M&T Bank Corp (MTB) 2012 Q3 法說會逐字稿

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2012 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Don MacLeod, you may begin your conference.

Thank you, Lynn, and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's third-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 would 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 made on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.

Now, I would like to introduce our Chief Financial Officer Rene Jones.

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

The third quarter was a busy one for us, including our announcement of the acquisition of Hudson City Bancorp near the end of August as well as M&T's final exit from the TARP program through the US Treasury's sale of its investment in M&T through a public offering.

As we noted in the press release, this year's third-quarter financial results reflect good progress from across most of our core banking businesses as well as the very favorable mortgage banking environment. I will begin by reviewing some of the highlights, after which Don and I will take your questions.

Turning to the specific numbers, diluted GAAP earnings per common share were $2.17 in the third quarter of 2012, up 27% from $1.71 earned in this year's second quarter and up 64% from the $1.32 earned in the third quarter of 2011.

Net income for the third quarter was $293 million, up 26% from $233 million in the linked quarter, and up 60% from $183 million in last year's third quarter. 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 acquisition activity.

There were no merger related expenses in the recent quarter's results. However, M&T's results for the second quarter of 2012 included related -- merger related expenses of $4 million after-tax or $0.03 per common share related to the Wilmington Trust merger.

GAAP earnings in last year's third quarter included $16 million of after-tax merger related expenses or $13 per share, also related to the Wilmington deal.

After-tax expenses from the amortization of intangible assets was $9 million, or $0.07 per common share, in the recent quarter, down from $10 million or $0.08 per share in this year's second quarter. After-tax amortization expense was $11 million, or $0.08 per common share, in last year's third quarter.

M&T's net operating income for the third quarter of 2012, which, as noted, excludes the merger related expenses and the intangible amortization, was $302 million, up 22% from $247 million in the linked quarter and up 44% from $210 million in last year's third quarter.

Diluted net operating earnings per common share were $2.24 for the recent quarter, up 23% from $1.82 in the linked quarter and up 46% from $1.53 in the year-ago quarter. Net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders equity was 1.56% and 21.53% respectively for the recent quarter, improved from 1.30% and 18.54% in the second quarter of 2012.

As usual, 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 would like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $669 million in the third quarter of 2012, up $14 million from $655 million in the prior quarter. The net interest margin expanded during the third quarter, increasing to 3.77%, up from 3.74% in the second quarter.

Major items impacting the comparison with the linked quarter were as follows. An estimated 5 basis points of the improvement is attributable to a lower level of excess liquidity held at the Federal Reserve. Average funds on deposits with the Fed declined to $151 million in the third quarter, down from $1.17 billion in the recent quarter. One additional day in the third quarter as compared with the second quarter reduced the margin by about 1 basis point, and what I would characterize as core margin compression was about 1 basis point as lower yields on loans were largely offset by the benefit from a lower level of long-term borrowings which were replaced by low-cost core deposits. This is consistent with our expectation of in and around 2 basis point of continued underlying margin compression per quarter.

Interest income recorded on acquired loans was little changed from the amount in the linked quarter. I will discuss our outlook for the margin towards the end of my comments.

Now, as for the balance sheet, average loan growth for the third quarter continued to be relatively strong, increasing by approximately $1.6 billion to $63.5 billion, or an annualized 10% growth as compared with the prior quarter. On that same basis, compared with 2012 second quarter, changes in average loans by category were as follows. Commercial and industrial loans grew by $400 million or an annualized 10%. This included a seasonal decline in auto floorplan loans of about 5% annualized, which was more than offset by a 12% annualized growth in other C&I categories.

Commercial real estate loans grew by $257 million or an annualized 4% growth. Residential real estate loans were up by about $1.1 billion, reflecting the tail end of our program to retain conforming mortgage loan originations to hold on our balance sheet. We resumed our normal policy of selling the bulk of our conforming loan production at the beginning of September.

Consumer loans declined an annualized 4%, reflecting the same factors we have been discussing for some time now -- our reduced appetite for indexed auto loans given the low absolute returns associated with them and our customers' reduced appetite for home equity loans.

On an end-of-period basis, loans grew by $1.3 billion or an annualized 8% compared to the linked quarter. Included in this figure was $7 million of annualized growth in C&I loans and the $1 billion increase in loans retained for -- and mortgage loans retained for investment.

Average investment securities continue to decline as our appetite for purchasing securities remains very low based on extremely modest yields that are available. Average core customer deposits, which exclude foreign deposits and CDs over $250, were up an annualized 9% as compared with the linked quarter.

The Upstate and Western New York region continues to benefit from the disruptions to customers and businesses impacted by the HSBC branch divestiture. Average loans in that region were up an annualized 14% compared to the linked quarter. Average commercial and industrial loans in that region were up by $291 million and average CRE loans were up by $114 million. And while modest, at 2% annualized growth, Upstate and Western New York was the only region with consumer loan growth.

Average core deposit growth in Upstate New York region slowed to an annualized 5% compared with the linked quarter. And core deposits -- sorry, average core deposit growth was an annualized 5% growth compared to linked quarter and core deposits are up 13% compared to last year's third quarter.

Turning to noninterest income. noninterest income totaled $446 million in the quarter compared with $392 million in the prior quarter. The recent quarter's results included $5 million of securities losses including other than temporary impairment charges related to our investment securities portfolio, down from $17 million in the linked quarter. Excluding those losses from both periods, noninterest income was $451 million for the recent quarter, up 10% from $408 million in the second quarter.

Mortgage Banking revenues rose by $37 million to $107 million in the recent quarter, compared with $70 million in the prior quarter. Residential mortgage loans locked for sale to third parties more than doubled from $856 million in the second quarter to $1.8 billion in the third quarter.

Commercial mortgage loan activity also remains strong.

Fee income from deposit services provided was $114 million during the recent quarter compared to $111 million in the linked quarter. Trust revenues were $116 million in the recent quarter compared with $122 million in the prior quarter. Recall that last quarter's results benefited from seasonal tax-preparation fees of about $4 million. In addition to the decline in the seasonal tax related fees, fees for managing our proprietary funds declined by about $1 million as a result of the rate environment. The remainder of the decline related to the timing of receivables, so looking back over the past year, we are pleased to note that trust and investment fees increased by 2% from last year's third quarter, reflecting our ability to retain customers throughout the integration of the two institutions.

Turning to expenses, operating expenses, which excluded merger related expenses and amortization of intangible assets, were $602 million for the third quarter, down from $604 million in the second quarter and $619 million in last year's third quarter. Included in operating expenses for the third quarter was $3 million -- a $3 million addition to the valuation allowance for capitalized mortgage servicing rights. And the efficiency ratio, which excludes securities gains and losses as well as intangible amortization and the merger related gains and expenses, was 53.7% for the third quarter compared with 56.9% in the second quarter of 2012.

While I would note that expenses were very well controlled during the recent quarter, the strong revenue growth trends were also a factor in improving -- in the improvement in the efficiency ratio.

Let's turn to credit. Credit continues to improve. Nonaccrual loans decreased to 1.44% of total loans at the end of the third quarter, down from 1.54% of total loans at the end of the previous quarter. Other nonperforming assets consisting of assets taken into foreclosure of defaulted loans were $112 million as of September 30, also down from $116 million as of June 30.

Net charge-offs for the third quarter were $42 million, down from $52 million in the second quarter of 2012. Annualized net charge-offs as a percentage of total loans were 26 basis points compared with 34 basis points in the linked quarter. This figure averaged 31 basis points for the first nine months of 2012.

The provision for credit losses was $46 million in the third quarter compared with $60 million in the linked quarter and the provision exceeded charge-offs. And as a result, the allowance for credit losses increased to $921 million at the end of the third quarter, reflecting continued growth in the loan portfolio.

While the dollar amount of loan loss allowance increased, the ratio of allowance to credit losses to loans declined -- for credit losses to loans declined slightly to 1.44% compared to 1.46% at the end of the linked quarter. Total loan loss allowance as of September 30 at was 5.5 times annualized net charge-offs for the quarter.

We disclose 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 is to say there is a low risk of principal loss. Loans 90 days past due were $309 million at the end of the recent quarter. Of these, $280 million or 91% are guaranteed by government related entities. The loans 90 days past due were $275 million at the end of this year's second quarter, of which 93% were guaranteed by government related entities.

M&T's estimated Tier 1 common capital ratio improved to 7.47% at the end of September, up from 7.15% at the end of June. This reflects higher capital from retained earnings, partially offset by the larger end-of-quarter balance sheet.

Lastly, I would like to offer a few thoughts on our general outlook. We expect the net interest margin to be fairly stable over the remainder of 2012 with the caveat that new inflows of temporary trust deposits could diminish the reported margin, but not the net interest income. The September year-to-date net interest margin of 3.73% is the same as we reported for the full year of 2011. We continue to believe the figure for the full year of 2012 will be comparable. That said, we continue to expect in and around 2 basis points of underlying core margin compression as we move forward. We would expect to offer our outlook on the margin for 2013 on the January earnings call.

Beyond Mortgage Banking, our lending pipeline remains healthy. That said, anecdotal evidence from customers is indicating that there may be some softening of demand as they await clarity regarding the election as well as tax and fiscal policy. And it is difficult to offer an outlook on Mortgage Banking with any certainty. With rates where they are, we believe there will continue to be fairly healthy demand for refinancings for the next quarter or two. As I noted earlier, we have begun selling the bulk of our conforming mortgage loan production again, rather than to retain them for investment, which should support Mortgage Banking revenues in the fourth quarter.

We were pleased to see further and improvement in our efficiency ratio, part of which was due to strong revenues. We have achieved the bulk of our expected expense savings from the Wilmington Trust merger with the possibility for some additional lingering benefits over the near term.

Our outlook for credit is unchanged. We expect continued improvement in nonaccrual and criticized loan portfolios with charge-offs remaining relatively stable.

Lastly, we continue to move forward with the Hudson City acquisition. The regulatory applications have been filed with the Fed and the New York State banking regulators. And you probably saw the draft of our S-4 registration statement and merger proxy were filed on Monday. We continue to expect the closing of the merger in the second quarter. That said, we are still very early in the process and we will keep you informed as we progress.

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 this morning. We will now open up the call to questions before which Lynn will briefly review the instructions.

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

I apologize, Rene, if I missed this in your prepared remarks, but could you give us a sense if, in that Mortgage Banking, number if there were any unusually large MSR hedge gains?

No, no because we don't --

It was 100% production.

We don't hedge our MSRs actually.

Okay, so it is 100% production I guess is the best way to think about it.

And in terms of the -- you mentioned the origination level doubled in resi mortgage. That has nothing to do with you choosing to sell off more of your production because you mentioned that happened late in September. That was all just volume?

No, so let me give you those numbers again and I will give you some clarity there. So, we did -- we locked $856 million in the second quarter, and it was $1.8 billion in the third quarter. Of that, there was about $500 million of that increase came from our decision right around the beginning of September to lock those for sale instead of our portfolio. So you still have a pretty big gain, but there is about $500 million worth of mortgages that we have flipped and are planning to sell. So that gave you a bit of a boost.

So when you look at the $37 million increase on a linked-quarter basis, I would guess that my rough estimate is that $15 million came from that -- $15 million of the $37 million came from that decision. And we still had, I think we still locked maybe $350 million in the quarter for our portfolio, which next quarter we would not do.

Got it. And with regard to the cash balance levels, this is a more normal rate of cash balances for you going forward, meaning we don't expect any fluctuations higher even if those trust deposits are coming in in the fourth quarter?

No, actually, you can expect continued fluctuation because of the nature of the business, which really came to us with Wilmington Trust. And the swings can be fairly large, but the earnings rate on those amounts are pretty low, so if I were -- on my personal model, I tend to take a look at those and put a very, very, very low earnings rate on them because they move the printed margin but they really don't do much to the net interest income.

So if you miss that, it can be a little confusing sometimes, but that will continue to fluctuate. It is very hard to predict because as we get business related to our trustee work around securitizations and those types of things, often times we get paid in balances as opposed to fees. And that trend is relatively high, I guess, based on relative to past experience. So --

Got it. Okay, thank you.

Bob Ramsey, FBR.

Just to follow-up on Erika's question about Mortgage Banking, so you said you all locked $1.8 billion in the third quarter and that without the portfolio activity, it could have been $350 million more. Based on your pipeline headed into the fourth quarter, is your expectation that you could do over $2 billion in volume or is there any shift in pipelines that gives you a different sense?

Well, we have what we call our mortgage pipeline, which is all the applications that we received during the quarter minus anything that has been withdrawn or anything that is actually already closed. And that is still on an uptick. So in the first quarter, it was $1.4 billion. In the second quarter, it was $1.8 billion. And at the end of the third quarter, it was $1.3 billion -- sorry $2.3 billion. So it is still has a bit of an upward trend associated with it.

Okay, so it looks like you will be doing more volume and selling even more of that volume in the last quarter. And is your expectation that margins will be relatively consistent third quarter to fourth, or any view there?

I think when you normalize for the amount -- like it took a while for the HARP programs to catch up and normalize at their level, so you saw margins rising. But I think that is probably right that, until that program dissipates over time, I think you'll see the margins remain where they were I would guess.

So I don't think the fourth quarter is really all that hard to predict. I think the bigger question is how long does this last? And then we are thinking about it as, at the end of the day, it allows us to build our capital, but we are not thinking that this trend can continue forever.

Okay, that is helpful. And then on the resi loan front, I guess I was a little surprised by the amount of growth. I thought you all had scaled back the portfolio and activity earlier in the quarter than it sounds like you did. But given that you have made those changes in September, would your expectation be that, from this level at both securities and resi mortgages, that you don't see a lot of growth in either of those portfolios?

So, again, the accounting has some effects that can get you a little confused. Right? So the $1.1 billion that you saw this quarter was all -- were loans that we locked in the second quarter. So, that means that the amount, the $350 million or so that we originated for portfolio in the third quarter still has yet to roll-on and that will come in the fourth quarter. So you should still see some growth, nothing like the same size that you saw this quarter. But it takes about -- in a normal time, it is about 45 days to go from lock to close. And with the pipeline so full we have expanded our capacity as much as we can, but that 45 days might be a little longer. Maybe it is 60 days, right? So, I think you will see it continue to rise a little bit in the fourth quarter and then I would guess it should level off. Okay?

Making that offer is, even on a normal basis, there is a certain amount of nonconforming that we originate and contained, prime jumbos, biweeklies and that sort of thing. And that is typically a couple hundred million a quarter.

It sort of serves to sustain the portfolio. It maybe compensates for normal runoff.

Okay, great. And then last question, I will hop out. You mentioned that the Wilmington cost saves are largely in the numbers at this point, although there could be some lingering near-term benefits I think you said. Could you just talk a little bit about what some of those opportunities might be or how material they could be?

Think about it this way. We just, last quarter I guess, just completed our integration. So some of the remaining impacts of that you are yet to see. So, I think, near-term, I wouldn't be surprised to see expenses come in control, maybe even slightly down. But then longer-term, even though there will still be some benefit that lingers into the next year, as we begin to think about 2013, one of the things that we are thinking about is our investments, our investments in technology, obviously our investments in the network associated with the pending deal with Hudson.

So my sense is that I feel pretty good about 2013, meaning that some of that lingering benefit will help us to pay for investment. It means our expenses will likely be relatively controlled in 2013, but not necessarily down. Right? So we are beginning to think about it. I will talk more about it in January, but that is my thinking today.

Okay, great. Thank you very much. Nice quarter.

Ken Usdin, Jefferies.

I was wondering, Rene, if you can talk a little bit about that preparation for ACBK a little bit more and as that balance sheet comes on. You gave us some color when the deal was announced about the expected longer-term shrinkage of that portfolio. I guess any updated thoughts with regards to how the M&T balance sheet will change in advance of closing and then any differences in terms of how you are seeing the runoff or anticipating the run-up of the Hudson City book to be either better or worse, especially given what we have seen in rates recently.

In short, as of now, it is really early, but there is no change in what we are thinking about. And as we begin to go through our normal M&T stuff, I think, as you look out, some of the questions are difficult to answer about the size of the balance sheet, but I think the thing to think about is we tend to focus less on balances and more on profitability.

So, for example, we get questions about will you continue the jumbo program? And the answer is yes. Would we do it differently? I don't know. It really depends on the profitability. We are going to focus on using equity in the best way.

So I think it is hard to comment on size, but I think we're probably the same place as we were when we did the announcement just a month or so ago.

In terms of preparation on the people side, I think everybody has had their introductions to date. We have already begun our process of looking at the M&T folks who might want to spend some time in New Jersey and we have been out there recruiting. So, it is nice to have a little leadtime in anticipation of the big distance between now and our anticipated second-quarter close.

So everything is going well. There is just not a lot of new stuff to really talk about. And, of course, as time passes, that will change, obviously.

Yes, okay. My second question, Rene, just about the trust income business. I know, again, this gets asked every quarter about the different machinations on how the business works from a revenue perspective. There were some benefits last quarter as well. Can you just talk about just some of the subcomponents within trust income, how they acted this quarter, and are you anticipating growth from here?

I would say -- let's do it this way. Let me just -- let me give you an advertisement first. So, I am really pleased, a bit relieved, in the sense that a year has gone by and we were able to get through what arguably is a pretty complex integration -- merging mutual funds, getting people introduced to each other, and then getting the two sales forces to work together.

And when you look year-over-year, we had 2% growth in trust fees. So, we got the institutions combined by the third quarter of last year. We have now had 2% growth.

What we have seen on the wealth side of the equation is that the couple of years leading up to and then last year, we had probably about as much new -- about as much runoff in business as we had new business. In the first nine months of this year that has crossed over and we have had more new business than we have had runoff. And, quite frankly, the runoff is slowed from what Wilmington experienced the last couple of years.

The stories are very good, meaning that we have a number of cases where we had pre-existing M&T clients that were more interested in doing business with us, both on the wealth side, or that felt that they were more inclined to do business with us simply because we had that wealth capability. But there is work to do. It is a little clunky internally and we have got our reporting and our process to get going. And I think that is probably -- that is probably understandable, given that whether you are directly involved in integration or not, in some way, shape or form whether you are explaining the integration to your customers or being directly involved, everybody is a little bit distracted over the course of the year to try to make all that work.

So I think we are off to a good start.

The growth -- my anecdotal estimate is that more of the growth that we got came from the CCS business, which has been, as I have mentioned several times, relatively diverse. And so that has been still robust and strong. I would say more of the growth -- or the 2% growth is probably coming from that side of the shop. But that is what we know. More to come.

Okay, great. Last quick thing is just the losses in OCI and the losses in equity in Bayview, any better sight, just given where we have come in the environment and spreads and credit improvement on when we might start to see those two areas finally start to tail off? Thanks for your color.

Sure, sure. So a couple of things. I think, if I go to our core nonagency portfolio, that is about $500 million now. It is down to about $500 million. We saw early-stage delinquencies on that portfolio come down in August. And so that tends to bode well for what we might see in our book, in our private label mortgage-backed securities book. We will have to see.

Despite the stabling of housing prices over the last quarter or so, we have always maintained a down assumption. And as we look out today, we are thinking that maybe over the next year, there is a slight upward trajectory in housing prices. And that is part of the reason why you have seen the change in the size of that OTTI.

So, I think it depends heavily on housing prices, and it depends if we were to get a lag effect, which was a positive effect on consumers and consumer delinquencies, then that would bode pretty well for that securities book. If it were to go the other way, it would change. But slightly more positive there. And then no big change in Bayview other than the same underlying credit costs seem to be very stabilized and on the asset management front, they seem to have more opportunities than not because they have been producing very strong returns, obviously absolute returns, but also relative to what you can get out there in the market today with low rates. So things seem to be good on those fronts. So --

[Spot] rate?

Yes.

Matt Burnell, Wells Fargo Securities.

You mentioned that you are continuing to see opportunities in Upstate New York, and referenced some growth rates that were above the growth rate of the overall Company. How much longer do you think that benefit can continue to help you in terms of your C&I loan growth and customer retention?

Yes, it's a good question. I think the (inaudible) we have been talking about the growth for a number of quarters and the opportunities, but I think a lot of my comments have been much more about the opportunities and what we are seeing as we see customers join M&T. Now you what you have seen is you've actually -- you have actually seen those customers roll on and begin to get funded and so forth, so you are seeing the results of the work we have done over the course of the year now.

I don't know. I think -- obviously, again, it can't last forever, but the trend is at a high point today. We are still hearing very positive things, particularly in the Business Banking area. Also, you noted on the consumer side, so maybe a couple more quarters I would hope.

And just to follow-up on the trust customer defection comment that you made earlier, could you remind us what your expectations were for the trust customer defections when you went into the Wilmington Trust acquisition and where they have ended up being?

Yes, I don't think I can do that in terms of numbers, but I can tell you we were nervous, because we never have done an acquisition or a merger where that type of business was engaged. And I would say out of the gate we were relatively pleased with the lack of any significant defection -- big-name defection. But where we began to get an understanding was that, as we looked back with the help of the Wilmington and their -- the Wilmington folks -- as to what happened when they went through their very difficult time on the Commercial Real Estate side, there are defections had jumped up, say, two years ago, two or three years ago, and then, again, they were up again going into 2011. And the only thing that was different about 2011, particularly in the second half, is that the M&T customers began to get engaged.

So, I don't think there was much of -- we didn't see any increase in trends of runoff from when we joined versus before. But we guess, anecdotally, we would have anticipated that there would be some. My sense is I would have been happy if we were only down a bit in trust income year-over-year. Right? If you think about in terms of trying to protect that revenue base and that customer base. Yes, we were up. So that is the best I can do for you.

Sure. And then just finally, your commercial loan yields were pretty stable, actually up 1 basis point quarter-over-quarter. How much pressure are you seeing in the structure on the C&I lending? We have heard anecdotally from a number -- from several other banks that customers are now looking to extend maturities on their commercial lending. And I guess I'm just curious as to how you feel about that and if you have seen any pressure in that regard.

No big scene. In some cases -- yesterday I got an e-mail about something in Upstate New York where that was exactly the case, somewhat aggressive pricing and looking to extend maturities. But that is the first I had heard about it from others.

I know, down in Maryland where our loan growth has been a little bit slower, particularly on the Commercial Real Estate side, the life companies have come back into play along with the conduits are actually slowly coming back into play as an alternative. And that puts a little bit of pressure on pricing and, therefore, for us, volume.

And then Pennsylvania, anecdotally it is that slow, steady improvement in the economy. And from time to time, you hear a lot about the smaller institutions being aggressive. This quarter, I really didn't get a lot of commentary about that.

So when I look at our book, I have got -- we have got a very robust thing here that we can see all of the amounts that we originated and what the margins are -- our margins have been up slightly each quarter, very slightly. And returns have held out pretty well. So overall, while I would expect the competition to be very aggressive, it hasn't been too bad relative to what we have seen in the past.

Okay, that is helpful color. Thanks, Rene.

Todd Hagerman, Sterne Agee.

Rene, just quickly, one of the things we don't talk about too often is the purchase accounting, and the effect on spread and margin. Obviously, there has been a couple of companies this quarter that have taken a pretty big hit with some of their underlying assumptions here. Just remind us or speak to how we should think about that on a go-forward basis? Just obviously, there is some timing differences relative to when you got Wilmington and so forth, but just think of how you guys are thinking about that or how we should think about that going forward -- whether you've made any changes recently or what the outlook is there.

So, remember, so for us, we have treated the acquired loans, non-impaired and purchase impaired, the same way. So today, I think you saw in our MD&A, we put a table in there which showed that the difference between, on the acquired portfolio, the difference between what the customers owed M&T and what the carrying balance was, was about $506 million. Versus the old days, it is funny accounting, because the $506 million is basically not on your balance sheet. Right?

So, when we look at this quarter, there has been no real change. Minimal, if any. I think, last quarter, we had $90 million of benefit to total margin from acquired loans. And that didn't change much at all.

But as we go forward, the way the accounting works now is that, in essence, the improvement in credit to some extent could come in and support your margin in the future. If rates were to remain low, prices for -- particularly with Wilmington, if prices for land and commercial real estate, construction projects were to revive itself, you wouldn't see that come back and through the credit. You would see it come through the margin.

So what we do is we just look every quarter. We look at the entire book. We look at the cash flow estimates that we have over the life of those loans. We run some screens to see if things are improving or getting worse or what it is. And then from time to time, meaning quarterly, if we were to think things are getting better with those cash flows or being able to collect some of that $506 million, which I think is about $470-something million this quarter, you would see that benefit into the margin. But there is no way to really predict this, right, because as of today we think what we are basically saying is that we don't think the $477 million or $470 million is collectible.

Right.

That is how it works.

Yes. Then just as a follow-up to that, have you -- in terms of your initial assumption in terms of the estimated life of those loans, has that changed at all? When you made --.

We don't change -- we don't change it from when we originally do the mark, but, honestly, time is going by, right? So on that Provident transaction, it was in 2009. So those portfolios are getting smaller, but we have not made any change in life estimates on the book.

Okay. And then just switching gears just quickly on the reserve and credit, obviously, credit quality is pretty exceptional at the Company. Historically, you guys have been pretty conservative as it relates to both your reserve coverage as well as very modest reserve releases. How should we think about that at this point, given where credit quality is and going into the Hudson City, we are going to have a pretty significant mix shift? And again, you started square one with the purchase accounting and then you have got the repopulation effect. I'm just wondering, basically, how low could this -- could your coverage go effectively.

(laughter). I love that question. I don't have a clue to the answer, especially when it comes to Hudson City. But let me start by -- look, our allowance ratio is coming down. I think that is a sign that our charge-offs have been improving at 1.44%. For the first time in a long time our allowance ratio is actually the same, 1.44% as our nonperforming ratio. So it is 1-to-1.

I think that my personal view is that more so than any big change in the inherent loss in our portfolio is the effect that delinquencies overall in the United States on real estate and delinquencies specifically on residential mortgages are really, really high. Still by -- if you go back -- we did a chart the other day that went back to the first quarter of 1985. They are very high.

Why you're seeing improvement is because of the underlying rate environment which is really being stimulated by the Fed and the policies. So we believe there really hasn't been a big change in the inherent risk in the portfolios, but there has been this environmental factor with rates that has actually helped us be able to move some of our nonperforming loans and for some of the performance on real estate to actually improve a bit.

So, we still see -- we remain cautious as we look at the underlying portfolio, but, obviously, things are pretty stable.

When it comes to Hudson City, the accounting rules are still relatively new. So, we are going through to make sure we understand exactly how we will treat those loans. These loans -- loans at a discount versus a premium may be different so we are working through that, and it is hard for me to tell you right now what we will do, but, obviously, we will try to be as clear as we possibly can regarding what we do there. But it is a little early for us to give you clarity on that.

Okay, thanks very much. Appreciate it.

Gerard Cassidy, RBC.

Rene, can you tell us the loan -- the mortgages that you have put into the residential mortgage portfolio, what type of resi mortgages are those? Are they the 15- and 30-year fixed or are they adjustable?

There was a mix of 15, 20 and 30. I don't know if I have the history of what we have put on. We were starting last quarter, we started moving -- so what you saw come on this quarter -- we started moving much closer to the 15-year space, and we were going to -- our anticipation was to keep moving more and more in that direction. But, then, of course, we stopped in September 1 simply because we were about to inherit a lot more mortgages from Hudson City.

Don, do you know the fixed and variable spread for what we have put on, for example, this quarter? I don't -- I will have to get back to you on that. But I think it is mostly fixed because at the end of the day we were trying to close down some of our -- or slow down our asset sensitivity. So we didn't have a big demand for variable rate mortgages.

Sure. The other question, and you guys, obviously, do a very good job on managing your expenses as it showed this quarter. And I'm curious. You had such a great quarter in the mortgage revenue area, mortgage production. How do you compensate your originators? Because if it was a big variable comp I would have thought -- I think salaries and compensation went down in the quarter. How do you guys compensate those folks?

It is industry standard. It hasn't changed over time. They get a percentage based on what they originate. And they do much better in environments like this than they do when things are -- when rates are going up. But I think what you're seeing is -- I will be just very frank -- our expense savings underlying for the core bank and for Wilmington and the combined bank has been very, very strong. So, you did see -- we do have higher mortgage banking expenses in that number. Those costs are mostly variable.

One thing that offsets it in the salary line is that you -- you are using FAS 91 to capitalize your salary costs. So the more that you originate, the more of your salaries that you defer over towards the life of the loan. So that's another thing that dampens the effect there. But cash expenses are higher.

Sure.

(multiple speakers) mortgage.

And could you also give us a little further color on the auto? You guys have been doing the business for quite some time and you already identified that the returns really aren't as good as you'd like in that business which is affecting the balances of consumer loans. Are you seeing underwriting standards that really are starting to make you nervous or is it just purely rate, you just don't like the rates?

I guess I will answer it this way. We could get a lot more volume and acceptable returns if we took a lot more risk. (laughter). But, you know, I don't know if there has been a change in the industry. I would guess not. I would guess that most people are -- most of our competitors or people offering this service in the banking industry are focused on the same group of very highly creditworthy customers. That doesn't bode well for everybody in the US to share in the benefit of low rates.

But, having said that, that is what probably puts most of the pressure on us is that we are -- we remain in a relatively high quality space there. But I don't think there has been any real structural change other than rate.

Okay. And do your guys who are on the front lines come back and tell you folks that, boy, we are seeing more competitors now in this space of P&C or a Huntington, names that may have not have been as competitive five years ago or four years ago?

I think that is just generally true. More or less, it is kind of funny. Our guys have been around here a long time. And so it tends to be stories about how, well, these guys are back in again and so and so left again. Because one of the strengths of M&T in this business is that whether things are good or things are bad, we never left. Right?

Right.

So we maintain our focus. And I think at times when people have started to get out of the business, that is when we have been able to take share and we have done very well in the business. Right now, it is just the opposite side of the cycle.

Just back to your other question, if we did $800 million of locks, $700 million were fixed.

Okay, good. Then, finally, and this might be more of a Board of Directors question, but in your history in the last 20 years or so years, 30 years, you've split the stock a couple of times. We have all seen the studies done by folks that look at stock splits and dividend increases generally being positive for stock prices over a long period of time. Is that -- would that come up in discussion do you think at the Board level if the stock breakthrough $100 a share and moves possibly higher?

My guess would be I doubt it. We are -- I'm not a Board member, but we tend to focus heavily on economics, and unless someone could show us some value that is created for each of our shareholders in the form of cash, I doubt that we would focus on those types of things. We have so much on our plate to do that I think those issues probably will go way to the back burner.

But I thank you for that question, because it has been a long -- the first time we have gotten a question in a very, very long time. (laughter).

You're welcome. We will talk to you. Thank you, Rene.

Collyn Gilbert, Stifel Nicolaus.

So, most of my questions have been answered, but just I know you mentioned that it is hard for you to predict growth and overall size of balance sheet post Hudson City, but I guess -- and maybe this is just a question for you to remind us what your strategy was, how you guys laid it out when you announced the deal -- but, so if I look back, and you guys generally have managed or maintained between securities and residential mortgages as a percent of earning assets about 23% to 25% range. And then, obviously, post Hudson City, that shoots up to 40%.

And I know you're thinking about profitability and thinking about the jumbo business, but just -- knowing all that you know now, knowing the way you guys have run the Bank for the last 20 years, where do you think you could manage that level down to?

A couple of things. Let's just start with where we are today. So, I don't know that anything has really changed in our appetite for discretionary assets. So, if I look internally through the first nine months at our plan, we are about $1.7 billion over in residential mortgages than what we thought when we built our plan. We are $1.7 billion under in securities. Right? So we look at those fungibles.

So I would always look at the existing book right now as the difference between -- I would add resis and securities. And you'd see that some of the change is just muted because of substitution.

Then as we go forward, we did say we would open up with the balance sheet I think of $27 billion of resi mortgages and that over the course -- maybe 18 months later -- that would be somewhere tapered down into the low $20s billion. I think our -- remember, at the time you're getting familiar with an institution, what you're trying to do there is manage mostly risk. Right? And then you have got to get in and get comfortable with it.

There is a portion of that business that I would guess also will serve to be -- to flip over to originate and sell, like we do today, but there is also a couple of new or a couple of products that are probably -- that are new to M&T, but that are very, very appropriate for that footprint around the jumbo mortgages. Right? And our intention is to continue those businesses and to spend our time trying to understand the profitability, and the profitability of those will dictate the size.

So, I don't take away my comments that 18 months after the acquisition we will have some $20 billion and more in resi mortgages. I don't know that I would treat all of those as discretionary assets. We will have to think about how that mix breaks out. But that is how we think about it, and if it changes, we will tell you, but we are learning.

Okay, okay, that is helpful. And just -- what was the amortization speed of your own residential mortgage portfolio this quarter?

It has been rising. And it moved up pretty quickly past 15%. I don't remember exactly what the number was. But it moved past 15% this quarter, I believe.

Okay, so that's --

Maybe in the high teens.

Okay, so that is way -- because I think Hudson City's was running at 27% or something. So --.

Yes, I think it was 22% -- yes, it was kind of (multiple speakers).

So you're lower than Hudson.

Yes.

Okay, okay. And then just on the -- and I think I can probably infer from your comment -- but when you were talking about Wilmington Trust and trust revenue is up 2% year-over-year and giving your add or whatever you said it was, did -- that 2% that you guys posted, is that better than what you expected, in line with what you expected or a little bit light, having gone in -- when you first went into the budgetary process?

My guess is it was better than I expected, less than the Wilmington Trust team expected. They were pretty optimistic. They are still very optimistic. And doing deals, you know that things don't always go really smoothly. Things have just gone better than average, so it is better than I expected.

Okay, okay, that was all I had. Thanks.

Craig Siegenthaler, Credit Suisse.

Rene, just wanted your perspective on two separate issues. One is we have been hearing there is more regulatory scrutiny around bank reserve levels, and I saw your reserve went up a little bit and that makes sense, because you had good loan growth. But any thoughts there?

And the second piece was the CFPB is considering giving mortgage lenders protection from legal risk. I am wondering if you see any impact there? The industry -- the industry may be more aggressive in extending credit at that point or maybe any specific points for M&T there.

No real outlook on the CFPB. But on the allowance front, look, I think we have all learned a lot from the last crisis. I think, on hindsight, many reserves were just too low. And I think that the trend is more emphasis on the banks to be very, very focused on identifying the underlying inherent risk in their portfolio. I think the stress testing actually probably adds to that. Right?

People are expecting us to really understand and think about the risk, where it could be lying within our portfolio. The one big trend, though, is more and more documentation for whatever your position is. We are seeing that from every front, whether it be the audit industry or various regulators that come to see us.

So that is what we are doing, and we are trying to make sure that we explain what we see and be very, very clear on it. I know there has been a lot of chatter, but at the end of the day, you've got to stick to your process and make sure you have explained it well.

Got it. All right, great. Thanks for taking my questions.

There are no further questions at this time.

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This concludes today's conference call. You may now disconnect.