M&T Bank Corp (MTB) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the M&T Bank second-quarter 2015 earnings call. (Operator Instructions)

I would now like to turn the conference over to Mr. Don MacLeod, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Paula, and good morning, everyone. I'd like to thank everyone for participating in M&T's second-quarter 2015 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, and good morning, everyone. As we noted in this morning's press release, M&T's results for the second quarter reflect a number of positive factors, including strong commercial loan growth as well as a rebound in commercial lending-related syndication fees. Expenses during the quarter were well contained. Net charge-offs remain at historical low levels, and capital and liquidity positions were further strengthened. Overall, I would say our results stepped up nicely from the prior quarter.

As we usually do, I will start out by reviewing a few of the highlights from the recent quarter's results, after which Don and I will be happy to take your questions. So turning to the results, diluted GAAP earnings per common share were $1.98 for the second quarter of 2015, up from $1.65 in the first quarter and unchanged from the second quarter of 2014. Net income for the quarter was $287 million, up from $242 million in the linked quarter and $284 million in the year-ago quarter.

There were two noteworthy items in the recent quarter's results. First, in connection with the previously announced divestiture of the trade processing business within Wilmington Trust's retirement services division, we recorded a pre-tax gain of $45 million. This amounted to $23 million after-tax or $0.17 per share.

Second, included in the operating expenses for the quarter are $40 million in contributions to the M&T Charitable Foundation. Taken together, the two items reduced net income by about $1 million or $0.01 per share.

As you are all aware, 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 when they occur. After-tax expenses from the amortization of intangible assets was $4 million or $0.03 per common share in the recent quarter, relatively unchanged from the prior quarter.

The net operating income for the second quarter, which excludes intangible amortization, was $290 million, up from $246 million in the linked quarter and unchanged from last year's second quarter.

Net operating earnings per common share were $2.01 for the recent quarter, up from $1.68 in the previous quarter and down one penny from the year-ago quarter. Net operating income yielded annualized rates of return on tangible assets and average tangible common equity of 1.24% and 13.76% for the recent quarter. Comparable returns were 1.08% and 11.9% in the first quarter of 2015.

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.

Turning to the balance sheet and the income statement, taxable equivalent net interest income was $689 million for the second quarter of 2015, an increase of $24 million from the linked quarter. The net interest margin was 3.17% during the quarter, unchanged from the first quarter. The offsetting factors driving the flat margin were as follows.

Redemption of $310 million of high-cost fixed rate TruPS in mid-April provided a benefit to the margin of about 3 basis points. Offsetting that benefit was about 4 basis points of pressure from additional actions taken toward reaching our LCR compliance, including purchases of high-quality liquid assets and the associated debt.

The core margin was little changed from the prior quarter. Average loans increased $1.1 billion or 7% annualized compared with the first quarter, stronger performance relative to that we have seen in recent periods.

Looking at each of the portfolio categories on an average basis compared with linked quarter, commercial and industrial loans increased an annualized 11%. Commercial loans increased about 9% annualized. Residential mortgage loans declined an annualized 6% and consumer loans grew an annualized 3%. This category included continued growth in indirect auto loans, offset by a decline in home equity loans and lines of credit.

Average core deposits, which exclude deposits received in M&T's Cayman Island office and the CDs over $250,000, increased an annualized 6% from the first quarter.

Turning to noninterest income or fee income, noninterest income totaled $497 million in the second quarter, which includes the $45 million gain on the trade processing sale that I mentioned earlier. Excluding that gain, noninterest revenues were up $12 million compared with the prior quarter, but down about $4 million compared with last year's second quarter. As noted in the press release, the year-over-year decline reflects foregone trust fees as a result of the divestiture.

Mortgage banking revenues were $103 million in the second quarter, up $1 million from the prior quarter. Slightly softer residential mortgage banking revenues were offset by higher commercial mortgage banking fees and driven by higher commercial mortgage loan originations for sale -- loans originated for sale.

Service charges on deposit accounts rebounded to $105 million, up from $102 million in the seasonally weak first quarter. And trust income was $119 million in the recent quarter compared with $124 million in the previous quarter. The decline reflects lower revenues as a result of the trade processing sale, which were $9 million in the first quarter, partially offset by seasonal tax preparation fees of about $3 million.

Commercial lending-related syndication fees increased by about $10 million from a somewhat soft first quarter. These fees are driven by transaction volumes and can vary from quarter to quarter. Adjusting for the impact of the trade processing sale -- and that is both the gain and the divested revenues -- total fee revenue was up 3% through the first half of 2015 versus last year.

Turning to expenses, we are beginning to see good progress in managing our expenses, particularly in professional services. Operating expenses for the second quarter, which exclude expense from the amortization of intangibles, were $641 million, including the $40 million donation to the Charitable Foundation. Excluding donations to the Foundation from all periods, operating expenses declined $23 million from the prior quarter and were down $3 million from a year-ago quarter.

Salaries and benefits were $362 million in the recent quarter, down $28 million from the first quarter. Of course, the decline reflects a return to a normal level of expenses from the seasonally high level in the first quarter, which also reflects some -- it also reflects some impact from the trade processing divestiture.

Professional services costs were down $4 million from the previous quarter and down $15 million from the year-ago quarter. The decreases reflect lower levels of spending, primarily consulting services, related to our reaching certain of our BSA/AML milestones, partially offset by higher legal costs.

The efficiency ratio, which excludes intangible amortization, was 58.2% for the second quarter, improved from 61.5% in the previous quarter and about flat with the year-ago quarter. If we were to exclude the divestiture gain and the charitable contribution, the efficiency ratio in the second quarter was 57.0%. On that same basis, the efficiency ratio for the first six months of 2015 was 58.9%, a 128 basis -- sorry, a 120 basis point improvement from the 60.1% in 2014's first half.

So next, let's turn to credit. Nonaccrual loans were $787 million, or 1.17% of total loans at the end of the second quarter, a 1 basis point decrease from the end of the first quarter. Net charge-offs for the second quarter were $21 million compared with $36 million in the first quarter. Annualized net charge-offs as a percentage of total loans was 13 basis points for the second quarter, improved from 22 basis points in the previous quarter.

The provision for credit losses was $30 million for the recent quarter, exceeding net charge-offs by $9 million. The increase primarily reflects loan growth. The allowance for credit losses was $930 million at the end of June, and the ratio of allowance to total loans was 1.36%, down just 1 basis point from the prior quarter. The loan loss allowance as of June 30 was 8 times 2015's annualized year-to-date net charge-offs.

Loans 90 days past due, which we continue to accrue interest on, excluding acquired loans that had been marked to fair value at acquisition, were $239 million at the end of the recent quarter. Of these loans, $207 million or 87% are guaranteed by government-related entities.

We were in the heart of our annual loan-by-loan review of the commercial portfolio during the second quarter. And given our very low exposure to the energy sector, we are not seeing any patterns of weakness with respect to either industries or geography. However, we expect that that review will result in an increase in criticized loans when we file our 10-K for the second quarter.

Turning to capital, our common equity Tier 1 ratio under the transitional Basel III capital rules currently in effect was an estimated 9.92% at the end of the recent quarter, up from 9.78% at the end of March.

Now turning to our outlook, halfway through the year, our view on the lending environment with respect to both demand from customers and the competition from peers is little changed. With average loans in the first half of 2015 up 5% over last year, we are running slightly ahead of the 4% projection that we gave you on the January earnings call. One change is that all of our regions participated in the growth in loans in this past quarter.

We are still accumulating high quality liquid assets to meet our target of 100% compliance with the liquidity coverage ratio by the end of the year, and we expect to issue additional unsecured bank notes in the coming months, with the proceeds to be invested in additional high quality liquid assets. Our outlook on the net interest margin remains intact and consistent with past comments. The margin held up nicely in the second quarter.

The two primary sources of pressure, steps toward LCR compliant and the core compression from loan and deposit pricing, remain in play. And an increase in short-term interest rates will likely act as an offset to those pressures should that occur.

We remain on track to grow net interest income on a year-over-year basis. We are still looking for low single digit year-over-year growth in fee revenue, in line with recent trends.

Next, I would like to give you an update on our outlook for expenses. We remain focused on producing positive operating leverage. Adjusting for the divestiture gain and the charitable contribution, revenue grew by 1.5% for the first half of 2015 against a 1.1% decline in expenses.

This past quarter, professional services expenses associated with BSA/AML compliance declined at a healthy pace, as certain milestones have been achieved. And we made progress towards a sustainable and repeatable process in all areas.

Looking ahead, those reductions in expense will be partially offset by continued investment in the plumbing that Bob Wilmers referred to in his annual letter to shareholders. These investments include customer-facing technology, our data warehouse, and continuous improvements in our risk management infrastructure.

While our spending this year on professional services will decline from last year, total GAAP expenses may grow modestly from the full year 2014. And our goal is to demonstrate continued improvement in the efficiency ratio over time.

Our outlook for credit is little changed, with continued low levels of charge-offs. And of course, as you are aware, our 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 when it actually unfolds in the future.

Now let's open up the call to questions, before which, Paula will briefly review the instructions.

(Operator Instructions) Ken Usdin, Jefferies.

Rene, just wondering if you could just follow on that comment about the full-year expenses and the kind of moving parts, especially within that other line. So are you saying that you are still seeing an escalation that would perhaps even more than offset that nice final delta that we've seen in some of the consulting and regulatory related?

I think my wording, Ken, is driven towards the difficulty of predicting any given quarter. And I think when you think about what we've been saying, we've kind of provided you with the trend that a lot of the consulting and higher levels of expenditure that we have been seeing for more than a year have begun to come down. And we've begun to make those investments that we've seen in the technology, and we will continue to do that. Those expenses will ramp up.

I think one of the things that is difficult is, for example, in this particular quarter, we had a high amount of legal fees. And much of those fees are associated with the hangover of dealing with the cases that are still outstanding from when we acquired Wilmington Trust.

But those are kind of temporary, in a sense. So those eventually will go away as well. So when you take the whole thing together, I am very, very positive about our ability to continue to improve our efficiency ratio. It's just hard to predict any given quarter there.

But I think my comments -- you can take my comments and sort of think about them over not one quarter, but several quarters. And I have a pretty high degree of confidence that we will manage expenses pretty tightly.

Okay. Understood. Secondly, just on Wilmington Trust and the trust department, could you just help us understand the sale of the transaction business? How much that took out of that line and just the underlying growth trajectory on that in the trust department?

Yes, I will start with we are -- within Wilmington Trust, we are still in the retirement services business. This was a specific function that we didn't think was core to the business or core to our future, and which we felt that another party probably could make more of that who had the necessary infrastructure that was there.

So I think we gave somewhere -- maybe in the press release -- what the earnings were a year ago in the second quarter and in this past first quarter. And I think the number is somewhere between -- in either case, between $9 million and $10 million.

When we look at the whole, there is very little impact on net income or earnings per share when we remove that business. So it wasn't something that was an engine of growth for us. But it was economically very attractive to others who had that infrastructure already, so it just made sense to kind of move on and divest of that particular business.

And then just on core trends underneath, what you're seeing in terms of Wilmington Trust growth and outlook?

Yes, things continue to be relatively steady. If you look at -- there is really a couple components. If you think about it at a very broad level, we have income from the wealth advisory services and we have income from the institutional client services. Those are the two big businesses.

But the third thing is that we have fee income from some of our affiliated managers that again are not really core to our business. We inherited them through Wilmington. And with the sort of lower performance that the industry has seen in active managers in 2013 and 2014, the balances from that latter category and therefore the fees are down from affiliated managers.

If you remove that, our wealth advisory services and institutional client service business are growing very nicely, both from a top line -- I would say we are somewhere, in any given quarter, between 2% and 5%. And from a bottom-line perspective, as we sort of rationalize and build out our capabilities in the back office, we are seeing nice growth in the bottom line there.

So that is going very well. We've got a lot more that we would like to do there, but everything is functioning very well from our perspective with Wilmington Trust.

Great. Thanks, Rene.

Sameer Gokhale, Janney Montgomery Scott.

Just a few questions. I was wondering, Rene, you touched on the additional investments that you want to make in some areas, such as customer-facing technology, data warehousing, infrastructure. Can you give us a sense for how far along you are in these specific areas?

Because over time, the commentary generally that I have received and others have received is M&T is a bank that operates very efficiently. And clearly you are investing in BSA/AML and beefing up that part of your processes and technology.

But in terms of these other areas, if one were to -- if you were to put a percentage of completion sort of metric across these different areas -- again, customer-facing technology, data warehousing, other infrastructure -- how far along are you in those areas?

It would be difficult for me to give you a percentage of completion, because I view these things as sort of long-term trends, right? What I would say is that we are making -- we had a pace to make certain investments over time, but a lot of that I would say was slowed down over the last couple years by the shift to restructure our risk management environment, along the lines with all the changes that came from Dodd Frank and the industry.

And as a regional bank, I think too much of the technology that we wanted to do, let's just say for our customers, was being drowned out a little bit. So we are trying to make a shift in that direction.

And so as we do that, the way we are thinking about our technology investment is to make sure that we are making enough investment in the foundation -- enough foundational investment that allow us to get customer-facing technology out there at a faster pace as things change over time. So this would be things like looking at the 360 view of the customer, looking at the idea that we had not had mobile check deposit for our retail customers.

So on a customer-facing side, I think you will continue to see a steady rollout. But we are hoping to increase the pace at which we deliver examples to our customers of things that make their lives a little bit easier. That is one component.

The largest component I would argue are investments that we need to make that will ultimately improve the efficiency at which the way we run the business. Getting a 360-degree view of our customers no matter where they -- which channel they come in into the bank; looking at our onboarding and account opening processes and making sure we have the right technology infrastructure so that things talk across the bank.

And then a last example would be improving our data quality and the control environment around that data in a way that is maybe a little less manual in some places and gives us better information. So those last ones are all about efficiency in the long term in my mind.

Okay. So then in terms of the shorter-term investment initiatives, would you anticipate -- for lack of a better term -- if you think of them as catch-up, to a certain extent, that catch-up component of it, do you think you would be done by the end of this year or say the first half of next year?

And then there is an ongoing, of course, investment initiative as you try to look at mobile apps and some other things. Is that a fair way to think about it?

Your general trajectory is right, but the time frames I would not focus on. I would focus on the idea that M&T is going to be talking more and more about technology infrastructure as we go forward. And I think what you're going to see as we focus on efficiencies in other areas of the bank over time, those will tend to offset that higher level of technology spending.

Okay.

I like to joke around every once in a while when we are putting together the operating plan and someone says hey, should we spend $100 million or $120 million on new technology investment? And you get wrapped up in the discussion, and then you wake up and you realize we spend $2.7 billion a year. So to me, it's more shifting our priorities to things that are going to improve the experience for our employees and for our customers.

Okay, that's helpful. And then just a couple other ones; the first one was on credit. You did mention that you were looking at the portfolio and kind of evaluating the individual credit. You know, we're about at the halfway mark.

And I think your comment was that as you complete that review, you'd expect there to be more criticized loans. So I was just hoping to get a little bit more clarity there. Is there a particular area which has not undergone review where you feel that there could be more criticized loans coming out of that area? Just if you could help us give some additional light on that, that would be helpful.

No, it is slightly different. So I'm not talking about the future. I'm talking about the work we've done to date. The way I like to say it is things are good on the credit quality front, but we do see a lot of competition. We see competitor stretching. So it's a great time to begin to look harder into your portfolio now, because you have the capacity to do so.

So that's what we sort of did. We took our annual reviews that we typically do over time, and we said you know what, let's take a harder look and maybe accelerate some of that. So I -- that's why we think as we look at second-quarter results, we will see some increase in our classified loan book. But that would be work that we typically do annually every year, but we just sort of made a bit of a concerted effort to do it.

You know you saw criticized go up, I would guess mostly because of energy loans in the first quarter with the industry. So it's not a bad time to just make sure you are diligent. And that is pretty classic for M&T to do that in the off cycle, so to speak.

Okay. And then just the last question was similar to your trade processing business that you sold. Are there any other areas that you sort of marked for strategic review as you think about it? Or do you feel that with the rest of your businesses, you don't see anything that you identify in the near-term horizon as something that you might want to divest?

Yes, let me start by saying nothing material. But there are probably a few things here and there associated with businesses that we've inherited over time that we are looking at. But most -- I feel like most of that work has been done now. So the whole of what we are doing now is focusing on investing, I think.

Okay, that's all I had. Thank you, Rene.

Frank Schiraldi, Sandler O'Neill.

I had one more expense question first. Just trying to -- as we think about 2016 now and we think about BSA-related expenses rolling off, would you say a majority of that will be captured by the bottom line, Rene? Or would you say that a majority of that will sort of be reallocated into technology spend?

I think it's a bit staggered. A large portion should be reinvested in technology spend, but I think it gives us the ability to sort of ensure that we've got our revenues growing faster than expense, is the way I would say it.

And to give you some sense, we talked about last year that we spent in total, ramping up our BSA/AML program and with the consultants in, $151 million in 2014. I would expect that be somewhere in the $90s million when we get done with the end of this year.

But on the flipside, we spent $30 million improving our CCAR results and process in 2014. We will spend $33 million this year. So in some areas, you're still making those investments and I think what you will see is it stagger over time. Those, too, will come down, but it is a bit staggered. So I just feel like we have very, very good ability to manage our expenses prudently while making the investments we need from the point we are at here.

Okay. So is the message more positive operating leverage year over year, rather than necessarily quarter over quarter as we go through the remainder of 2015?

Yes. Someone had asked me the question: how fast are you going to get to 55? So it's just not the way we think about running the business here at M&T. We think long term. And we -- our goal would be we would be very happy if we continue to make progress on the efficiency over time. And if it happens in that manner, what's nice about it is it's sustainable, but it's healthy. It's done in the right way.

So we've got good momentum. You see it in our numbers already. We are going to keep that momentum going. And I think we will get to where we need to be to make sure the bank is efficient, as it always has been, relative to our peers.

Okay, great. And then just on asset sensitivity, as we think about the Hudson City balance sheet coming over later this year, as we think about, I guess, your shock analysis, how much of that asset sensitivity would you say, maybe in percentage terms, would be lost once Hudson City balance sheet comes over?

This is a big estimate. I am not even going to look at my numbers. I'd say half of it is absorbed, maybe slightly more. But there is still a very -- there is still an asset-sensitive position where those two balance sheets could come together. Don is writing on a piece of paper: one-third.

Okay, one-third to and a half. Got it, okay. Thank you.

David Eads, UBS.

Following up on this core banking inefficiency thought, I'm curious just to hear a couple thoughts on where you guys feel like you are in terms of the branch footprint. Obviously, we've seen an industry-wide trend towards shrinking branch counts and you guys have done that as well.

But it sort of seems like you guys are fairly productive when it comes to your branches. So I'm just kind of curious where your thoughts are on branch count.

I think it feels to me like we did a lot of work in that space over the last couple of years. Very quietly, I guess. We didn't talk about it much. We are hearing a lot more people in that space today. I think we are ahead on that front.

And then if I speculate a little bit, I think it's hard to rationalize in that space more without the right technology platform. So that goes back to the other issue is that if we focus on our capabilities for the employees there and the way we do business with those customers, there will probably be room again down the road. But I think we are pretty close to as far as we are going to go in that space.

Okay. And then you guys have maintained really quite solid CRE growth here, despite everyone else. There is a lot of talk about how competitive that market is. Is there anything you guys are seeing that is letting you kind of gain share there? Or can you comment on the CRE?

The number one thing for me is that if you were to look at the last year over the quarters, while we had decent growth -- 4% or 5% -- it was being supported by one or two regions, particularly the Metropolitan New York City area, Tarrytown and Western New York.

And what you've seen a little bit last quarter -- and definitely this quarter -- is just growth everywhere. So Baltimore has gone from slightly declines to positive numbers. I think, in fact, and go through them -- annualized growth this quarter was 4% in Upstate and Western New York. The Metropolitan area, which is New York, Philly, and just up north of New York, was 8%. Pennsylvania was 12%. Baltimore was 7% and our other regions in total were 5%. That is total loans.

And the real estate, it is not really that different. But what you really did see was a little bit more growth than we had been seeing in Pennsylvania and Baltimore, Washington, Delaware areas. So that was probably the differentiating factor in why our loan growth was a little bit higher (multiple speakers).

Did that just feel like increased demand from borrowers? Or was there a pullback of competition? Do you have any sense for what allowed that growth to accelerate in the southern part of your footprint?

I'd say predominantly additional credit with existing relationships that we've had for a very, very long time. We are putting money to work. Not a lot of new -- like, if you think about market share in terms of customers, it's not like we're collecting lots of new customers.

Sure.

I think our existing relationships are putting money to work.

Great, thanks.

Bob Ramsey, FBR.

Just to follow-up on that. To the extent it is existing relationships with -- or growing existing relationships, is this customers increasing line utilization? Have you seen any improvement there? Or is it customers consolidating business at M&T? Or what's kind of -- are they net borrowing more?

So if you look at usage, it's been up. Utilization has been up the last two quarters slightly. If you look at -- I guess the way I would think about it is the -- first place I would point you to is you think about some of the loan fees that were up in terms of the syndication fees. So we are getting a fair amount of volume from existing customers where the size of the credits are increasing.

So that is why we are getting higher syndication fees. So for us, we only want to take so much exposure. So we tend to sell down the amount. Remember, we typically don't do anything -- or very little -- in my terminology would be participation [zen], where we are not the lead underwriter.

So I think what you are seeing, particularly from existing customers, is people doing some larger projects. And that's why we got -- they are doing more, we have got more loan growth, but you are also seeing in the fee line as we sell down some of those and sort of mitigate the amount of volume that we see there. I don't know if there's any else particular that I could clarify for you there.

Okay. Shifting gears a little bit, could you maybe provide us any update on Hudson City and how that process is evolving?

As you know, it has been a long process since back in 2012, where we've been trying to do whatever it takes to sort of get to the stage where we can complete an acquisition with Hudson.

In terms of what we've talked about in the past, our progress in improving our BSA/AML compliance program is all on track with our expectations. We've made significant progress. We've enhanced our processes and our systems, and all those things are running and in place.

So at this point in time, there is not much more that we can really say or do. We have to allow our regulators the time to work through their process and to work through the application. But it's really not in our control to be able to speculate as to whether or when the approvals for our merger would be received. I wish it was different, but that is where we are.

Okay, fair enough. And then last question. I know you were asked earlier about rate sensitivity. Just kind of curious; I know you will give some rate disclosures in the Qs and Ks, but as you think about impact of that first 25 basis point move, is there a proportionate lift in earnings on 25 bps? Or is it less on the initial increases because of floors or some other reason? Or how are you thinking about the initial movement in rates, whenever that happens?

I think there is impact right away. It wouldn't be very delayed at all, because we are very sensitive, particularly on the short end. One of the things that when I look at the results, as you say, beyond the Q, when I look at the results on a flattening or a steepening, what surprised me a little bit is that in a flattening, which is typically not great for us, today, it would be better than, actually, a 25 basis points across the board raise.

And the reason for that is that so many of our loans, particularly commercial loans -- C&I -- are priced off of LIBOR, the short-term LIBOR rates. But in the past, we never had all of this long-term debt that we had to issue into the market, which is fixed.

And so when you look at our profile, if anything has really changed, it's that a parallel increase of 25 basis points would begin to affect us. But if that was an increase in the short end and no change in the long end, it would probably impact us more.

Okay, okay. All right, thank you.

Brian Klock, Keefe, Bruyette, Woods.

On the expenses -- and we've had a lot of conversation about it today on this call. I guess just thinking about the charitable contribution expense that you are able to invest this quarter, I think from looking at your call reports, it was about a $6 million charitable expense in the first quarter. And I think that's probably what you fund quarterly.

So is there any thinking about that maybe this contribution expense may have funded the rest of the year's contribution to the Charitable Foundation? Maybe there is some room for that to be cost savings when we think about your next couple of quarters.

It changes over time. I think if you kind of follow some of the things that we've done, we had a gain or you could call it a windfall from buying Wilmington trust And this particular business that was embedded in it that was not core. And it just made sense to us to take those proceeds and put them into something that is really important to us in the foundation.

You go back, you remember when we recovered from lawsuits $50 million or $60 million from the CDO's litigation that we had. We felt that it just made sense to take those proceeds which were windfalls out of our core operating -- not part of our core operating and put them into the foundation.

So it would be lumpy. So we could continue to do that if we think it makes sense from time to time. So we would not overfund it if it was fully funded. And clearly, usually after you have done something as large as this, you might see a pause. Hard to say.

Appreciate that, okay. I guess shifting over to the revenue side, you talked about the large syndication fees. If I look at the line item that you guys disclosed in the 10-Q, there is the line of credit and other credit fees.

I would imagine that is where the syndication fee is, then. It was only $26 million in the first quarter versus an average of about $33 million. So if this was $36 million in the quarter, does that means maybe the next quarter you would not expect the $10 million to go away. But maybe it's kind of in that sort of $33 million, $32 million quarterly run rate? Is that what we should expect?

I hate saying the words I am going to say, but I actually can't predict. We got lumpiness there and there seems to be a lot of business -- I don't know that that's slowed. So it's hard -- at some point, you will see lumpiness as you look at that line over time. But quarter by quarter, I would -- a year ago, it was $34 million. It seems pretty consistent.

As I think about it, we had a strong second quarter of last year coming off of the first quarter. So it's hard for me to tell you what it's going to look like.

Okay. All right. And then I guess last question. The margin guidance that you gave, it did seem ex the LCR impact from what you guys did in the first quarter that there was -- the core margin actually was somewhat stable.

So I guess thinking about it for the third quarter, your guidance was the continued sort of core compression, which you have always said in a couple of basis point range. Should we expect then the LCR activity to be something that would compress the margin again on top of that? So I guess just want to make sure I am understanding the guidance for the third quarter on both what's core and the LCR piece.

Yes, the LCR will compress the margin. But we see very little impact on NII when we look at the forecasts from it.

Okay, okay. And is that something that is going to be in the same neighborhood of what you did in the first quarter when you think about the HQLA purchases you might do, and bond issuances that you do to fund that?

So are you going to the asset side first? Because we've -- you know, I mean --

Yes, yes. So I guess this level of purchases, yes.

The first, I expect the second half to be maybe slightly less than the first half in asset purchases. And I expect the funding to be somewhat similar to what we issued in the first six months.

Got it. Very helpful. Thanks for your time.

David Darst, Guggenheim Securities.

Do you feel like you are at a point where your service charges on deposits will begin to stabilize? Or do you think there is still more pressure to come?

I don't know. I think we are thinking about that quite a bit. I think that what you've seen has been a change in customer behavior and I think we've got to spend some time thinking about how we react to that.

I don't think it's necessarily a bad thing. I think we have to make sure that we have the products and services that are meeting their needs. So I would look at the current trend and say it probably continues for some time. But I know we are looking at that heavily. Don't really have an answer for you there.

Okay. What might be the timeline for you to deploy mobile check deposits?

I think that is one example of things that we are doing that will be out next year.

Okay. And then anything you can add to the discussion of growth around your organic initiatives in New Jersey?

I can tell you things are going well. We feel good about the progress we're making and the team is working very well together, almost -- pretty much on all fronts. Obviously, there's not much you can do in certain areas without branches, but we are really, really pleased. And on all fronts, credit quality, everything seems to be going very nicely. So no hiccups there at all.

Okay. And I guess your comment around Hudson City is that at this point, you've done everything you can do and you've handed it over. You are truly waiting for a response at this point?

We've made a tremendous amount of progress and we are very, very pleased with the progress we've made and in the time frame we've made it. And that is sort of what we committed to do. So now, we got to see what happens.

Okay, great. Thank you.

Gerard Cassidy, RBC.

Question for you: you mentioned that you're going through this deeper dive in your loan portfolio, which in the Q, we will see a likely increase in the criticized assets. Should we expect then that the reserves could be built up in the third quarter to reflect this deeper dive? Or are the reserves already set for this deeper dive?

Anything that we would have seen would be reflected at the June 30 date. You saw we added over $9 million to the allowance and the majority of that was loan growth. But anything else we would have seen in there would have also been reflected, so I don't expect any additional impact on what we have learned to date.

Okay. And then in terms of growth, in your loan portfolios, are there any regions within the footprint that stand out over others, whether it is Upstate New York versus Maryland or parts of Pennsylvania, etc?

What stands out to me is the Mid-Atlantic. It's the second quarter in a row where we are seeing loan growth after quite a few quarters where things were slow, even slow to down. So that was nice to see.

We are not seeing any impact in any particular area, but I could tell you that if you go across the footprint, the largest growth we saw would be in healthcare and healthcare-associated type businesses. Real estate and rental and leasing businesses and retail trade, those also saw growth. But we also saw growth in education services, construction, and manufacturing. So seems pretty broad-based.

Very good. And then, finally, to follow up on some of the Hudson City questions. If I understand it correctly, obviously you guys worked very diligently in updating your systems for the BSA/AML issues that were identified.

It seemed like those were pretty much resolved. And then out of left field came another issue on CRA, directed, if I understand it correctly, more at the Hudson City side of the equation.

If that is correct in what I just said, who is responsible for resolving that CRA -- if there is a issue that the Consumer Financial Protection Bureau or whatever agency is addressing it? Is it a Hudson city responsibility or is it an M&T responsibility to resolve whatever questions they may come up with?

I think first, Gerard, we are definitely two separate entities today. So we run our own franchises and we manage our own franchises. That's really important to know.

I think the second thing I would say is that the issues that you saw in the newspaper regarding the CRA issue were not new to us. They were long and old things we saw way back when. So I think they just sort of somehow became news and put in the newspaper and became news.

In terms of -- so if they are Hudson City issues, we should expect Hudson City to address them and deal with them before the transaction closes, I assume?

They deal with their issues; we deal with ours.

Okay. Fair enough. I appreciate your time. Thank you.

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

Again, thank you all for participating today. And as always, if clarification of any of the items in the call or the news release is necessary, please contact our investor relations department at area code 716-842-5138.

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