M&T Bank Corp (MTB) 2013 Q2 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank second-quarter 2013 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). Thank you.

I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Jackie, and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's second-quarter 2013 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 found 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.

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

As I noted in the press release, our earnings quality remained strong in the recent quarter including higher net interest income, comparatively strong mortgage banking revenues, and above average credit quality. We took advantage of favorable market conditions by executing prudent balance sheet actions that enhanced our liquidity, capital, and long-term return profile while continuing to serve the needs of our communities in a relatively competitive landscape in an evolving regulatory environment.

Let's review the detail of the quarter's results, after which Don and I will be happy to take your questions.

Turning to the specific numbers, diluted GAAP earnings per share per common share were $2.55 in the second quarter of 2013, up 29% from $1.98 in this year's first quarter and up 49% from $1.71 in last year's second quarter.

Net income for the recent quarter was $348 million, up from $274 million in the prior quarter. Net income was $233 million in the second quarter of 2012. During the quarter, we took advantage of the stronger risk appetite from investors in the current low interest rate environment by selling over $1 billion of private-label mortgage-backed securities previously held in our available-for-sale investment portfolio.

The after-tax loss on the sale amounted to $28 million or $0.22 per common share. This transaction resulted in higher liquidity and capital and removed a risk-sensitive asset which had been generating substantially all of our other than temporary impairment charges from our balance sheet and assists us in preparation for entering the 2014 CCAR process.

Also during the quarter, we sold our holdings of Visa and MasterCard common stock, which we had received through the restructuring of those companies back before the financial crisis. The after-tax gain amounted to $62 million or $0.48 per common share.

Lastly following the second anniversary of the Wilmington Trust merger, we reversed an accrual for a contingent compensation obligation assumed in that transaction. The result is a reduction of noninterest expense having an after-tax impact of $15 million or $0.12 per common share. Taken together, these three items contributed $50 million to net income for the quarter or $0.38 per common share.

Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions.

Included in GAAP earnings for the second quarter of 2013 were after-tax merger-related expenses related to Hudson City that were incurred early in the quarter and which amounted to $5 million or $0.04 per common share. This compares with $3 million or $0.02 per share in the prior quarter.

After-tax expenses from the amortization of intangible assets was $8 million or $0.06 per common share, unchanged from the prior quarter.

Net operating income for the quarter which excludes those merger-related expenses and intangible amortization was $361 million compared with $285 million in the linked quarter. Diluted net operating earnings per common share were $2.65 for the recent quarter, up 29% from $2.06 in the linked quarter.

Net operating income expressed as an annualized rate of return on average tangible assets and average tangible common equity was 1.81% and 22.72% for the recent quarter. The comparable returns were 1.48% and 18.71% in the first quarter of 2013.

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

Turning to the balance sheet and the income statement, tax equivalent net interest income was $684 million for the second quarter of 2013, up from $663 million in the linked quarter. As required by GAAP, we regularly revisit the cash flow projections on which we base our valuations of acquired loans. In general, continued improvement in economic conditions particularly in the former Wilmington Trust footprint led to a reduction in estimated expected credit losses on acquired loans of $130 million.

As a result, our estimates of cash flows to be generated by the acquired loans have increased by about 2%. Those increases resulted in about $6 million of additional interest income in the second quarter on our $4.9 billion portfolio of acquired loans as compared to the first quarter. Of course 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 decline.

Net interest margin was 3.71% during the second quarter, unchanged from the first quarter. The higher level of accretable yield from acquired loans added about 6 basis points to the margin compared to the first quarter. Prepayment penalties on commercial loans combined with cash basis interest received on nonaccrual loans added about 7 basis points to the margin as compared with the prior quarter. And higher level of excess funds held at the Fed reduced the margin by about 9 basis points.

This reflected a higher level of deposits held by Wilmington Trust customers in connection with pending capital markets transactions as well as proceeds from the private-label MBS and the Visa and MasterCard stock that we sold.

Lastly in line with our prior outlook, there was some 4 basis points of what we would consider core margin compression, which reflects the continuation of the trends that we and the industry have been seeing, higher-yielding loans maturing and being replaced at today's lower yields.

As for the balance sheet, the average loans grew at an annualized 1% from the first quarter. Compared with 2013's first quarter, changes in average balance and average loans by category were as follows, commercial and industrial loans grew at a healthy 9% annualized. Commercial real estate loans grew an annualized 2%. Residential real estate loans declined an annualized 12%, reflecting in part our conversion of $288 million of FHA loans into Ginnie Mae securities, the majority of which were retained in our investment portfolio.

Consumer loans were down an annualized 2%. On an end of period basis, both commercial and industrial loans as well as CRE loans grew at a similar pace to what we experienced on an average basis for the quarter.

From a regional perspective, the upstate and Western New York region as well as Pennsylvania experienced decent overall loan growth at 8% and 7% annualized respectively. This included double-digit annualized growth in C&I loans. While the benefit we have been seeing as a result of the HSBC divestitures locally is tailing off, I would tell you that there is still some lingering benefit as customers who had not moved to M&T in the initial period following the merger are now finding M&T to be a good fit.

The loans in our Metro region, which includes New York City, were relatively unchanged. We are reflecting paydowns on several large CRE transactions that generated the prepayment penalties I referenced earlier.

The mid-Atlantic region was also flat, I think largely in connection with the fact that it's the region that we are seeing the most competition from banks as well as from life insurance companies. Average core deposits which excluded deposits received at M&T's Cayman Island office and CDs greater than $250,000 grew an annualized 12%, reflecting in part the trust-related deposits I mentioned earlier.

Turning to noninterest income, noninterest income totaled $509 million in the second quarter compared to $433 million in the prior quarter. Included in that figure is $56 million of net securities gains which includes the losses on the sale of the private-label MBS and the gains from the sale of Visa and MasterCard stock that I previously noted. Noninterest income excluding securities gains and losses was $452 million, improved from $443 million in the linked quarter.

Mortgage banking revenues declined to $91 million in the recent quarter compared with $93 million in the prior quarter. Residential origination volumes declined by 2% from the first quarter while residential gain on sale margins declined by 40 basis points.

The bright spot was on the commercial side, where originations and gain on sale revenue nearly doubled from the first quarter, which masked the decline on the residential side. We will update you on our outlook for mortgage banking revenues in a few moments.

Fee income from deposit services provided were $112 million during the recent quarter compared with $111 million in the linked quarter. Trust and investment revenues were $125 million, up from $122 million in the prior quarter. Those revenues benefited from the normal seasonal uptick in tax preparation fees.

Turning to expenses, operating expenses which excluded merger-related expenses and the amortization of intangible assets were $578 million for the second quarter. Excluding the reversal of the accrual that I mentioned at the beginning of the call, operating expenses were $604 million. This compares to $618 million in the first quarter. The decline compared to the linked quarter reflects a return to normal levels of compensation expense following the seasonally high levels in the first quarter, partially offset by higher professional service fees including those related to our BSA AML work.

The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and the merger-related gains and expenses, was 50.9% for the second quarter, improved from 55.9% in the prior quarter. Excluding the reversal of the Wilmington Trust accrual, the efficiency ratio would have been 53.2% in the second quarter. That efficiency ratio was also improved from 56.9% in the year-ago quarter.

Next let's turn to credit. Our credit quality remains strong and in line with our expectations. Nonaccrual loans were 1.46% of loans at the end of the second quarter, improved from 1.6% of total loans at the end of the previous quarter and 1.52% of total loans at the end of last year.

Other nonperforming assets consisting of assets taken in foreclosure of defaulted loans also continued to decline, down from $96 million at the end of the first quarter to $82 million as of June 30.

As has been the case for some time, we expect to report a further decline in our level of criticized assets when we file our 10-Q next month.

Net charge-offs for the second quarter were $57 million compared with $37 million in the first quarter. The increase was the result of a $30 million charge-off on a loan to a wholesaler and remanufacturer of auto parts. The annualized charge-off rate -- the annualized net charge-offs as a percent of total loans were 35 basis points, in line with our long-term average. Annualized net charge-offs were 23 basis points in the linked quarter.

The provision for credit losses was $57 million for the second quarter, exactly matching charge-offs. As a result, the allowance for credit losses was unchanged at $922 million at the end of the second quarter. The ratio of allowance for credit losses to total loans was 1.41%, again unchanged from the linked quarter.

The loan loss allowance as of June 30 was 4.9 times the annualized net charge-offs for the -- the annualized year-to-date net charge-off level.

Loans 90 days past due excluding acquired loans that had been marked to fair value of acquisition were $340 million at the end of the recent quarter. Of these, $315 million or 93% are guaranteed by government-related entities. Loans 90 days past due were $331 million at the end of the first quarter, of which 94% were guaranteed by government-related entities.

M&T's Tier 1 common capital ratio was an estimated 8.55% at the end of June, up 62 basis points from 7.93% at the end of the first quarter. With the adoption of the final rule on Basel III capital (inaudible) for US Bank Holding companies, we are now working on formalizing our disclosure for this ratio and should begin ongoing reporting of this measure by the end the third quarter. Our preliminary estimate is that our Tier 1 common ratio under Basel III will be 40 to 45 basis points lower than that under Basel I.

This contrasts with our remarks on the January call where we estimated that our Tier 1 common ratio under the Basel III NTR would be lower by some 75 to 100 basis points than under Basel I. Said another way, we estimate that our Tier 1 common ratio under Basel III at the end of June would be approximately 8.1%.

Lastly, let's turn to our outlook. The rise in long-term interest rates during the quarter from historical low levels provide us with an opportunity to invest in higher yielding qualifying liquid securities. And we continue to see the potential for the estimated 3 basis points of quarterly core margin pressure that we previously indicated.

The intense competition among lenders in our markets continues although at this point our outlook for mid single-digit loan growth for 2013 is unchanged. The tapering off in residential mortgage banking activity that we referenced earlier this year has obviously begun and should lead to further declines in mortgage banking revenues and gain on sale margins during the second half of the year.

Turning to expenses, while we expect our core expenses to continue to be well managed, we expect our professional service expenses to continue to rise, reflecting our continued investment in infrastructure including risk management as well as enhancements to our capital planning and stress testing. In addition, we are hiring staff to support those and other regulatory efforts.

And with respect to credit, despite the charge-off on the loan to the auto parts company this quarter, we expect net charge-offs to remain low for the remainder of 2013, which as I have noted before are already below what we've considered to be our long-term loss rates.

As I mentioned previously, we remain focused on enhancing our capital and liquidity profile and closing the gap with our peer regional banks as we transition towards becoming a CCAR bank in 2014. We continue to build quality capital at a healthy pace with our estimated Tier 1 common ratio at 8.55%, again up 140 basis points from last June and 62 basis points from March.

Lastly, I want to end by giving you an update on the BSA AML matter that we disclosed in April. As you know, we subsequently entered into a written agreement with the Federal Reserve on June 18 which outlined our obligations to address the Fed's concerns regarding BSA AML compliance. The written agreement calls for submitting a plan in the near term which would then need to be carried out to the satisfaction of our Board and the Fed. The satisfactory execution of that plan is a critical path towards a resolution of that written agreement.

We are working diligently to address these matters in a timely and accurate manner, the successful resolution of which will result in a stronger risk management infrastructure at M&T for years to come.

Of course all of these projections are subject to a number of uncertainties in various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may materially -- which may differ materially from what actually unfolds in the future.

I know you all have been busy this morning with all of the earnings announcements in addition to ours, so now maybe let's open up the call to questions before which I will have Jackie briefly review the instructions.

(Operator Instructions). Brian Klock, Keefe, Bruyette & Woods.

Good morning. Thanks for the color in the call related to the margin. I just want to make sure I got all the moving pieces here. So within the release you guys talked about a $13 million impact to net interest income, which sounded to me it would be related to the $130 million you reclassed from the nonaccreatable. So is that -- that is something I think -- how does that kind of reconcile with the $6 million you talked about here this morning?

You've got to think about when we report in our Q, the table on accretable yield, it's all the yield on the acquired loans. So you have that number coming down from quarter to quarter. We added our new estimate of our cash flows that we are likely to receive, so really when you look at the change from the quarter to quarter that accretable yields from acquired loans, that actually increased by just $6 million because the number is coming down over time.

Got you, so the $70.5 million you recorded in the first quarter, that number had gone down by $7 million and now you've added $6 million in?

Yes, so I think that number is about $6.5 million higher than the last quarter, $70.5 million to $77 million or so.

I got you, okay. So I guess going forward then, that $6 million -- I guess if I had a run rate that I was assuming you'd have a level yield in that acquired portfolio, that accretable yield would go down. I should be adding somewhere about that $13 million impact to my -- what I would've guessed would've been your normal accretable yield going forward? Is that fair?

I think if you were to reset yourself, you can kind of look back at those tables we provide and you can see how much that is coming down. So for example -- well, I won't give you an example, but you can kind of work your way through that.

But the way I think about it, Brian, is so we're left with about $4.9 million of acquired loans out of, say -- sorry, $4.9 billion of acquired loans out of $60 billion. And if you look at the yield, the yield, the difference between our yield on loans with versus without those acquired loans, is about 15 basis points. And if you assume for a minute that the average life is three years, you are going to lose about 5 basis points of that every year, a basis point or so a quarter. That's embedded in when Don and I talk about 3 basis points of compression, that's one of the things causing that compression.

Got it, okay.

So your assumption of level yield, that's the way we look at it and that's the appropriate way to look at it, I think.

Okay, so ex all of this, your guidance then of saying look, you should be back to sort of the 3 basis points to 4 basis points of core compression, that is assuming though that you take that -- what about $2 billion or so, $2.4 billion of interest-bearing deposits, that excess liquidity which was the 9 basis point drag this quarter on the NIM, you are going to put that back to work, either you are going to buy some securities or actually put that in organic loan growth?

Yes, how do I --? Good question. What I would say is you got it right. Our thought process is 3 basis points of compression a quarter. We are still sticking with that. One of the things that we do have is we do have the opportunity to reinvest that cash in sort of qualifying liquid securities as you start thinking about the new ratios that are coming out. So that gives us some ability to offset.

I don't know how to exactly think about that because as you know, we often think about match-funded so as we put on Ginnie Maes and those types of things, economically we think about the spread towards wholesale funding that we could go out and get. But you're right, one of the sources that could in the near term have the margin be more stable is reinvesting that cash.

Okay, I'm going to get in the queue but just with that, so you haven't reinvested that excess liquidity yet then?

We've invested some, so if you look at the investment securities portfolio, you have got -- so we sold the $1.1 billion of the Agencies. That probably had an average impact of somewhere between $600 million and $700 million on the balance sheet. But we also purchased a little over $800 million of Ginnies. And if you think about what we've been saying, our investment securities book has been shrinking in part because -- and this is my term -- the rates seem to be a little artificial.

And so with the jump up of 100 basis points, it was sort of a nice opportunity for us to say okay, let's start buying some so that we can hold those qualifying securities as we go forward.

Okay, I guess the agencies you bought, can you give us the yield? And then I'll get in the queue.

The Ginnies we bought, we committed to buy in 2Q but they all settle in July, so they are not on the balance sheet at June 30.

All right, thank you, guys. I'll get back in the queue. Thanks.

Todd Hagerman, Sterne, Agee.

Good morning. Rene, a couple questions just in terms of the BSA issue as well as Hudson City. First off, can you give us a sense of the timeline for the planned submission to the Fed?

The only thing we really can give you is as you saw in the written agreement, the requirement around 60 days for us to come up with our credible plan that would need to be approved by the regulators and then what is probably most important is from there we have to actually go execute that plan. So the way I would think about it is we are really focused on submitting that plan and then we will have our head down for some time trying to make sure that we have everything in place to execute it.

So I think sort of speculating on any timeline at least right now doesn't make much sense for us. We will keep updating you as we move forward. But there's not really much to say beyond that at this point.

Okay, it is only just my assumption that you guys obviously had kind of started that work prior to formally receiving the agreement based on what they had possibly communicated to you previously as you guys disclosed that last quarter.

That's true. I will say two things. I feel that I'm happy we've got a good jump start on the issue and in the same tone, I think there's a lot of work to do. So I think the way we think about it is once you get into something like that, like everything else you want to build a first rate process, not one that just sort of meets the hurdle but that you can sort of use as an investment for the long term.

So I feel good and at the same time I also feel like we've got a lot of work to do.

Yes, understood. Then I don't know if you can answer this but within the agreement, there's not necessarily any prohibition in terms of asset purchases and so on and so forth. But I think as you mentioned in your remarks, you want the plan and execution so to speak to be to the satisfaction of not only the Fed but the Board as well.

So help me kind of understand in terms of again kind of that process if you will from a formal standpoint and how it may affect or influence your ongoing kind of evaluation of the Hudson City transaction as I think about valuation and your ongoing review of that deal as time goes on?

Well, you've got a couple of questions in there. I think one, I'm going to repeat myself. I think once we get through the work we have to do on BSA AML and we get through the satisfaction of everybody, everybody, then we will consider what we do with things such as Hudson City, but really not before then.

In terms of the economics, we have a good understanding of Hudson City's balance sheet. We think about for example what the moves in rates will do to them. There's a lot of moving parts, but there's nothing that makes us uncomfortable about the economics of the transaction relative to where we were before. Obviously all of that has got to be revisited when we sort of get back at it.

That's very helpful. I appreciate it.

Ken Usdin, Jefferies.

Can you talk a little bit about the servicing acquisition that you guys are going to close? When is it going to close and how do we think about the financial impact of it?

Well again, I think the first thing is that we are not purchasing servicing, right? What we have agreed to do has been out there in the public for some time is to be a sub servicer. And so just sort of operationally, if you think about expenses for a minute, you are likely to see expenses rise on a normal basis. I talked about that early in my earlier comments but we have now hired about 500 people located here in Buffalo that used to work for a third party and all of those 500 people are up and running as of July 1.

So first thing you are going to see is that there will be a little bit higher expenses as you get into the third quarter. And then that work will trickle in through the quarter and so I don't think you really get a full running impact of any change in our servicing profitability probably until the fourth quarter.

But I would say it's kind of relatively negligible if you think of the bottom line because of the fact that you've got a sort of startup negligible next quarter because you've got to put those upfront costs in place.

Yes, I was getting more at what you think the incremental kicker is from a run rate perspective, not from a next quarter but is this accretive to earnings? Is it --? The math would say it is. I'm just trying to get a sense of is this a needle mover? Is this just --?

It's a great question, Ken. I guess the way -- I didn't think about it until you just said that but I don't really -- it's not that big but that it's going to offset the decline that we are going to see in residential mortgage gains. We saw a 40 point decline on the residential side there. I wouldn't be surprised to see the same again next quarter. And I don't -- I think that's probably the bigger theme. Maybe mortgage banking revenue will be a little bit supported over the next few quarters by it but you are still going to see an overall downward trend.

Then, Rene, just that reversal of the Wilmington gain, can you just talk to us about the size of that and where that was geographically within the expense lines?

It's in other expense and this was -- when we closed the merger at the outset of the opening balance sheet, there was a contingency outstanding obviously because you can take yourself back to all that turmoil. We wanted to make sure that we were properly reserved given all the contracts that were sort of out there.

I think what you see is a very nice sign that as over time we have kind of gotten through the integration. It's now a little past the two-year anniversary. A lot of people have remained with M&T and have decided to sort of remain as part of the group, so what you are kind of seeing is the finality of all of that. And it was sort of that amount that was no longer considered a contingent liability as we got to this quarter. So I think I said the amount, did I not?

On a pretax basis, it was $26 million.

$26 million, okay, and then last quick thing is just can you give us the mortgage apps pipeline closings?

Yes, so I will give you a couple numbers. So this lock volume I will give you the first quarter was $1.8 billion, $1.9 billion. Second quarter was $1.8 billion and then if I give you the pipeline at the end of the first quarter, we were $1.6 billion. At the end of the second quarter, we were $1.6 billion. So what's happening is the volume is up -- is remaining steady, maybe down 1 or 2 percentage points but the only reason that's happening is because the gain on sale margins are dropping at a healthy pace.

So I think that kind of tees you up. I wouldn't expect a big, big change in volume next quarter but I would expect gain on sale margins to continue to decline.

Understood. Thank you, Rene.

Bob Ramsey, FBR Capital Markets.

Good morning, Rene. I was hoping you could talk a little bit about how the movement that we've seen in mortgage rates and interest rates generally impacts the Hudson City acquisition. I think that those assets get marked to market at close. So with mortgage rates higher, how does that affect I guess the capital gain as well as the income off of that business?

Okay, so I'm going to give you this in a very general sense and from my understanding of over the past year the balance sheet, not necessarily from having any conversations with Hudson City.

I would guess if I look at the profile of that balance sheet the mortgages will extend some, net interest income will be higher. The issue you had is a steepening of the curve, so obviously that's going to affect a little bit of the mark on any sort of fixed rate asset side. But you are going to have them out there for a longer period as well so that's a little bit of an offset. And I wouldn't expect much -- I wouldn't expect much in the way of any change in the mark on the liability side, because the short end didn't move.

So you could get some -- if you're thinking of marks, maybe there would be some negative impact as where we stand today. Really what matters most is what happens to the short end because that's where the big issue is on the wholesale borrowings.

The second point I would make is that as we see things here, these are reflections of the economy improving so you also should get some improvement on the credit profile. They are pristine but having said that, everybody should get some benefit from the improvement in the economy.

The third thing is that the change in the Basel III rules is probably a positive effect from what we were all thinking on how mortgages are treated both from the complexity of what we have to do to track it all and also from the favorable capital treatment from the rule now being finalized. So there's a lot of moving parts but those are the items.

Okay, that's helpful. Then one other question and I will hop back out. The bump in CRE loan yields this quarter, I know you mentioned prepayment penalty income. I'm just curious how much of that was the prepayment, how much was maybe the adjustment assumptions on the Wilmington purchase loans? And I didn't catch the prepayment dollar amount if you give it earlier.

I lumped it all together and in I think with the nonperformings and we said that was 7 basis points, the two in total relative to the previous quarter. I mean without getting real -- I have it somewhere. It's probably half of that is probably prepayment. Give me a second.

I don't have the two broken out, but let's say it's half of the 7 basis points just as a general thought. I think the real issue is interesting is that -- so when we sit around thinking about that, we say okay, maybe that won't recur next quarter, so we tend to be relatively conservative. But having said that, it's very logical that we were seeing prepayments -- those prepayment penalties because all throughout our balance sheet, we saw the impact of lower rates and people trying to refinance. We saw it in credit in both deals in our normal portfolio where it actually was not a bad quarter in terms of loan volume in terms of origination but we are seeing a lot of refinancings.

We are seeing that in the nonperforming book. It's also part of what's behind the reversal on the Wilmington side of the -- into accretable yield because people are able to refinance things are relatively healthy. So that said, it's hard to predict it is somewhat lumpy in the margin but it could continue as people are trying to make sure they lock down their refinancings with the anticipation of rates being up.

Okay, the Wilmington credit market adjustments, was that predominantly in the commercial real estate portfolio? Is that where virtually all that was?

It's across the board. There was a fair amount, healthy amount in the real estate portfolio.

Okay. Thank you, Rene.

Erika Penala, Bank of America.

Just a follow-up question on the liquidity. What -- of the $2.4 billion in average balances especially in light of the Basel III requirements on liquidity, how much should we consider excess for reinvestment?

Let me just -- I'll do it in two parts. So overall, our focus over the next couple of quarters is to sort of -- is to continue to improve our liquidity profile and sort of the movement in rates makes that a little bit easier today. So as we get to the outset, it would not be surprising to see all of that sort of reinvested in very, very liquid type securities.

But beyond that, we probably would continue to focus on that through additional -- we did $800 million of unsecured funding a quarter or two ago. We will probably do more of that, so over time we will start to work on that liquidity profile as we get closer to the final rules and then that will have to be also invested.

So I'd kind of think of the first set as maybe all of the $2.4 billion, $2.5 billion will be invested and then there will be more but those will be at sort of match-funded spreads.

Got it, and just a second question on the follow-up to your expense guidance, should we think of the base upon which we are growing expense for the second half of the year as $604 million?

I don't see anything wrong with doing that. I think yes, then you'll have to make adjustments for -- again I mentioned the people we've hired and we continue to hire both on the regulatory side. I think since last quarter for example, we have hired 53 BSA AML professionals. We've added to the team and then you will see professional services rising some as well. But starting at that $604 million is probably a good way to go about it.

Got it, thank you.

Craig Siegenthaler, Credit Suisse.

Thanks, guys. Good morning. Just looking at overall loan growth here, I understand why you are reducing the consumer real estate portfolio at a pretty fast clip here. But I am wondering can you provide some commentary around your expectations for overall loan growth before the Hudson City deal closes, really given kind of modest negative loan growth in the first quarter and flattish loan growth here in the second quarter?

What was the first part? Modest negative growth -- what?

I was just saying -- the question is what are your expectations for overall loan growth given residential real estate is kind of running off and commercial is actually fairly strong?

Yes, I don't know if you caught that but we securitized some FHA loans and so a little under $300 million of that just went right into our securities book. So in terms of earnings assets, there wasn't much of a change. There will be a slight runoff in the resi portfolio. But we will also do some -- retain a certain portion to sort of keep that runoff to be flat as we go forward.

The C&I -- it was a little higher than normal and I would say at 9% growth is pretty healthy. We haven't seen a change. When we look at our pipeline for both C&I and CRE, the quarter was pretty good. The amount of pressure on deals that we accepted was a light, the margins were strong. The thing that we are seeing is that there's a fair amount of prepays particularly on the fixed rate portfolios.

Then finally, if you look at the consumer side on an as at basis and particularly if you look at home equity and indirect for the first time they actually had slight growth. So sort of seems like those are leveling off which is kind of why we held onto our 5% number overall.

So we don't see much change. Some people are talking about slowdown but everything we see, the slowdown is driven by pay downs, which is always good from a credit perspective. It's always good from the customer locking in lower rates and being healthier, right? So that's our logic behind sort of sticking with 5% or mid single-digit I think is what we -- low mid-single digit loan growth.

Got it. Rene, you classified about $10.4 billion of consumer real estate loans in the June quarter and I understand why that was down but do you expect the portfolios to decline at a pretty quick pace the next few quarters? Do you think that should kind of level off here?

Hasn't changed much. It's been down 1%, 2% every time we report and on an as at basis, it was actually flat to up this quarter. So I kind of view it as slowing. I can't think of another reason why that would change.

Then just a number question on the fee waiver. What was the impact of fee waivers in the second and first quarter in the trust income line? Was it material?

Fee waivers --?

On the money funds, I think I have to get back on that, Craig. I don't have that at hand right now.

Finally to your last question, I think the other thing is that we may do more securitizations. So that will be just a reclass. But again, we want to make sure that the portions of our balance sheet that we have as customer loans that we make sure that they have guarantees and a certain amount of liquidity as we kind of think about our liquidity coverage.

Got it. Great, guys. Thanks for taking my questions. Don, we can talk after the call.

Ken Zerbe, Morgan Stanley.

Great, thanks. Rene, at the beginning of the call you mentioned that part of the reason why you sold the securities was to help your 2014 CCAR application. Has anything changed in terms of the application process? Is there a certain reason for why you are doing it? Because obviously you went through the process last year. I was just wondering what's different about next year's process?

That's a great question. That's a great, great question. Well, we went through the CapPR process, which is a process where we run our own models and we go through a review in the Federal Reserve -- and Federal Reserve actually goes through and reviews our governance and our process. But we have actually never been a CCAR bank which requires an extra step, which is being part of the horizontal process in which half of that process is what we did before but the other half is that it now goes through the Fed's own models, right, which was something that we are not familiar with.

So we have really taken the position that as we kind of have learned about our portfolio, we thought -- we want to make sure that we are pretty well positioned to go through that test for the first time. And of course that sort of is all benchmarked off of where you are at 9/30.

So it's been a big focus of ours. That married up very nicely with the private label mortgage-backed securities is that we run a model and we've modeled those for valuation purposes and until recently, our model was saying that those securities were worth more than what the market prices were implying. But as we got into the other part of the quarter, that changed and the valuations on the market were well above our model. So we decided to pull the trigger.

To give you some sense, had we pulled that trigger back in 2009, the difference would've been roughly $240 million, right? So it's not a core security. It's also a risk-sensitive security so if you have stress and housing prices were to drop, then not only are you not going to collect that $200 million extra, you are going to take a hit in OTTI under extreme stress.

So it's not a core asset. We decided to move it off and then we take the billion dollars and we also use it to improve our liquidity profile.

That helps. Then just really quickly, our last thing is on the CRE payoffs, you mentioned there was a couple big ones in the quarter that drove the prepays. How large were they? I'm just trying to get a sense of if it was meaningful for the growth in CRE this quarter.

Yes, it would have changed the percentage growth. I definitely think so. I don't know how to -- first of all, there were several. You know, several loans anywhere from $5 million to $30 million, $35 million would not be abnormal. And not only that, in our nonaccrual book, we had several loans that paid off as well. So both there and the nonaccrual balances.

So how do I say it? I kind of think of it as more of a trend. I don't know how long the trend will last but I don't know if that helps. There was not one really large transaction that paid down.

All right, thank you very much. I appreciate it.

That was our final question. I would now like to turn the floor back over to management for any closing remarks.

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