in average loans category -- loans by category were as follows. Commercial and Industrial loans grew by an annualized 9%. Commercial Real Estate loans grew by an annualized 8%. Residential Real Estate loans were up by $806 million, or an annualized 43%, reflecting our continued policy of retaining the bulk of our non-conforming mortgage loan originations to hold on our balance sheet. Consumer loans declined an annualized 6%, driven by lower indirect auto loans, and modestly lower home equity loans and lines of credit. On an end-of-period basis, loans grew an annualized 6% compared with the linked quarter.

Average investment securities declined by an annualized 7%. Our appetite for purchasing securities was lessened in the first quarter based on the low yields available, combined with our ongoing residential mortgage loan retention program. Average core customer deposits, which exclude foreign deposits and CDs over $250,000, were down an annualized 3%. The decline reflects the impact from trust deposits, which we had temporarily held on our balance sheet during the fourth quarter in a fiduciary capacity before paying the funds to the ultimate beneficiaries.

We experienced core deposit growth in all of our community banking regions. On an annualized basis, average core deposits grew in our upstate New York area by 11%, while our Metro area, which includes New York City, Philadelphia, and Westchester, which we sometimes call Tarrytown, grew by 4%. Pennsylvania also grew by 4%, followed by the Mid-Atlantic with 2% growth. The outsized growth in upstate New York was aided by our ability to acquire new customers as a result of the disruption coming from HSBC's exit of the upstate market. On an end-of-period basis, core deposits increased an annualized 11%, reflecting in part seasonal in-flows of municipal deposits.

Turning to non-interest income. Non-interest income totaled $377 million in the first quarter, compared with $398 million in the prior quarter. The linked-quarter results included $55 million from the settlement of the lawsuit that I previously noted. Other-than-temporary impairment charges related to our investment securities portfolio amounted to $11 million in the recent quarter, compared with $25 million in the linked quarter. Excluding those charges from both periods, as well as the legal settlement, non-interest income was $388 million for the recent quarter, up an annualized 22% in comparison with the $368 million in last year's fourth quarter.

Mortgage Banking revenues rose to $56 million in the recent quarter, compared with $41 million in the prior quarter. The increase is attributable to the combination of higher loan volumes, wider gain on sale margins, and lower repurchase costs. We estimate that our Mortgage Banking revenues could have been some $21 million higher had we elected to sell the mortgage loans we originated to hold on our balance sheet in the quarter. That comparable figure was $11 million in last year's fourth quarter.

Fee income from deposit services provided, which include debit card interchange, were $109 million during the quarter, compared with $104 million in the linked quarter.

Turning to expenses -- operating expenses, which exclude merger-related expenses and the amortization of intangible assets, were $620 million for the first quarter. This compares to $706 million in the fourth quarter, which included the BLG write-down, and the contribution to the M&T Charitable Foundation. Excluding those two items, operating expenses for last year's fourth quarter were $597 million.

This quarter's seasonal increase in salaries and benefits that I mentioned earlier amounted to approximately $26 million for the recent quarter, and included the items which we typically note, such as the accelerated recognition of equity compensation expense for certain retirement-eligible employees, higher FICA expense, higher unemployment insurance expense, and expenses related to our 401(k) match. As in prior years, we would expect a decline in the second quarter as these items return to normal levels.

Including those $26 million of seasonal items, our operating expenses were still just $2 million higher than they were in the third quarter of 2011, which, as you will recall, was the first full quarter following the merger, but before any of the merger-integration synergies had been realized. This should give you a good indication that we have made substantial progress in achieving the majority of our target expense savings, even though we've yet to realize the benefits from the mid-year conversion of our trust and investment systems. The efficiency ratio, which excludes securities gains and losses, as well as intangible amortization, and merger-related gains and expenses, was 61.1% for the first quarter, compared with 67.4% in the fourth quarter of 2011.

Next, let's turn to credit. Overall credit trends continued to show improvement. Non-accrual loans decreased to 1.75% of total loans at the end of the first quarter, down from 1.83% of total loans at the end of the previous quarter. Other non-performing assets consisting of assets taken in foreclosure of defaulted loans were $140 million as of March 31, down from $157 million as of the end of 2011.

Net charge-offs for the first quarter were $48 million, down from $74 million in the fourth quarter of 2011. Recall that in the fourth quarter we charged off approximately $19 million on a single residential development project in Northern Virginia. There is still the potential for some lumpiness in charge-offs from time to time, as loans that otherwise are specifically reserved for, may ultimately result in charge-off. Annualized net charge-offs as a percentage of total loans were 32 basis points, down from 50 basis points in the linked quarter.

The provision for credit losses was $49 million for the first quarter, compared with $74 million in the linked quarter. The provision very slightly exceeded the net charge-offs, and as a result, the allowance for credit losses increased to $909 million as of the end of the first quarter. The ratio of allowance for credit losses to total loans was 1.49%, compared with 1.51% at the end of the linked quarter. The loan loss allowance as of March 31, 2012 was 4.7 times net charge-offs for the quarter.

We disclose loans past due 90 days, but still accruing separately on non-accrual loans because they are deemed to be well secured and in the process of collection, which is to say there's very low risk of principal loss. Loans 90 days past due, excluding acquired loans that had been marked to fair value at acquisition, were $273 million at the end of the quarter. Of these loans, $253 million or 93% are guaranteed by government-related entities. Loans 90 days past due were $288 million at the end of 2011, of which 88% were guaranteed by government-related entities. M&T's estimated Tier 1 common capital ratio was 7.04% at the end of March, up from 6.86% at the end of December. This reflects higher capital from retained earnings, partially offset by the larger end-of-quarter balance sheet.

Lastly, as most of you know, we don't offer much in the way of earnings guidance, but we'll share our thoughts on our general outlook. Our balance sheet continues to be positioned for slight downward pressure on the net interest margin as a result of new loans and securities coming on to the balance sheet at lower yields than those maturing. This should be muted by a lower cost of deposits combined with lower cost on borrowings.

As we noted on the January earnings conference call, we expect the full-year net interest margin for 2012 to be modestly lower than the 7.37%(Sic-see press release) reported for the full year of 2011. And when combined with mid-single digits loan growth, we anticipate continued growth in net interest income throughout 2012.

The possibility of large temporary trust deposits coming on to the balance sheet for a period of days or weeks, as was the case in last year's fourth quarter, is more likely than in the past, driven by our large corporate client service business and its success in generating new business. I'd stress that while these deposits can dilute the stated net interest margin while they're on our balance sheet, there is no diminution -- there is no reduction of net interest income, and in fact, it's a very slight positive due to net interest income while we have them on our balance sheet.

We remain very focused on expenses, both on the day-to-day cost of operating the business, as well as on achieving the remainder of our cost-saving opportunities arising from the Wilmington Trust integration. We continue to expect the remainder of those opportunities to be realized over the next three quarters, with the majority of the impact occurring in the second half of the year, following our planned second-quarter trust systems conversion. And we continue to expect up to $10 million of merger-related costs in 2012. This figure includes the costs incurred in the recent quarter.

I believe our caution with respect to credit may have been misunderstood by some to mean that we are concerned about the potential for an uptick of problem loans in our own portfolio. I want to stress that, in fact, our caution comes in part from our conservative DNA, combined with external factors such as the continued historically high level of unemployment, the Eurozone crisis, the US fiscal deficit and the possibility of another fight over the federal borrowing cap. Unfortunately, none of those issues are under our control.

That said, we continue to see steady improvement in the level of criticized and non-accrual loans supporting our strong credit performance. Over time, we optimistically expect those trends will continue. Of course, all of these projections are subject to a number of uncertainties, various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors, which may differ materially from what actually unfolds in the future.

And now we'll open up the call to questions, before which Paula will briefly review the instructions.

(Operator Instructions) Marty Mosby, Guggenheim.

The deployment of liquidity was one of the big impacts on the balance sheet this quarter. You deployed about looks like $1.5 billion of those deposits in the Fed, moving them into the loan growth, which a lot of that's dictated by the Mortgage Banking and how much you're being able to see. With the increase in Mortgage Banking fee income as well as the opportunity probably to touch more mortgages and also the kind of increase in deposits that rekindled the period-end number back in the Fed balances, looks like you got about another $1 billion left that you could redeploy going into this quarter. What's your thoughts about utilizing that?

I think obviously we had a big end of fourth-quarter loan growth which carried over to this -- to the first quarter, but I think if I take it in parts, we definitely have -- we've not seen an abatement of growth in deposits so that trend has continued longer than I guess I would have thought if I was sitting here a year ago. So that bodes pretty well. I noted in upstate New York that we've got great deposit trends, there's a bit of disruption going on here from all the different conversions and so forth. So I think that's good.

And then if you flip over to the other side, I think we had 5% end-of-period growth in C&I loans. So while not as robust as in the fourth-quarter end-of-period, we're still seeing growth and obviously we've got a fair amount of residential mortgages that we've been putting on each quarter. So I think I would guess that we'll be able to utilize the core deposit growth that we see. Having said that, I think as we mentioned, our Commercial Client Services business is such that we could get even larger swings of cash balances which in some cases I think might go unutilized as I think out in the future, whether it be from our loan agency business or from assisting people with securitizations and those types of things, if the capital markets start to pick up.

But with additional origination production going on, do you feel like you want to use the extra $1 billion with the stronger deposit growth that you've already seen? It's like you reloaded as you went through the first quarter and you got a chance to go out and deploy another slug of mortgages in there that could really help balance the balance sheet as well as be able to generate some offset to that compression that you were talking about in net interest margin.

I guess I haven't thought about it that way. I continue to think -- we continue to think that because we're light when you combine discretionary assets which we would call mortgages and securities, we're just doing the tradeoff. If you look on the other side, I don't have the amount, but we had a runoff on our securities book.

Right.

As well. So that's kind of a substitute for the mortgage growth and my sense is that tradeoff will continue. I think that was down almost -- the investment securities were down almost $0.5 billion.

The last thing I was going to ask you, is trust fees increased a nice 3% which is the first increase we've seen since the merger with Wilmington Trust. How much of that was market valuation lift versus when we were out there talking to Management? You all were real excited about being able to see some of those customers, Wilmington Trust, come back on board and be able to see -- be able to cross-sell into that product as well. How much is market related versus tactical or strategic traction that you're getting? And thanks for taking my questions.

Thanks, Marty. Good questions. If you look, let me sort of tee that back up. I would say that as I now look at -- we have three quarters. We went from the third to the fourth and our trust fees, Wilmington combined with M&T were flat. When you look at a lot of trust businesses in hindsight, a lot of people were down. So we were actually pretty pleased with our results in the fourth quarter. And then we saw a nice growth into the first quarter which was driven primarily by two things. Our capital markets and agency business as well as an uptick in the retirement services. The retirement services obviously is a result of the S&P 500 being up 12%. So there we saw fees grow maybe 4%, 5%, because we don't have 100% equities there. We're a little sensitive to equities but we still have improvement.

Then as we look at the various capital markets business, if you think of our default administration business, as you know we've got -- we've been able to get a number of sort of headline appointments there. We're the trustee on GM, Eastman Kodak, American Airlines, we added MF Global. Those things combined and the work associated with those things have actually allowed us to sort of hold our ground there and in fact actually get a little bit of an increase. So what I'm always impressed about is that I thought we had a pretty aggressive outlook on what we might be able to do in the first quarter for trust and we were able to do that. What I'm most impressed about is sort of as we learn about it, the diversity of the Wilmington Trust business is a nice thing. There's always sort of something going on. There's a win in one place when you don't see it in another. So that's the best answer I have for you. We were pretty pleased with trust.

Thanks.

Craig Siegenthaler, Credit Suisse.

We had several questions on the composition of consumer Real Estate originations which I'm guessing is almost all conforming resi mortgages. But what is the average maturity, yield, and duration on these originations?

I'll give you some sense. If you give me about two seconds here. So we've got -- if you look at what we did in the quarter, so I'd say about half of what we did are agency-related securities. Of that, about half of those, 50% of those are 15-year. Another 10% to 12% are 20-year and then the remainder, maybe 30%, 40% of it would be 30-years. And then we're more on the 30-year side with the FHA production that we did which was a sizable portion also of the total amount that we did, maybe 40% of what we did. And then we've got some smaller products which are more in the 15 -- sort of weighted themselves down towards the 15- to 20-years. I would guess it's probably like half 15-year, half 30- at this point. And with the idea that we're graduating more towards 15-year as we put things on to deal with the duration issue.

And then Rene, especially related to the 30-year duration or the 30-year maturity paper, what are your thoughts on duration extension risk to the balance sheet, given what could happen when government stimulus ends and rates eventually go up?

I think that the -- we're not concerned about it in the sense that if we were to keep putting mortgages on for a longer period of time, I guess we would get to a point where we think we had too much duration risk. But we're already relatively low and again, we're light in that space. Right? So think of it is when you think of the replacement of the securities book which a lot of our MBS and you look at the tradeoff, our duration is growing a bit but it's still in the wheelhouse of where it's been in the past. So nothing concerning just yet.

Okay. Not even on the change of where that could go when rates go up? Because obviously it would extend out.

Yes, we would be concerned -- that's what we're considering when we're putting it on. We're thinking about extension risk and all those types of things as we model it out. Right now we're still comfortable with the mortgages although I do say that we do have more of an appetite for 15-years as we progress because with the re-fi boom we're probably ahead of where we thought we would be.

All right. Great. Thanks for taking the questions.

Ken Usdin, Jefferies.

Couple quick things. So number one, just to ask the question, obviously the CCAR came and went, and I think you guys made the comment that what you had not put in for anything related to the eventual TARP payback and that you would just have to I guess resubmit that at that time. Was wondering if you could kind of walk through just how you have to think through that, at whatever point it is in the future when you get to that point. Do you have to just -- do you have to wait until an annual review or can you resubmit an interim if you had a thought process around becoming a more immediate time frame?

I think what we said was that the to the extent that we wanted to repay the TARP, we would have to resubmit and I guess this process is to resubmit. But at this point in time, I don't really have any more information on our thinking. We've stated it a lot in the past. But I do think if you don't mind, I would like to just sort of kind of walk back through the points again because I think it kind of matters. We've heard a lot of stories out there about our TARP. You'll recall that we were kind of reluctant to participate in the program and so we -- as a result, we were the only one in the largest banks to take just 1% of $600 million. The thought process back then was that we didn't want it. We didn't think we need it. But at the height of the crisis, there was a lot of pressure on banks to prove that they were strong enough to receive it. So what we essentially did is we took the minimum to show that we were strong enough to qualify but not -- but also strong enough not really to need it. And so then as you kind of move along we ended up with acquiring some troubled franchises, Provident and Wilmington and we took on more than $180 million more. We paid back $700 million. So now we've paid back more than we originally took and so I think our plan is to just keep dialoguing with the Treasury and others over time and we'll pay back the remaining balance when we find that that's practical or appropriate. We're committed to paying it in full.

I think the other thing is is that if you look at the second piece of that, if you look at where the warrants are trading since -- whether they be ours or those other institutions, there's a very sizable gain that's embedded in the warrants. Our picture, we'll get rid of it as soon as we can. I don't have any more information for you today but that's our goal and as we work with the Treasury we'll hopefully get to a point where we can give the money back.

Great. And the other piece of this that is are you at the point at least where now where you can help us get a better understanding of what your Basel III would look like if you had to present it today?

We talked about that. I'm not -- I think we're just going to wait. Most of the banks that have done it as you know are speculating based on what the Basel III original rules are coming out of Europe. Our opinion is we'll just wait and see what happens when the final rules come out. We'll publish something then.

Okay. My second question Rene, obviously the mortgage strength across the board was very clear this quarter, both in terms of the amount you were able to put on the books and then your comments, just seeing the mortgage banking fee strength and plus the fact that you could have gotten if you sold. I was wondering if you can give us a little bit deeper color in terms of just what was origination versus what was gain on sale on the fee side, and can you walk us also again through your time lag in terms of apps that haven't closed or gotten paid on yet.

I can try to do it in a simpler fashion. Maybe I'll just give you a couple of numbers if you give me a minute. When you look at our -- I'll start with application volume. We had total application volume of $2.4 billion which was up 31% from the linked quarter. Right? So huge volume increase in total. And then if you kind of look at the components of that, most of it was from re-fi activity. About 12% of that volume was from the HARP program. So as you get back a couple of quarters, that didn't exist. So that almost expands almost a third of the increase is the way I would think about that. And I would guess that that will continue for some time. On those, we're selling all of those but we are keeping the servicing on some portion of those loans. And then as you look, I think we locked about $900 million for future sale to our Treasury division and in the fourth quarter that might have been about $800 million. You actually saw the $800 million flow into the balance sheet this quarter, right. You should see some strong effect. Depends on where rates are with the total volume coming next quarter. But in any case, we seem to -- we'll have some nice carryover into the second quarter on our balance sheet.

Great. All right, thanks, Rene.

Steven Alexopoulos, JPMorgan.

Maybe I'll start at last quarter you pointed to more cost saves than the original $80 million. I think you said $90 million to $100 million. Just wondering where do you think that's looking now and what was actually in the run rate as of the first quarter?

If I were to guess where we are, we're probably getting pretty close already to about the -- to the 15% number. We're knocking on that door of cost saves which suggests that we're sort of on track to be a little bit over because, again, we haven't completed our trust and investment systems conversions, right? So I think that's what we're saying. We feel like a lot of the uncertainty there or the work is done but obviously as we go further, I think we're going to probably outperform that original number would be my guess.

Okay. And Rene, once the cost saves are realized, how should we think about the growth of core expenses with Wilmington in the mix? Historically around 4% per year, is that higher now with Wilmington?

It's interesting. When you look at the expenses, if you take a detailed look at the expenses, it's pretty amazing. You can't discount, and maybe even suggest go back and read again Bob Wilmer's message. The amount of expense that's been added because of the regulatory side and not just the obvious ones but sort of all the added staff that you need for credit and compliance and those things is pretty high. I think I was looking at -- I don't have it exactly in front of me but I think it's on the runs, we were probably -- FDIC insurance was probably up 52%, 53% from a year ago quarter. So all that said, to the extent that a lot of that is not going to continue at that pace, I think now we're settling in, trying to think in the new environment how do we operate things and so our focus is going to be on containing that growth as much as we can. Where you might see some growth would be on investment in things like technology, because as you look at your distribution network, which needs to be rationalized not just for us, but everybody, you can only do that when you have pretty good technology that offsets it and some consistency there. But I think expenses will be pretty well managed. I think about the spread. I definitely think that we'll have an abnormal spread between revenue growth and expense growth relative to the past couple of years.

Got you. On the margins, just to follow up on your comments for slight pressure, would you consider restructuring some of the long-term debt, the way at least one other bank has, to take pressure off the margin?

No, because it's not economic really. This restructuring that we did, again for Wilmington Trust, this is the only one that I ever remember in the 20 years I've been here and I would guess you could probably go back 30 and say the same. So I doubt it because there's no economics in that whatsoever. We still have some -- one of the things you see in the margin which is kind of subtle but we still have some wholesale funding or longer term wholesale funding from Provident and those transactions that will run off over the course of this year that will give us a little bit of relief.

Great. And maybe just to follow up on Ken's question on TARP, I know you're very clear with your answer. Just curious, could we see an update on this this year or is it more likely with next year's stress test and capital plan that we would next see an update on that?

Can't tell you, Steve. When I know, I'll tell you.

Okay. Fair enough. Thanks for taking my questions.

Erika Penala, Bank of America Merrill Lynch.

This is Connor Fitzgerald for Erika. Correct me if I'm wrong. I think I heard you mention that Auto loans were down. Was that a deliberate decision on your part to pull back or did the overall pie shrink this quarter?

Yes, Auto loans were down. It's not any different than it's been trending. I think we said the total consumer loans were down about 4%. Auto loans were down I think about 3%, unannualized, I would guess. Yes, so that portfolio has been running off because quite frankly as we said, we try to maintain a return at least at our cost of capital of 12%, maybe 12%, 14% is where we've been running and we've seen a lot of competitive pressure there. I'll recount one of our folks was out recounting a story where he went out and looked at some of the transactions going on. In one case he had a 2009 sports car, the purchase price was $100,000. The loan to value was 98. And the credit score was 702. The yield for the customer was 1.34%. So with that kind of activity, we can't get anywhere near there that. It doesn't make much sense to us. But in fact it seems like it's a pretty good environment for the consumer because money is very, very cheap. In our mind, we'll continue to generate $80 million to $100 million of that paper a month unless something changes in the competitive front and that means that we're going to see slight downward trends in our balances there.

Got it. Thanks. And then just on credit quality, how are you guys thinking about normalized charge-offs as we move through the cycle and your reserve level?

Couple of -- this is a guess. I mean, if I think back over long periods of time, I would guess we've built a Company that the average charge-off rate over long periods is probably 30 to 40 basis points. Right? And that swings low and we still have high nonperformers so I would expect that as that tapers off you'll over long periods you could get some good credit performance. The other thing I would direct you to is that if you look again over long periods of time, our movement in charge-offs mirrors the industry. So while we've always been much lower on a relative basis, the tracking of it is almost in lock step because we're in the same asset classes as everybody. It's just that we try to get more security on the loan. So I don't know if that helps you at all.

Yes, that does. Thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Hey Rene. Just to be clear. Hopefully you have this number. The $21 million that you guys cited, if you had sold the resi mortgages you would have had $21 million of additional Mortgage Banking income. Presumably that also means that you wouldn't have had the growth in resi that you did which obviously provides or grows your earning assets, grows net interest income. Do you happen to have like a net number? Because it seems wrong to just add in the $21 million because you're already getting income from the loans that you kept.

Yes, we probably should have done a better job of that. Think about it this way, Ken. So when you -- the way the accounting works is when you're selling it, originating the loan for sale, at the time of the lock you record the gain. So the loan hasn't been closed yet. So all the gain-on-sale revenue you see in the first quarter was from loans we locked but have not yet closed. The $21 million is related to those $900 million of loans we talked about which have not yet closed. So they're not in our numbers at all. They won't be in our balance sheet until about 45 days after the lock period. So that means on average, in the second quarter. Is that clear?

Yes. No, that does help. That's great.

The other thing we did, that's why we gave you the $11 million last quarter. So if you use last quarter's, that's what boosted the -- it was those loans that boosted the first-quarter balance sheet.

Okay. And then just another quick question. In terms of how -- what percentage I guess of your portfolio are you comfortable with resi mortgage being? How large can that grow?

We're way below the industry average. I don't know, a couple of points as a percentage of assets. We're not looking to do anything dramatic. I would guess when we're done we'll be below the industry average.

Okay. But you're comfortable going up close to the industry average. Okay.

Let me say that again.

I guess for you guys. That's what I was asking. Your tolerance for resi.

Again, it's an offset for securities. So it depends on where we are for our investment securities portfolio. So right now we're really low. I forget the numbers but we're probably half of what the industry average is for investment securities. So you kind of have to look at both of them together.

Okay. All right. Great. Thank you.

Matt O'Connor, Deutsche Bank.

Hi. This is actually Adam Chaim calling for Matt O'Connor. Just have two quick questions for you. Sorry if you discussed this already. Was there any impact from NPAs on NPAs and reserves from the new regulatory guidance on second lien home equity. I think two-thirds of your home equity was second lien at year end. And the second is regarding salaries and benefits expense. Even excluding the seasonal increase, the $26 million you noted in your prepared remarks, it still came in a bit higher than we expected. How much of that expense is generally driven by mortgage compensation?

I think let me go in reverse order. I think very little of it is really driven by mortgage compensation. If you think about it, because when you book the loans you have to defer a portion of the expenses. It actually works the other way, it dampens the salaries a little bit when you have high mortgage volumes because you're deferring. But having said that, our business is growing as well so for example the size of our servicing portfolio is a little larger as well and a few things like that, we've added people in the servicing area. So that's what you're seeing there. And I think the other thing that we'll continue to do from time to time is particularly with the Wilmington business, we'll start adding teams of people where we think the revenue growth actually can help us out. So I would say probably the biggest thing that you're seeing there that you can't quite see is probably a larger servicing portfolio and it's some more staffing there.

And then if I go back to your other question on the second liens, we did some work and basically what we think is that classifying our second lien loans as non-accrual when the first loan is not paying would really have very little impact on our financial results. So what we do is -- and we disclosed some of this in our 10-K. Actually, in our most recently published 10-K. We've got about 35% of our home equity portfolio that's actually a first lien, that are actually first-lien loans. And then there's another 55% where behind -- which are behind first-lien loans that are not owned by us or serviced by us. And what's really true about those loans is that we can't precisely determine whether there's a delinquency on the first loan. So what we do is we have a process in determining our overall adequacy of the allowance where we start by looking a bit at our history and then we test that history and adjust it if it's appropriate by looking at several factors including some of our near-term forecasts. And in that what we're looking at is by geographical region, we're looking at changes in our collateral values and as we do that, because we don't know what's happened to the first mortgage, because we're not servicing it, essentially what we do when we do those scenarios is we assume that the original balance, we assume that the first loan's not paid down at all and that the original balance is still outstanding and then we use that to run our estimate. But as we run through the whole process, we feel pretty comfortable that we've appropriately quantified the loss content in our portfolio, our home equity portfolio and as you know, that portfolio had a really nice performance over time. I think we were somewhere between 58 and 69 basis points of loss over the last three years. So I think we're in pretty good shape there.

Okay. Thank you.

John Pancari, Evercore Partners.

Can you talk about that trust deposits seasonality, can you help size it up in terms of how much you expect it could be, that it could impact the deposit balance.

I wish I could. It doesn't really work that way. For example, recently we were -- early in this second quarter, we were engaged as a trustee on a large securitization. Right? So depending on the size of that securitization, we'll get way above average -- we'll be holding that cash for that client for a short period of time but it could be a significant amount of money. Sometimes it gets cut in half. So it can swing by several billions of dollars, depending on the type of transaction that we're engaged in and how many we're engaged in.

Okay. All right. Separately, can you give us a little more color on loan pricing through the quarter, particularly on the commercial side? I know you gave some color around the resi book but just curious in general what you're seeing there. But more importantly just competitive loan pricing, you also mentioned indirect Auto, so clearly we're seeing it there but I'm curious what you're seeing elsewhere. Thanks.

Let me put as a backdrop to that, in a number of places we're seeing very positive things from our customers, whether that be because there's an uptick in the economy or activity or in some cases just because the competition is down because a lot of their competitors have been weeded out. As you look at that as a backdrop, we have seen -- I'm going to use better language than one of our regional presidents. I'll change his words, he told me that from a competitive standpoint, silly is back. And what he's talking about is that many of the community banks are pretty aggressive both on price and structure and I'd say even relative to a year ago. And then when you get to some of the larger institutions, to the extent that they're healthy, because they're carrying -- we believe because they're carrying a fair amount of equity, they've been willing to do things that were probably a little lower than we would have expected. I think it makes sense in the context, if you think -- if they think they're sitting there with excess equity, then that's kind of what you get. It's pretty competitive.

But having said that, as we look into like Pennsylvania for example, our business bankers and our branch managers seem to feel that there's good loan demand there, and not necessarily complaining about prices. Again, I would articulate that in Western New York and upstate New York we've been in terms of customer count on the business banking and loan side as well, we've seen good growth there at fairly reasonable margins. So that's what we know.

Okay. That's helpful. Lastly, can you give us just some color on the fluctuations again in the other revenue line item as well as in the other expense item, just some color on the moves.

Yes, it's really one topic. Think about the idea that we had a big, big loan growth, really in the fourth quarter leading into the first. What we actually had was probably an outsized amount of commercial loan fees, whether that be regular loan fees or syndication fees, what have you. And then as you went to the first quarter, we probably had an abnormal low amount coming. So I think what will happen, that will sort of get back to a normal pattern. It's hard to really predict syndication type fees and credit fees on a quarter-to-quarter basis, so it jumps around a little bit. So I would say fourth was extreme. First is extreme the other way.

Same thing on expenses?

That was on the other revenue. So on the other expenses, yes, yes, you've got to normalize -- you've got to normalize for a couple of things. Right. First you've got to take out the Bayview write-down and the Charitable Foundation and once you do that, we were better by about, I don't know, $10 million, $11 million, and really when you look into what's driving the better performance, there's a lot of seasonality. So you get professional services and those types of things that were higher at the end of the year and some of that will come back. First quarter is usually seasonally low in most of the other expenses, and then it ticks up a little bit going forward.

Okay. Thanks for the color, Rene.

Bob Ramsey, FBR.

This is Tom Frick for Bob Ramsey. Just one quick question. As expected your tax rate kind of ticked up looks like 6 points this quarter. Is 33% a good run rate for you going forward or how should we think about that?

I'm a random walk guy. So my answer is yes, I think so. It was low last quarter because of the income was low and we had -- typically you get this fixed tax credit. I think we're probably at a pretty good place right now.

Okay, great. That's all I had. Thanks.

Collyn Gilbert, Stifel Nicolaus.

Just as we think about the loan growth, you had indicated perhaps single-digit loan growth. A lot of that's obviously being driven by the resi initiative at this point. As that starts to slow and that strategy maybe plays itself out a bit, how do you think about the allocation of capital from there and how does it change and maybe tie that in to where -- what aspects of your business right now are you kind of most encouraged by?

Yes. Okay. So take the resi out for a minute. We had obviously a nice quarter of loan growth, C&I and Real Estate this quarter, and then on an end-of-period basis C&I was about 5%, CRE was about 1%. So things continue to grow. Right? And over time, I would guess that the economy gets better and you can't continue to see all this liquidity coming into the system and you're going to see growth. So I'm not too worried about that. The one benefit I think is that there's so much uncertainty still around capital levels, everybody guessing at where we're going to be in the future and so the idea that we're deferring the gains kind of works in our favor because we're not -- we're growing capital. Capital is growing. But if we were to accelerate that by selling all the loans, then we're not quite sure what our use for that capital would necessarily be. Particularly as we get up past the range that we're comfortable on this sort of Tier 1 common ratio.

I think right now it's just a wait and see. But I mean, in terms of what we're pleased with, I think we're watching cautiously our pricing but yet our loan growth and everything I look at quarter-over-quarter, quarter-after-quarter is probably a better term, slightly outpaces the industry. I feel that we've been taking share in a lot of places and that's continued so we feel good about that. And again, I guess I would have to reiterate that this is a very, very nice quarter from the wealth and trust business. I think we were very pleased with that. I think we've got a lot of positives. The Bank is very healthy. In fact, I think the thing that struck me, I think it's on page 14 of our press release where we do the five-quarter trend and you kind of look at the fees. The fees were up across the board with the exception of that other that I mentioned, and sort of tied to syndication fees. We feel pretty good about the way the underlying business is performing. We've got to figure out how to do it a little more efficiently when all of this noise from the new environment settles down and we can get our arms around it. But that's our task.

Okay. Okay. That's helpful. And then just finally, how does M&A factor in to your strategy over the next 6 to 12 months given what's going on in the environment?

Well, you don't buy banks. They get sold. Hopefully someone will call us up from time to time. If they did, we would probably be ready. I think the one practical thing we're doing is while we're not really concerned -- you think about our dividend policy. So before obviously 2007 if you looked at our dividends, our dividend payout ratio was probably between 25%, 27%. We used to keep it very, very low. And then we used share buyback. Now our total payout ratio is somewhere around 40% and it's actually when you think of it in total terms, it's low. So we're accumulating capital. Even beyond the idea of accumulating it for the new Regs and the new Tier 1 common rules, it's that there's not really a ton of cost to doing that today because we think bank stocks are very, very low. I think we did a slide on that. We went back to 2000. You can see that pricing is still relatively low on bank stocks and we think that with the regulatory environment, we'd be surprised if there's not more consolidation. So our strategy is really simple. Just keep working on your own bank and eventually something will come up that makes sense for both parties and be ready to do it.

Okay, good. That's helpful. That's all I had. Thanks.

Craig Siegenthaler, Credit Suisse.

Wanted to refine your commentary around deposit trends. Sounds like there's some positive lumpiness coming in the trust business and we had some at the end of the first quarter. But also second quarter sometimes can be a more difficult seasonal quarter for deposit growth. So what is your expectation in terms of total deposit growth and also how do you feel about the loan to deposit ratio now that it's 100% versus your longer-term objective?

What we talk about here, first of all, we have modest growth planned in our deposits for the year, particularly because we're more concerned about what happens when the rate environment turns around and we've got a really significantly high levels of demand deposits relative to history. So we're cautious on the idea that if things turned around and you do see loan growth, you're probably going to see a runoff in some commercial level deposits as those customers can go out and get better rates of return elsewhere and they start actually using the cash. So I don't -- can't tell you what it's going to be. I can just tell you that we're very cautious about it so we tend not to assume large amounts of growth in the deposit portfolio. We work really hard to get it but --

Got it. Then just one follow-up. Thanks for taking all my questions. Most equity markets are up around kind of 10%, 11% in the first quarter and your trust income was only up 3%. That's also on the back of a strong fourth quarter. I know it's a smaller mix of equities. Is that normal to see your trust income up around 3% when equity markets are up something significantly higher like 10%?

Yes, I think it is normal because even when you look at the assets that we have, and I'll give you the number in a minute. There's a smaller portion of it is the equity markets. A lot of the business, particularly in the corporate client service business is not really tied to the markets. It's tied to -- actually, it's not tied to the equity markets. It's more tied to the overall capital markets and who is issuing debt and what kind of transactions are going on. Right? So if you look at our total assets under management, I think about 36% are equities, and so that kind of makes sense, 12% up, 3%, 4% up in our retirement services and those asset intensive businesses.

Got it. Great, guys. Thanks for taking my questions.

This concludes the question and answer session of today's conference. I would now like to turn the floor back over to Mr. MacLeod for any closing remarks.

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