M&T Bank Corp (MTB) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second-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 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 Bank's second-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 relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those form found on Forms 8K, 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.

As we noted in the press release, this year's second-quarter financial results reflect strong performance across most of our business. I'll share the details on these in the moment, but 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 $1.71 in the second quarter of 2012, up 14% from the $1.50 earned in this year's first quarter. Net income for the second quarter was $233 million, up 13% from $206 million in the linked quarter.

For the purpose of comparison, recall that last year's second-quarter marked the acquisition of Wilmington Trust Corporation, and as such, those results included several items related to the merger. Looking back, those items included $67 million of after-tax security gains amounting to $0.54 per common share, which were the result of repositioning our securities portfolio in connection with the merger in May 2011. Also, included in GAAP earnings in the second quarter of 2011 was a $42 million net after-tax merger-related gain amounting to $0.33 per share.

Finally, last year's second quarter included a net $9 million, or $0.07 per common share, after-tax impact related to our purchase of $370 million of TARP-preferred stock that M&T had previously issued to the United States Department of the Treasury. That purchase resulted in the partial acceleration of the amortization of the discount on that preferred stock, which was reflected as a net after-tax $9 million decrease in our net income available to common shareholders. Reflecting those items, diluted earnings per common share for last year's second quarter were $2.42 per share and net income was $322 million.

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 intangibles, as well as expenses and gains associated with mergers and acquisition activity. Included in GAAP earnings for the second quarter of 2012 were merger-related expenses attributable to the Wilmington Trust acquisition amounting to $4 million after-tax or $0.03 per common share. This compares with $2 million after tax or $0.01 per common share in the first quarter.

GAAP earnings in last year's second quarter included a $42 million after-tax net merger-related gain. 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 first quarter. After-tax amortization expense was $9 million, or $0.07 per common share, in last year's second quarter.

M&T's net operating income for the second quarter of 2012 which, as noted, excludes only the merger-related gains and expenses and the intangible amortization, was $247 million, up from $218 million in the linked quarter. Diluted net operating earnings per share were $1.82 for the recent quarter compared with $1.59 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 1.30% and 18.54%, respectively, for the recent quarter, improved from 1.18% and 16.79% in the first quarter of 2012.

In accordance with 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. Tax equivalent net interest income was $655 million for the second quarter of 2012, up $28 million from $627 million in the prior quarter. As required by GAAP, we regularly revisit cash flow projections on which we base our valuations of acquired loans. In general, based on stabilizing economic conditions and our success at restructuring several large acquired loans, our estimated cash flows to be generated by acquired loans have increased by about 1%. Those increases lead us to recognize about $14 million of additional interest income last quarter on our $7 billion portfolio of acquired loans.

Certainly, as acquired loans repay, and that portfolio reduces in size in future periods, the dollar amount of interest income earned on acquired loans will also reduce, but we estimate that the incremental impact in each of the last two quarters of 2012 should remain at about -- at the $13 million to $14 million level.

Notably, lower-than-expected cash flows on loans must be reserved for immediately. Reflecting those improved cash flows, the net interest margin expanded during the second quarter, increasing to 3.74%, up from 3.69% in the first quarter. Major items impacting the comparison with the linked quarter are as follows. The $14 million increase in net interest income on acquired loans that I just noted added 8 basis points to the margin this quarter. Cash basis interest received on loans previously classified as non-accruing, combined with a slightly higher level of prepayment fees, was $7 million higher in the recent quarter as compared with the prior quarter. More than half of the increase came as a result of one large nonaccrual loan being fully repaid. This had a positive impact on the margin of approximately 4 basis points.

During the second quarter, we again experienced large inflows of temporary trust deposits which arose from customer funds held in escrow in connection with a bond issuance, and the merger transaction. Where possible, we use that cash to pay down discretionary borrowings, but the net impact was a $981 million increase in the average cash balances that we held at the Federal Reserve. The low yield on those higher deposits at the Fed reduced the margin by an estimated 5 basis points during the quarter. Cash held at the Fed returned to a more normal level by the end of the quarter.

Core banking activities reflected slight compression in the margin with new loans coming on at yields lower than those already on the books. This has largely been offset by lower deposit rates and a higher portion of non-interest-bearing deposits. The net impact for the quarter was approximately -- was an approximate 2 basis point reduction. I'll discuss our outlook for the margin in a few moments.

As for the balance sheet, average loan growth in the second quarter was strong, increasing by approximately $1.3 billion, or an annualized 9%, to $61.8 billion. On that same basis compared with 2012's first quarter, changes in average loans by category were as follows. Commercial and Industrial loans grew by $372 million or an annualized 10%. Commercial real estate loans grew by $178 million, or an annualized 3%. Residential real estate loans were up by $930 million, reflecting our program of retaining the bulk of our conforming mortgage loan originations to hold on our balance sheet.

Consumer loans declined an annualized 5%, driven by lower indirect auto loans and modestly lower home equity loans and lines of credit. This was partially offset by a 7% annualized growth in all other consumer loans, primarily recreation finance.

On an end of period basis, loans grew $1.9 billion, or an annualized 13% compared with the linked quarter. Included in this figure was 12% annualized growth for C&I loans and 7% annualized growth for the CRE loans, which sets us up nicely as we enter the third quarter.

Average investment securities continue to decline as our appetite for purchasing securities remained low in the second quarter based on the low yields available. Instead, we continued with our program to retain residential mortgage loan production.

Looking to deposits on the deposit side, average core customer deposits, which exclude foreign deposits and CDs greater than $250,000 were up an annualized 18%, reflecting the large inflows of temporary trust deposits that I mentioned previously. As a result, as noted, M&T's average interest-bearing deposits at the Fed increased by approximately $1 billion compared with the first quarter. The majority of the increase was paid out by the end of the quarter. Thus, on an end of period basis, core deposits increased an annualized 14%.

We continue to benefit from the disruptions to consumers and businesses impacted by the HSBC branch divestiture in upstate New York. Average loans in upstate and western New York -- in the Western New York region were up an annualized 8% compared to the linked quarter. That includes 18% annualized growth in commercial and industrial loans. Average core deposits in upstate and western New York region were up by an annualized 15% compared with the linked quarter and up 12% compared with last year's second quarter.

Turning to non-interest income, non-interest income totaled $392 million in the second quarter, compared with $377 million in the prior quarter. The recent quarter results included $16 million of other than temporary impairment charges related to our investment securities portfolio compared with $11 million in the linked quarter. Excluding those charges from both periods, non-interest income was $408 million for the recent quarter, up 5% from $388 million in the first quarter.

Mortgage Banking revenues rose to $70 million in the recent quarter compared with $56 million in the prior quarter. We saw increased levels of activity on both the commercial and the residential sides of our business. On the residential side, so-called HARP 2 loans bolstered gain on sale revenues from both a volume and a margin perspective.

Fee income from the deposit services provided, which include debit card interchange, were $111 million during the recent quarter compared with $109 million in the linked quarter. Trust revenues rose to $122 million in the recent quarter compared with $117 million in the prior quarter. Contributing to the increase were seasonal tax-preparation related revenues and merger-related synergies as well as new business wins.

Turning to expenses, our operating expenses, which exclude merger related expenses and amortization of intangible assets, were $604 million for the second quarter. This compares to $620 million in the first quarter, which includes $26 million of seasonally high -- $620 million in the first quarter which included $26 million of seasonally high compensation related items. The seasonal factors returned to more normal levels in the second quarter.

The conversion of our trust systems to a single operating platform has been substantially completed. We expect no additional merger-related expenses related to the Wilmington Trust acquisition. We do expect continued realization of merger savings in the second half of 2012.

The efficiency ratio, which excludes security gains and losses as well as intangible amortization and merger-related gains and expenses, was 56.9% for the second quarter compared with 61.1% in the first quarter of 2012.

Next, let's turn to credit. Credit trends continued to show improvement. For example, nonaccrual loans decreased to 1.54% of total loans at the end of the second quarter, down from 1.75% of total loans at the end of the previous quarter. Other nonperforming assets consisting of assets taken in foreclosure of defaulted loans were $116 million as of June 30, also down from $140 million as of March 31.

Net charge-offs for the second quarter were $52 million, up slightly from $48 million in the first quarter of 2012. Annualized net charge-offs as a percentage total loans were 34 basis points compared with 32 basis points in the linked quarter.

The revision for credit losses was $60 million in the second quarter compared with $49 million in the linked quarter. The provision exceeded net charge-offs and as a result, the allowance for credit losses increased to $917 million at the end of the second quarter. The increase in part reflects the $1.9 billion of loan growth that we saw during the quarter.

While the dollar amount of loan-loss allowance increased, the ratio of allowance to credit losses to total loans declined slightly to 1.46% compared with 1.49% at the end of the linked quarter. The loan-loss allowance as of June 30, 2012 was 4.5 times annualized net charge-offs for the quarter.

We disclosed loans past due 90 days but still accruing separately from nonaccrual loans because they are deemed to be well secured and in the process of collection, which isn't to say there is low risk of principal loss. Loans 90 days past due were $275 million at the end of the recent quarter. Of those, $255 million or 93% are guaranteed by government-related entities. Loans 90 days past due were $273 million at the end of this year's first quarter, of which a similar 93% were guaranteed by government-related entities.

Lastly, while we don't report criticized loan levels until our 10-Q is filed, we do expect another meaningful decrease in the second quarter. M&T's estimated Tier 1 common capital ratio was 7.15% at the end of June, up from 7.04% at the end of March. This reflects higher capital from retained earnings partially offset by a larger end-of-quarter balance sheet.

Lastly, I'd like to offer a few thoughts on our general outlook. We expect the net interest margin to be fairly stable over the second half of 2012 with some slight downward pressure from lower yields on new loans, offset by lower costs on deposits and on other borrowings. Overall, as we noted on both the January and April earnings conference calls, we continue to expect the full-year net interest margin of 2012 to be modestly lower than the 3.73% reported for the full year of 2011. Combined with the continued growth -- continued loan growth, we also continue to expect growth in net interest income throughout 2012.

As a result of the stronger than expected mortgage banking activity over the past year, we are thinking about our internal targets for the retention of conforming residential mortgage loans. We have already begun retaining a lower proportion of our 30-year fixed rate originations beginning in this year's third quarter. We would not expect our overall retention of mortgage loans to remain at the current elevated levels much beyond the end of 2012.

While I'm pleased see our efficiency ratio decline to 56.9% in the recent quarter, we do expect that expenses will continue to be well controlled through the remainder of the year. The conversion of Wilmington Trust systems is complete, and realizing the remaining merger synergies will serve to offset the continued pressure from new regulatory mandates. As we mentioned, we do not expect any additional merger-related expenses.

Credit continues to strengthen. We expect continued improvement in the nonaccrual and criticized loan ratios with charge-offs remaining stable. Of course, all of these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future.

I appreciate your patience. We will now open up the call to questions before which Paula will briefly review the instructions.

(Operator Instructions). Todd Hagerman, Sterne Agee.

Good morning everybody. Hi. A couple of questions, Rene, just in terms of the Wilmington Trust acquisition. First, you mentioned a couple of things on the Trust revenue benefit this quarter. Could you give us a better sense just with some of the components, as I think about the legacy Wilmington, the private client business and in particular like their corporate services business, how that may have contributed -- or some of the strength in the quarter?

Yes. I think, for the most part, most of the businesses held up very, very well on a linked-quarter basis, and as I talked about, the largest portion of the increase then came from some tax services that we provide, tax-related services that we provide to our customers, and that tends to be seasonal fees.

We also had a bit of a lift because, as you bring together the two entities, in particular things like the funds, as you merge the funds you begin to get synergies on net revenues, so net of fees you are paying to service providers. So those things help.

You know, if you look into the business, we saw a little bit of an uptick in the Retirement Services space. We saw the capital markets group was a little weaker, and continued weakness is probably what I would say because there hasn't been much issuance. Having said that, I guess as I think about corporate America and I think about what's out there, there's a lot of pent-up demand for refinancings, and so I think down the road that probably bodes pretty well for us. But that was slightly weaker than maybe where it typically would run given the capital markets.

And then also we are seeing a little bit of a slowdown in -- where the agent brought in on syndicated loans, because obviously credit is working out better. So we have the engagements we have, but in terms of new business, that's slowing which is probably a good sign for the rest of the business. But overall, we are on track. We're sort of above where we expected to be, and that's nice, and I think things are going pretty well there.

Okay, that's helpful. And then perhaps if you could just give a sense now, with the integration complete, and particularly as I think about the Wealth Management business and Trust overall, could you give us the mix now how that may have changed or how that, again, just generally breaks down? You know, as I think about private client, traditional trust, that sort of thing?

I guess, at some point, I'll break that out for you. I don't have it with me right now, in part because we don't really think about it in exactly that same way. So at some point, if we break out CCS, which is the largest portion of the revenues, from Wealth, when I think about the Wealth, again, I think about what's going to happen on the Wealth side is in addition to the existing customer base, much of that growth is going to be coming from M&T's pre-existing clients, right?

Yes.

So, as we offer them services, whether they be cash management, wealth transfer or helping them exit their business, we kind of think of them in that way. So in part, I tend to look at some of that as how are we doing on our commercial bank side, right, and how that is working with our private bank. So we don't really break it out separately that way, but things are pretty stable. I would say that, if you think about it years past, I think our markets are probably good for keeping the portfolio relatively stable. But we still have a lot of work to do in order to go out there and penetrate the M&T customer base.

Yes, the only reason I ask is just to get it from a modeling standpoint with some of the seasonality in some of the businesses, just to get a better sense of the mix, and how to think about it.

Yes. At some point I guess we'll lay that out maybe in our Q or not, but I haven't done that yet. So --

Okay. And then just quickly on the mortgage, and the benefit this quarter, was there any uptick at all in terms of the reps and warranties similar to what we are hearing from some of the other companies this quarter?

In terms of (multiple speakers)

In terms of the number of requests, yes.

Yes, so the number of requests was relatively stable. If you remember, we had talked throughout last year that we were somewhere around 25 to 35 requests. Last quarter, this quarter, maybe we were somewhere around 36, 37 requests, so we are sort of at the higher end of that. But they still are in check. Having said that, we are also concerned about the same sort of things that you saw, which is sort of changing behavior. We do our best -- in fact, you'd be surprised -- to reach out to the other parties to me sure we understand their pipeline and the things that are coming to us. But even with that, I would say when you look at our Q, you will see that we continue to set aside amounts either for make-whole prices on loans, repurchase requests, or reserves for future ones. So we are very cautiously looking at that stuff, and just because no one has called us doesn't mean that we take the position that they won't.

Can you disclose what that reserve position ended at the quarter?

What we do is we keep disclosing how much we have charged in the quarter. I think, this quarter, that was $10 million. Last quarter, it was $4 million. A year ago, it was about $10 million.

Okay, great. Thanks very much.

Craig Siegenthaler, Credit Suisse.

Thanks guys. Good morning Rene. Just looking at the Commercial real estate growth which is really the opposite of what some of your peers are seeing, can you talk about which geographies and industries are supplying this and maybe why your growth is stronger than peers?

In Commercial real estate?

Yes.

Yes, I can talk a little bit about it. I think, you know, the growth is also the split between Philly, New York, Hudson Valley at about annualized growth of 5%. All of our Pennsylvania markets saw about 2% annualized growth, and then in Baltimore, Washington, which includes Delaware, which is important, we are seeing about 4% growth. I mentioned it's important because you've got to remember we've got acquired portfolios underneath that are probably still running off, right?

So one of the things that you saw in the addition of our move of stuff from non-accretable to accretable yield is simply the fact that, in Delaware, we have higher prepayment fees than we probably initially thought. So that kind of gives you a sense that, at least in the quarter, that it's not really concentrated in one area. I would guess maybe part of the issue is that we probably still have less runoff in real estate because our book is pretty good, pretty clean.

Got it. And then when you think about pricing terms, LTVs, can you talk about how they've trended over the last six months here, especially on LTVs? I know it's probably because you have a wide range or maybe talk about average -- the average LTVs have been trending.

Average LTVs have been trending. Let me start by saying we haven't seen a significant pressure. First of all, last quarter I said that there wasn't much change in terms of pricing pressure over the last six months. This quarter, that continued and quite frankly, even though we had higher volume, our pricing and our ROEs held up very nicely. So I thought that was very impressive. As you know, we track every deal we do, both in terms of margin, but also in terms of a full P&L. What it tells me is that a lot of the business we are getting is not just loan business, but it's probably the operating business as well, which is the only way that you can really get, in this environment, pretty strong internal ROEs on the business. So if that helps, my sense is that we are doing a nice job of capturing full relationships.

The LTVs I don't think have changed, and I would guess if you think of our total book, it sits in the 60s% in sort of in terms of loan-to-value on commercial real estate. That hasn't changed at all.

And how about terms? Are terms extending at all in terms of duration?

How do I say this? We could've increased volume by moving in that direction, but we chose not to do that. So not for us.

Got it. But the industry has.

I don't know if it's a change, but there is a pocket of business out there that you can get if you wanted to change your standards. It doesn't make any sense for us to change our standards. So I don't know if that's a change, but when I look overall, I didn't see a big change this quarter from talking to everybody in terms of competitive pricing and competitive structure.

Got it, understand. Thanks for taking the questions.

Brian Klock, Keefe, Bruyette & Woods.

Good morning Rene. Rene, I just was wondering. With the NIM guidance that you gave of, again, still sticking to be modestly lower than the 3.73% in 2011, obviously the second quarter included a $14 million impact from the accelerated accretable yield. Now, are you expecting -- maybe you can just remind me what you said earlier about do you expect that same level of accelerated accretable yield be in the numbers and therefore in your guidance for the margin for the second half of the year?

Yes. So maybe think about it this way. The way I would think about it is we said $14 million was in this quarter. I don't expect that's changed significantly next quarter or the quarter after because that's real cash, right? And what you should know is that as you think about it over time, the number will come down because the loan book prepays. Right?

Right.

And you won't keep at that pace. But as I sort of look out a couple of quarters, we feel pretty confident that that -- those cash projections will continue for that period of time, and then we will have to give you better estimates as we move out.

Okay, just to make sure I understand it then, so in the first-quarter 10-Q, you said you had about $81 million of accretable yield that went through NII. So total on all the acquired portfolios?

Okay.

So does that mean there was $95 million in the second quarter for you -- that $14 million of the increase cash flow impact?

I think it was more -- it might (inaudible) something more like $90 million, somewhere in that range, but you're pretty close.

Okay. Then last question on the NIM guidance, thinking about opportunities in the second half of the year to maybe refinance some higher-cost CDs, and then you've also got quite a bit of high-cost capital trust preferreds out there, so do you think about, you have the $3 billion shelf you filed earlier in the second quarter. Is there a possibility of looking at trying to use that shelf to refinance some of those high-cost capital trust preferreds as well?

Well, I mean the shelf is there because you've got to have a shelf. In particular, we actually have to have a shelf technically because we have the TARP, so you've got to have that.

We did, for example, finance a payoff, about a $400 million borrowing of some debt that was passed as qualification, so it ran out of capital treatments, so we prepaid it. We have the opportunity to do things like that sometime, so we did that I think beginning, I think it was July 1. So you have benefit from that.

And then ultimately, I think you've got it on the hybrids and all that. There's a lot of room there but I can't figure out the timing because it all has to go in sequence with whatever we end up doing with TARP and all the hybrids and the whole thing together. So, I'm just not quite sure on timing, but as I look into the future, I have some benefit. That is not counted in my factor. Those hybrids and those things are not counted when I think -- when I say I think our margin should be relatively stable for the second half of the year from where we are today.

Got it, all right. Thank you very much.

John Pancari, Evercore Partners.

Good morning Rene. Can you give us a little more color on the loan growth that you saw in the quarter? For example, how much of that consumer real estate growth was actual retention of the one-to-four family originations? And then separately, just a little more color on the commercial growth that you saw?

Yes, so I'll have someone check that. I don't think our -- I think almost all of the growth was what we held for the portfolio as opposed increases in the pipeline. But I can get that for you.

And then really, again, as you think about it, if you look overall, on the C&I side, we had really strong growth in upstate New York, 18% compound annualized growth. But it's kind of across the board. New York, Philadelphia, Tarrytown -- or Hudson Valley we saw the same, Pennsylvania we saw growth. We saw a slight decline in C&I in Baltimore and Washington. Delaware, I think part of that is the prepay in Delaware, but it's also we had the payout of a large nonperformer that would've been in the Baltimore area. So those -- the declines are coming from a positive thing.

And then I talked about commercial real estate. You know, there's nothing concentrated about it. It's not in one segment; it's not just in auto. When you kind of listen to everybody across the regions, it comes from multiple different types of businesses. I don't think it's a big change. It's actually up slightly from where we've been running, but I think, year-over-year, we probably have very similar growth. So for example, we had almost 10% annualized growth in C&I, but -- on a year-over-year basis, we had 10% growth in C&I. So I think things are holding steady, but they're going pretty well.

Okay, all right. And then secondly, how much was your unamortized premium on the balance sheet as of the end of the quarter?

Unamortized premium --

In your MBS portfolio, sorry.

I don't think -- I think I understand what you're saying. I don't think the concept applies. So let me say this, that if you -- give me a second. If you look at our loan yield, most of our loans, prior to this quarter, our acquired loans were recorded at a premium as opposed to a discount. Just said another way, we had -- acquired loan yields were lower than our legacy coupon. So after making the change, it's changed slightly.

So give me a second. I think what I would say is you saw that our loan yields were for 4.42% for the quarter. I would say we're about 40 basis points or so higher than that. I'm sorry. Are you asking about MBS?

Yes, actually I indicated on the MBS portfolio, I was interested in getting a gauge of oncoming amortization expense.

Yes, let me flip it around. Most of what we do we're putting on the books as a 101.3. So there's not a lot of prepayment risk in the sense that if they're prepays, we end up just replacing them at very similar yield. I kind of didn't quite get what you're asking.

The other thing to think about when you stay with that topic is, as you think about what's happening out there, we don't have some of the same risk as everybody else when you move to our securities book, which is MBS, because last year we sold a couple of billion dollars of our securities book and we sold most of the higher-yielding securities, right? So, we have less concern about seeing high prepays that we couldn't replace.

Got it, okay. That's helpful. And then lastly, can you just give a little bit of color on the impact of the new Basel III NPR on your Tier 1 common ratio? How much of a basis point impact that would bring about?

I've got to tell you, we are looking at what all you guys are calculating. I think, at some point beginning of next year, we'll probably have to publish it and put it in our Q as to what we think the impact is. But we really haven't finalized what our calculations are.

I think, at the end of the day, we'd rather be more certain than to do a speculative number there, but with the new NPR, we are beginning to do that. And I think, by the beginning -- or end of this year, beginning of next year, we'll be publishing something. Whatever we publish, though, I think doesn't really reflect the fact of anything that we would be able to do to mitigate the impact, right? So whether it be MSRs and whether it be the deferred tax position that we have or the types of loans that we have on our books, or securities, there's probably a lot we can do over time to mitigate whatever the impact will be. But in about six months we will be disclosing those numbers.

Okay. Thanks Rene.

Ken Usdin, Jefferies.

Hey, Rene and Don, how are you guys doing? So coming back to the margin outlook, I think we are all clear now that the step-up from the accretion benefit, that kind of run rate. What I want to try and understand is, over time, obviously that benefit will decline. Can you help us understand from the current run rate of all things acquired loans of this $90 million or so, what the pace of runoff would be over the next couple of years? Is it fairly ratable or is there a really long duration of these assets that will kind of keep it somewhat extended out, any color just on the role and the duration would be helpful.

Yes, let me give you a couple of things. So I'll try to make it as simple as possible, but I'll start with a caveat, which is we've got to look at these things every quarter, and re-look at all the cash flows. So barring any changes, generally we talked about where we thought it would be for the next couple of quarters. As a rough rule of thumb, I would say that the amount of change that would be in our numbers next year for four quarters would be equivalent to what we saw in the three quarters this year, give or take a few million dollars. And then it starts to run down further from there.

I'm sorry, Rene. The amount of change, that's --

Well, so we talked about a $14 million change, right? So and then we said that amount that we are adding is probably fairly similar in the next couple of quarters, right? So you take those three quarters and you get an amount. I would guess, in the next year, 2013, our four-quarter amount would be very similar to that amount. So it's coming down, but we've got four quarters instead of three. And then from there, it continues at its pace out. Predicting it out any more years than 2013 I think is probably -- probably doesn't make much sense.

So you're saying -- I'm sorry, that's still a little confusing. So you get 3 x 14 (inaudible) but then next year you're basically saying that $42 million would be the whole year?

That's probably -- I'm not giving you the $42 million, because these are rough numbers, but generally yes. You've got the right concept.

Okay, so it starts to drip down, and then it's fair to look at it is that it kind of drips down sort of by that proportion as we go forward?

Yes, as loans pay off. So why I'm so cautious is, if prepayment fees pick up, it changes. If they slow down, it changes. But that's generally what we have modeled to date as we sit here today.

Right, okay. So it's not an incremental positive. It stays at this level for the next few quarters, and then has a gradual roll over the next few years, presuming that the book is prepaying as you kind of expect it. If in fact it prepays faster, you can always redo the cash flows like you did this quarter.

Yes, exactly. And it's because -- you got it exactly. And the reason that's the case is because we are talking about cash. All right? So as those loans prepay, then the next question as we go through analysis is did it pay on loans that we -- did we get paid on loans that we thought were impaired? As a good thing? We get paid on loans that we thought were clean, right? So there's a lot of moving parts that come into it, but you've got the concept perfect.

Okay. Then my second question is if we just -- I heard your comments again about being able to hold up loan yields versus -- or the decline in new loan yields would kind of track the ongoing decline in funding costs again for the next couple of quarters. I guess the question is how competitive is it on the loan side, and then also how much room do you think you can continue to reduce deposit costs again in the out year in the next year or so?

We've tried to be very diligent in saying that we've got a couple of basis points of compression almost every quarter. So I think that there, that exists and my sense is that, as we run out on the liability side of repricing, which we are getting pretty close though, beyond the two quarters, I think that's the number that I would throw out there, that we are going to see a couple of basis points of slowing margin compression. You've heard the earlier question Brian Klock raised, is then the question is can you refinance anything else in terms of hybrids and those types of things? We haven't thought about that. It's too far away to think about it.

So when I bring it all together, we'll have the natural decline in accretable -- in the accretion benefit over time, and then there's this -- unfortunately with the rate environment, there will be just be a little bit of a drip on the core as well?

Yes, I think that's right. And the thing I would keep in mind as you think about revisiting acquired loans, I was about to say earlier when I was on the wrong topic that if you look at our loan yields today, 4.42% I think they were, we are about 30 or 40 basis points higher now on the acquired book. I think the biggest book is Wilmington. And on the Wilmington acquired loans, I think our yield is roughly 4.44%. So again, we don't have a lot of replacement risk there. okay, which is a real positive thing. And quite frankly, if there's any change in the rate environment, right, we probably can replace those at higher margins higher yield and margins, right?, when you're taking the funding costs out. So with no change, I think you've described the state of affairs, which is basically no change, and the rate environment no change in anything. But we are always trying to position ourselves to make sure that we are okay in all rate environments.

Very fair. Thanks Rene.

Steven Alexopoulos, JPMorgan.

Good morning. Maybe I'll start, is the C&I loan growth a sign that the loan pie increased in the second quarter, or is it market share gains, particularly given a relatively large transaction in your backyard?

The latter is true. We picked up a few more clients, but I think we've got -- the activity we see is a lot from our existing clients. I think upstate New York is a whole different thing and that's where a lot of the growth came from. But in other markets, I would say is a little more quiet out there, so again it's not a big change. It feels a little stronger this quarter, but I would guess, if you took away the Western New York parts of things, that it wouldn't be.

Don is pointing out to me that the usage in outstanding is up a little bit as well. So it seems like, outside of Western New York, it is coming from more usage.

So despite even the macro backdrop, you're not seeing any signs yet of corporate borrowers getting more cautious?

They are still cautious as far as I'm concerned.

They're being cautious, ok.

Cash balances are really high and they just haven't changed, right?

Yes, the reflection of caution, the deposit inflows I think probably are a reflection of that.

Got you. Maybe, Rene, where are we on the cost saves now with Wilmington? I know we had talked about $90 million to $100 million. Can you give us a sense what percentage is now in the run rate?

I'm going to guess and everyone in the room is going to get queasy. I think it's around 16%. I think we'll be around 20%. And I think you'll see in the second half. I can't really -- I think we will see some benefit next quarter, but I'm sure will see benefit in the next two quarters from the conversions and things that we have done and actions we've taken, and then maybe a little bit after that, but if I were to guess, I would say we are 16% now, and by the end of the year, we would be maybe not quite at 20%, but getting closer, 18%, something like that. But it turned out pretty well.

That's helpful. I just want to clarify. In your comments about retaining mortgages, did you say you plan to still retain in the second half but to a lower degree and then go back to selling fixed rate production in 2013?

Yes. So what we did is we, starting in the month of June, maybe even the second half of the month, we decided to discontinue retaining a number of the 30-year programs. So, we might have -- in the second quarter, I think the number is probably like about 63% of our production in the second quarter that we put on the books was above 20-year. And now we are on pace for that number of 30-year to go below 50%. 20-plus to go below 50% because we are discontinuing programs. I think we'll continue to do that, so the longer stuff will slow down. By the time we get to near the end of the year, beginning of next year, my guess is that what we will be doing is using more 15-year type paper and maybe 20-year paper to sort of replace runoff. But we started the program, I don't know, a year ago or so. We've had more volume than we thought we would get, and as I said all along, we only have so much appetite there. We really don't want to totally change the profile of our books, and we really only did this in part because we weren't taking on investment securities. So that's what I think. We will taper it off a little bit as we go, moving -- focusing on duration first and then volume.

Okay, thanks for taking my questions.

Erika Penala, Bank of America Merrill Lynch.

I just wanted to ask Steve's expense question another way. So I feel like, because Mortgage Banking revenues are so strong, there is some distortion in terms of the dollar number. I guess could you give us a sense of what you expect the efficiency ratio on your Mortgage Banking unit to run for the rest of the year and, separately, your expectation for the efficiency ratio for the rest of the Bank, ex Mortgage Banking?

First of all, it's a great question. I don't know that I can answer the question, because I would say whatever the efficiency ratio is of our book, which -- do we have it in the segment? I don't know if we have in the segment either -- is just abnormally high today, because we've got lots of volume coming on at high margins and you don't have the ability to ramp up your production enough, so it's abnormally high.

So I think, if you remove that, put it this way, what's happened really is we've got a nice benefit for Mortgage Banking which will be somewhat short-term. I don't know how long. But in the interim, we are going to have to really continue to focus on the expense side because the core bank hasn't seen the full improvement yet that we need -- we probably need to see sort of sustain a low to mid 50s% efficiency ratio when the Mortgage Banking kind of subsides. But as you think about the Wilmington side, we are in pretty good position because we've got more expense savings that will kind of flow in and the work is done.

And the other thing that I would tell you is, in our expense base today, there's a fair amount of -- a fair amount of expense. I don't know how to characterize it. I don't want to say it's non-recurring, but it's expenses related to gearing up for the new regulatory environment, whether it be consultants on -- that we use on capital policy or whether it be other expenses that we're using to sort of build out on new compliance structures and so forth. That over time will settle down a bit. So, even though you can kind of see when you look year-over-year, I think next quarter you'll see year-over-year when you look, you'll be able to see the impact of Wilmington Trust. I think that there's still probably some room to at least -- to be able to sort of contain expense growth because our regulatory costs are high. One of the areas that's very high these days is Professional Services. And I think that's primarily because of all the change we're going through.

Got it. Then just one last question, I know you've been asked maybe accretable question many ways in this call. And I appreciate the color that you gave Ken. I'm just wondering. Did what happen in the quarter -- was that a reclassification from non-accretable to accretable? So the credit experience over the life time is better and that's why it's not a quick vest? And if so, I guess clearly the prepayment levels are going to be a big swing factor in terms of how much it drops off, but potentially if credit expectations continue to be better relative to the mark, you could just be refilling that accretable tank, so to speak.

I think everything you said the way you said it was true, so let me go back through it. So first of all, yes, it was, after looking at the cash flows, we reclassified -- and this will be in our Q -- about $140 million from non-accretable, i.e. cash flows that were owed to us that we didn't expect to collect, we now expect to collect and will move to accretable yield. All right?

And then -- and that comes from three factors. One, we worked out some deals in a more favorable way than we thought. The environment seems a little bit better but also because prepays are faster. Those aren't usually -- those are pretty consistent in a sense, right?

And so I think the last part is you never know. It depends on what happens to the economic environment and if we see the current trends continue, or continue to be more favorable than we predict them now, yes, we could have more. And I think the way to think about it, again, is I point you to the yields. I think we've been doing that since we did the Provident acquisition; that's the way to look at this. That yield on the Wilmington Trust is almost spot on what we're originating loans at today basically, our legacy loan book. So that tells you that, unlike most acquisitions you've seen in the past, those yields have been -- the loans have been booked at a significant discount. In our case, to the extent that we continue to see improved results even beyond what we see today, yes, there could be more. But it's hard to tell, right?

The other thing I would point out is that to the extent that if we look at any particular loan in our book and it goes the other way, where cash flows are worse, then we take that charge immediately into the provision. And we've done that over time. We had some of that this quarter as well. So it kind of goes both ways. But the accounting forces, you to be conservative on the positive side.

Got it. Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning. Thanks for taking my question. Couple of quick ones I guess. How long -- you mentioned some benefit from the disruption in the Western New York market. I guess I'm curious as to how long you think that that might provide an upside benefit to your loan growth. Is it a one quarter issue? Is it a full quarter issue? Is it -- how should we think about that?

One, I really don't know. I only can assume that what's really happening is people are trying to settle into the change that's happened in the marketplace. And that change is not just driven by the HSBC sale; it's driven by the physical conversions, that recently the names on the branches, on another set of branches changed to KeyBanc, and then if you go further to other places in upstate New York, that's continuing to happen. So the best I could say is just through this year as people kind of settle in and try to figure out where they want to keep their lasting banking relationship.

Okay. And then a question on the provision. Given that you saw a 10% quarter-over-quarter decline in NPA balances, it certainly sounds, from your earlier comments, that you're expecting credit quality to continue to get a little bit better. How should we think about the potential for reducing reserves over the next two to three quarters? Isn't that just driven by lower losses, lower delinquencies, or is there something else that you're adding to your analysis that makes you a bit more cautious?

I think the first thing to look at is the allowance of loans is coming down. So you see it there. So the inputs to the allowance are, yes, there's improving credit. I think, in part, that's somewhat offset by what we need to add for the loan growth. So if loan growth subsided, that would be -- you might see something there. On the other pieces, as we look at the acquired loan book where we have $140 million of cash flows, but as Erica said we move from non-accretable to accretable, from time to time, we'll see credits that go the other way. Right? That we'll have to add to the provision immediately. So those are the components. But if you look at it, last year this time our allowance to loans was 1.55%. We're down to 1.46%. So it's a fairly -- I consider that a meaningful decline.

And just one final quick question, you mentioned HARP 2.0 was a bit of a benefit to the mortgage business this quarter. What amount of your total originations this quarter were related to HARP 2.0?

Let me look for that number. 57 -- let me make sure I think I believe that number. So -- well, let me give you the numbers, that's probably easier for that. So we originated new locks, which were a total of $1.7 billion. Okay? Only $864 million went to Treasury. Okay? So take those out. So, if you think about the gain on sale, you just take the $1.7 billion, take out the $864 million and you're left with a total. $492 million of that was HARP, and I think that gets you to a 57% of what we are selling.

Okay.

We sell all to HARP.

Right. But in terms of total -- in term of HARP relative to the total originations, it would be the roughly $500 million divided by the roughly $1.7 billion? Correct?

Yes, correct.

Thank you very much for your help.

Collyn Gilbert, Stifel Nicolaus.

I just want to follow up on that reserve question. So you've indicated obviously it's a fairly meaningful drop to date, but I guess I'm looking at it maybe a little bit differently. And I heard you on the moving parts in terms of the non-accretable component and swings and that. But I guess if I look at it, at the peak of the crisis, you guys saw losses -- your losses peaked at 1%. So in my mind, it seems as if your reserve could go quite a bit lower, especially given where we are in the overall cycle, economic cycle, than where you stand now. Or are you suggesting that kind of keeping in this $145 million level is where you're going to be?

That is a great question. So first of all --

That's why I wait until the end of the call.

I would characterize it differently. In a single year, we had 1% losses. And our job is to look at the losses inherent in our book that we can identify over time. And then to some extent, there is a portion that we might not be able to identify, so you can't use the one-year loss estimate against that process.

I don't know. I guess if we continue to see the loan growth, I think there's going to be downward pressure on that allowance for loan level. As we've seen, I don't see anything that's going to change it. I feel pretty good about the integrity of our process because the way I look at it is, at the depth of the crisis, we had coverage of about 1.2% or something -- actually 1.5% of our charge-offs -- 1.5 times, I should say. And so the idea that, after the depths of a crisis, you're sitting there with the years were, if they are 1.5 years worth of coverage, it tells us that we did a pretty good job in our allowance methodology of identifying the risks that were inherent in the portfolio. I don't think about it any different. But --

Okay, okay. And then just on the resi mortgage strategy, so when we think about kind of the funding of the growth, at least for the back half of this year, is that going to come out of your cash balances or your interest-bearing deposit balances? And then how should we think about the relationship between if, we are not going to see growth in resi mortgages next year, does that mean we start to see some growth in the MBS side? Or how are you thinking about it in totality?

Yes. I think the way I look at it is, first of all, straight answer, I think we've been funding everything with deposits because deposit balance has been very high.

As we look forward, I think that the underlying loan growth is not bad. Right? If you look at the stats we gave you today. And then I think really we kind of hit our -- we are getting close to what we think is a natural limit on the amount of resi mortgages we want to hold. So I am not sure that, even if rates stay low, that we'll be able to sort of jump in and start buying securities again. We'll have to look at that. I think, to date, it's been a nice substitute, but I think we are -- we are just very cautious. We don't tend to put a lot of long-duration on -- I don't know, we are kind of nearing about $10 billion. We're getting closer to $10 billion in the resi book. And I just think the best way to think about it is we probably, for at least for now, maybe hitting our tolerance level. I think that's the best I can tell you.

No, that's helpful. That's helpful. Okay. Then just two quick items. The -- did you say or do you have the number what seasonal tax items were in that Trust line?

No, but it was about $3 million.

Okay. And then the $14 million in accretable yield that you saw, how did that breakout between C&I and CRE?

I think it's mostly CRE because a lot of it is coming from Wilmington and actually Provident. I don't know the exact number, but most of it is (multiple speakers) CRE.

Okay. Then the final question, did you say on the temporary trust deposits, what was the dollar amount of those two that kind of inflowed in the quarter?

Absolute dollar amount was really high. The average was about just under $1 billion, but at one point, I think we peaked at like $4 billion during the quarter. So you just got the average. But they were there for 30 days or something like that. So --

Okay. That was all I had, thanks.

Bob Ramsey, FBR.

Hey, good morning Rene. You just mentioned that you guys are getting close to the natural limit on the amount of resi mortgages you want on your balance sheet. How do you think about that limit? Is it a percent of assets, a percent of earnings assets? Kind of what factors into that decision? And then what is the yield at the margin on mortgage production today versus MBS that you might purchase?

Given the margin -- well, so I think I'll get that number for you. It's somewhere in here. It's something like -- I don't know, [$380 million] was what we put on it. Give me a second. Let me find that.

Sure.

We put on -- you know what? I'll have to have someone find it for you. But I think it's somewhere in the high 3s in terms of -- I'm looking at [$360 million], somewhere around there. It's not too much change from where we were last quarter. So that's that.

And then just give me the first part of your question again?

And that [$360 million] I guess is on originate loans, how does that compare to mortgage-backed securities that you would be buying in the market?

We are not buying them. So I don't know. We are not buying them. So they would -- I'm going to guess they would be 50 basis points lower. But that's a guess.

To your other question on how we think about the natural limits, we look at a lot of things. We look at our asset sensitivity. We look at our duration and our exposure to any one class. We also think that about the profitability of those loans over long periods of time. And I don't know how to say it, but I would say that we have not reached any internal technical limit, but we have sort of (inaudible) appetite today before putting it on pause. Because, remember, for 20 or 30 years, we never retained mortgages.

Yes.

So we've moved the position a bit, and I think we are going to probably sit on it after a while and sort of see how it feels and watch the risk metrics, and then go from there.

Okay. And in the mortgage-backed securities portfolio, what is the CPR that you all are seeing on the portfolio you have today?

I don't know if somebody has, but it's been creeping up a bit, but the last quarter maybe it was around 10%, not very high. And I think it might be in the low teens, maybe 12%, somewhere in that range on an annualized basis.

That's swell. That's good.

The new -- just so you know, the new 30-year MBS yields would be $250 million.

Okay. And then, in the mortgage-backed, what were the gain on sale margins this quarter, and do you think, looking into next quarter, they will be more or less stable and sort of how does the pipeline today look versus last quarter? Obviously as you said, you will be selling more of whatever production there is.

The gain on sale margins were relatively stable. They move a little bit depending on the percentage that you have of HARP, and so in a sense the actual number was higher because more of what we're actually selling is HARP. I don't know if I have the exact number. In total, the gain on sale on new locks is around 3%. And so that's definitely elevated because of HARP. I think typically we would be lower 2s%, maybe 2% if we were just talking about normal production.

And then HARP presumably is going to still be a big piece next quarter as well, so would you expect it to be comparable?

I think it continues for the rest of this year. Our pipeline looks strong, so when I look at like applications, I don't see a big change in that mix. And then I look and say to myself -- I'll give you a couple of numbers. We had application volume, which is sort of the front end of the process, was up 23% linked quarter. And then we track another thing which we call our mortgage pipeline, which is apps minus things that are denied, withdrawn or closed loans, so it's the purest sort of indicator of what's going on into next quarter. And that was up 26%. So there is really no pace -- slowing of pace as we kind of go from second to third in my mind.

So it sounds like volume should be stronger, the percent you sell should be stronger and the margin should be stable, is that fair?

It's my guess, it's a lot of moving parts in that business, but yes. I don't see a lot of things changing.

Great. Last question for you, the FDIC assessment expense was down pretty meaningfully this quarter. Any thoughts there? Is this quarter a good run rate or what drove the improvement?

It can be -- let me just say asset mix, and then we continue to try to think about ways in which we can change our behavior to make sure that we are optimizing that. And so our goal will be to focus on that number over time. Whether it be on sort of looking at the amount of construction lending we have done or looking at how we are making sure we are properly classifying loans and a whole host of other things, we look at it pretty closely. Again, I'll say this; I say it every time. We are in the 90th percentile. That's not a good thing for us, so we're going to focus on that line.

Great, thank you Rene.

Gerard Cassidy, RBC.

Good morning Rene, how are you?

Good morning, good.

A question for you is in terms of the improvement in credit quality that you've seen and what you expect to hopefully see in the next 6 to 12 months, is there any particular asset class that's improving better than expected, or faster than expected? And geographically are there any parts of the footprint that are performing better?

Yes. We saw improvements. Most of the improvement I would say is in the Commercial real estate space. So there's slight improvement in C&I, but one of the things we've seen, Gerard, is I think it has a lot to do with the low rate environment. I think it's also very much akin to what we talked about on the acquired book, which is that we're finding that we are able to either restructure or work out transactions more favorably than we might have thought. And part of that is because other lenders where the markets are actually willing to sort of step in at the prices that we've got, sort of the nonperforming loans on our books at this point. So we are seeing a lot of these things work out.

I'm not sure if there's a real change in the inherent risk as much as there is a change in the market and appetite for actually taking on these assets that now have been written down at pretty heavy discounts, which on the flipside, with the low rate environment, one of the places you can go to find yield is on these projects that were stalled and failed in the past and that have been written down. So a lot of it is in the Commercial real estate space, also prepayments being higher. When you look at our net interest income, when you look at prepayments being higher, it's very consistent with that same theme.

And speaking of credit quality, can you give us an update on the Bayview impairment, where is it now and how is it looking at this point?

I think our basis on our balance sheet in Bayview is about $104 million. Somewhere around $104 million I'm going to guess. And then there's been no change. We don't -- we don't have any great concern. I think that the Bayview asset management seems to be doing very well in this environment. It's an environment where they have access to servicing portfolios, maybe without some of the burdens that some of the banks have. And they also have the ability to purchase assets at higher yields than you're getting out here in the low rate environment. So they seem to be doing very well and fine, no real change to anything there.

Okay. Final question on the funding side of the balance sheet, you may have touched on this and I apologize. In your CD book that you have, how does that reprice over the next 12 months? I think there's about $5.5 billion in that CD book that I think you pointed out is about 90 basis points is what it's costing you. How does that reprice going forward over the next 12 to 18 months?

I look at the yields as I looked at them some time ago. But they seem to be down a couple basis points in a very consistent blip every quarter. Let me just take a quick look at that again. But -- (multiple speakers)

There's no high rate -- as you are looking for it, there's no real high rate tranche near that's 3% are something that might reprice in the fourth quarter or anything?

No, there's not -- go ahead Don.

There are still some brokered CDs on the books from Wilmington, and there wasn't a lot of runoff this quarter but there will be a little more in the next two quarters.

Don, where they fairly -- are they priced fairly highly compared to the rest of the book?

Yes, but not outrageous.

Think about it this way, Gerard. You said Provident, right? Wilmington, Provident. So you mark those. So a year ago for one, I think some of them are Provident so that's three years ago. So you can look maybe to the Provident to see if there's something. But as someone just pointed out to me, most of the majority of our time deposits are with -- inside a year. So I think you're going to continue to see the same sort of steady trend you've seen over the last several quarters.

And one final question on the funding costs. What environment, considering the Fed has stressed that this rate environment is going to stay this way through the end of '14 with the low end of the -- or the short end of the curve close to zero or at zero, and the long end of the curve currently is about 1.49%. Deposits for you and your peers are coming in quite strongly. What kind of environment do you need to see where the deposit costs actually go down to 5 or 10 basis points, considering money market, mutual funds today are paying 1 and 2 basis points? Do you guys -- can you envision an environment where the deposit costs for NOW accounts and savings accounts can fall to 2 or 3 basis points?

Never say never, but I hadn't really thought about it. Even so, think about it this way. It doesn't give us that much boost. I think, on NOW accounts, we are at 7 basis points. In savings we were at 18 basis points at the end of the quarter. So I guess my answer is it seems like we are almost there now.

I appreciate it. Thank you.

This concludes the Q&A session for today's call. I would now like to turn the floor back over to Mr. Don MacLeod for any closing remarks.

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