M&T Bank Corporation (MTB) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Don MacLeod of Investor Relations. Sir, you may begin your conference.

Thank you, Paula, and good morning. This is Don MacLeod. I’d like to thank everyone for participating in M&T Bank's Second Quarter 2012 Earnings Conference Call both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules, from our website, www.mtb.com and by clicking on the Investor Relations link. Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements. Now I’d like to introduce our Chief Financial Officer, René Jones. René F. Jones: Thank you, Don. Good morning, everyone, and thank you for joining us on the call today. As we noted in the press release, this year's second quarter financial results reflects strong performance across most of our business. I'll share the details on these in a moment, but let me begin by reviewing the highlights, after which, Don and I will take your questions. Turning to the specific numbers. Diluted GAAP earnings per common share were $1.71 in the second quarter of 2012, up 14% from the $1.50 earned in this year's first quarter. Net income for the second quarter was $233 million, up 13% from $206 million in the linked quarter. For the purpose of comparison, recall that last year's second quarter marked the acquisition of Wilmington Trust Corporation, and as such, those results included several items related to the merger. Looking back, those items included $67 million of after-tax security gains amounting to $0.54 per common share, which was a result repositioning our securities portfolio in connection with the merger in May 2011. Also, included in GAAP earnings in the second quarter of 2011 was a $42 million net after-tax merger-related gain amounting to $0.33 per share. Finally, last year's second quarter included a net $9 million or $0.07 per common share after-tax impact related to our purchase of $370 million of TARP preferred stock that M&T had previously issued to the United States Department of the Treasury. That purchase resulted in the partial acceleration of the amortization of the discount on that preferred stock, which was reflected as a net after-tax $9-million decrease in our net income available to common shareholders. Reflecting those items, diluted GAAP earnings per common share for last year's second quarter were $2.42 per share, and net income was $322 million. Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis, from which we exclude the after-tax effect of amortization of intangibles, as well as expenses and gains associated with mergers and acquisition activity. Included in GAAP earnings for the second quarter of 2012 were merger-related expenses attributable to the Wilmington Trust acquisition amounting to $4 million after-tax or $0.03 per common share. This compares with $2 million after-tax or $0.01 per common share in the first quarter. GAAP earnings in last year's second quarter included a $42-million after-tax net merger-related gain. After-tax expense from the amortization of intangible assets was $10 million or $0.08 per common share in the recent quarter, unchanged from the first quarter. After-tax amortization expense was $9 million or $0.07 per common share in last year's second quarter. M&T's net operating income for the second quarter of 2012, which as noted, excludes only the merger-related gains and expenses and the intangible amortization, was $247 million, up from $218 million in the linked quarter. Diluted net operating earnings per share were $1.82 for the recent quarter compared with $1.59 in the linked quarter. Net operating income, expressed as an annualized rate of return on average tangible assets and average tangible common equity -- shareholders equity, was 1.30% and 18.54%, respectively, for the recent quarter, improved from 1.18% and 16.79% in the first quarter of 2012. In accordance with SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity. Next, I'd like to cover a few highlights from the balance sheet and the income statement. Tax equivalent net interest income was $655 million for the second quarter of 2012, up $28 million from $627 million in the prior quarter. As required by GAAP, we regularly revisit cash flow projections on which we base our valuations of acquired loans. In general, based on stabilizing economic conditions and our success at restructuring several large acquired loans, our estimated cash flows to be generated by acquired loans have increased about -- by about 1%. Those increases led us to recognize about $14 million of additional interest income last quarter on our $7 billion portfolio of acquired loans. Certainly, as acquired loans repay and that portfolio reduces in size in future periods, the dollar amount of interest income earned on acquired loans will also reduce but we -- what we estimate that the incremental impact in each of the last 2 quarters of 2012 should remain at about $13 million to $14 million -- at the $13 million to $14 million level. Notably, lower than expected cash flows on loans must be reserved for immediately. Reflecting those improved cash flows, the net interest margin expanded during the second quarter increasing to 3.74%, up from 3.69% in the first quarter. Major items impacting the comparison with the linked quarter as -- are as follows: The $14 million increase in net interest income on acquired loans that I just noted added 8 basis points to the margin this quarter. Cash basis interest received on loans previously classified as non-accruing, combined with the slightly higher level of prepayment fees, was $7 million higher in the recent quarter as compared with the prior quarter. More than half of the increase came as a result of one large non-accrual loan being fully repaid. This had a positive impact on the margin of approximately 4 basis points. During the second quarter, we again experienced large inflows of temporary trust deposits, which arose from customer funds held in escrow in connection with a bond issuance and the merger transaction. Where possible, we used that cash to pay down discretionary borrowings, but the net impact was a $981-million increase in the average cash balances that we held at the Federal Reserve. The low yield on those higher deposits at the Federal -- Fed reduced the margin by an estimated 5 basis points during the quarter. Cash held at the Fed returned to a more normal level by the end of the quarter. Core banking activities reflected slight compression in the margin with new loans coming on at yields lower than those already on the books, and this has largely been offset by lower deposit rates and a higher portion of non-interest-bearing deposits. The net impact for the quarter was approximately -- was an approximate 2-basis-point reduction. I'll discuss our outlook for the margin in a few moments. As for the balance sheet, average loan growth in the second quarter was strong, increasing by approximately $1.3 billion or an annualized 9% to $61.8 billion. On that same basis, compared with 2012's first quarter, changes in average loans by category were as follows: Commercial and industrial loans grew by $372 million or an annualized 10%. Commercial real estate loans grew by $178 million or an annualized 3%. Residential real estate loans were up by $930 million, reflecting our program of retaining the bulk of our conforming mortgage loan originations to hold on our balance sheet. Consumer loans declined an annualized 5%, driven by lower-end direct auto loans and modestly lower home equity loans and lines of credit. This was partially offset by a 7% annualized growth in all other consumer loans, primarily recreation finance. On an end-of-period basis, loans grew $1.9 billion or an annualized 13% compared with the linked quarter. Included in this figure was 12% annualized growth for C&I loans and 7% annualized growth for the CRE loans, which sets us up nicely as we enter the third quarter. Average investment securities continue to decline as our appetite for purchasing securities remained low in the second quarter based on the low yields available. Instead, we continued with our program to retain residential mortgage loan production. Looking to deposits on the deposit side, average core customer deposits, which exclude foreign deposits and CDs greater than $250,000 were up an annualized 18%, reflecting the large inflows of temporary trust deposits that I mentioned previously. As a result, as noted, M&T's average interest-bearing deposits at the Fed increased by approximately $1 billion compared with the first quarter. The majority of the increase was paid out by the end of the quarter. Thus, on an end-of-period basis, core deposits increased an annualized 14%. We continued to benefit from the disruptions to consumers and businesses impacted by the HSBC branch divestiture in Upstate New York. Average loans in Upstate in Western New York -- in the Western New York region were up an annualized 8% compared to the linked quarter. That includes 18% annualized growth in commercial and industrial loans. Average core deposits in Upstate and Western New York region were up by an annualized 15% compared with the linked quarter, and up 12% compared with last year's second quarter. Turning to non-interest income. Non-interest income totaled $392 million in the second quarter compared with $377 million in the prior quarter. The recent quarter results included $16 million of other than temporary impairment charges related to our investment securities portfolio compared with $11 million in the linked quarter. Excluding those charges from both periods, non-interest income was $408 million for the recent quarter, up 5% from $388 million in the first quarter. Mortgage banking revenues rose to $70 million in the recent quarter compared with $56 million in the prior quarter. We saw increased levels of activity on both the commercial and the residential sides of our business. On the residential side so-called HARP 2 loans bolstered gains on -- gain on sale revenues from both a volume and a margin perspective. Fee income from the deposit services provided, which include debit card interchange, were $111 million during the recent quarter compared with $109 million in the linked quarter. Trust revenues rose to $122 million in the recent quarter compared with $117 million in the prior quarter. Contributing to the increase were seasonal tax-preparation-related-revenues and merger-related synergies as well as new business wins. Turning to expenses. On operating expenses, which exclude merger-related expenses and the amortization of intangible assets, were $604 million for the second quarter. This compares to the $620 million in the first quarter, which includes $26 million of seasonally high -- the $620 million in the first quarter, which included $26 million of seasonally high compensation-related items. The seasonal factors returned to more normal levels in the second quarter. The conversion of our trust systems to a single operating platform has been substantially completed. We expect no additional merger-related expenses related to Wilmington -- to the Wilmington Trust acquisition. We do expect continued realization of merger savings in the second half of 2012. The efficiency ratio, which excludes security gains and losses, as well as tangible amortization and merger-related gains and expenses, was 56.9% for the second quarter compared with 61.1% in the first quarter of 2012. Next, let's turn to credit. Credit trends continued to show improvements. For example, non-accrual loans decreased to 1.54% of total loans at the end of the second quarter, down from 1.75% of total loans at the end of the previous quarter. Other nonperforming assets consisting of assets taken in foreclosure of defaulted loans were $116 million as of June 30, also down from $140 million as of March 31. Net charge-offs for the second quarter were $52 million, up slightly from $48 million in the first quarter of 2012. And annualized net charge-offs as a percentage of total loans were 34 basis points compared with 32 basis points in the linked quarter. The provision for credit losses was $60 million in the second quarter compared with $49 million in the linked quarter. The provision exceeded net charge-offs, and as a result, the allowance for credit losses increased to $917 million at the end of the second quarter. The increase in part reflects the $1.9 billion of loan growth that we saw during the quarter. While the dollar amount of loan loss allowance increased, the ratio of allowance to credit losses to total loans declined slightly to 1.46% compared with 1.49% at the end of the linked quarter. The loan loss allowance as of June 30, 2012, was 4.5x annualized net charge-offs for the quarter. We disclosed loans past due 90 days but still accruing separately from non-accrual loans because they are deemed to be well secured in the process of collection, which is to say, there is low risk of principal loss. Loans 90 days past due were $275 million at the end of the recent quarter, of those, 255 or 93% are guaranteed by government-related entities. Loans 90 days past due were $273 million at the end of the -- this year's first quarter, of which, a similar 93% were guaranteed by government-related entities. Lastly, while we don't report criticized loan levels until our 10-Q is filed, we do expect another meaningful decrease in the second quarter. M&T's estimated Tier 1 common capital ratio was 7.15% at the end of June, up from 7.04% at the end of March, and this reflects higher capital from retained earnings partially offset by a larger end-of-quarter balance sheet. Lastly, I'd like to offer a few thoughts on our general outlook. We expect the net interest margin to be fairly stable over the second half of 2012, with some slight downward pressure from lower yields on new loans, offset by lower costs on deposits and on other borrowings. Overall, as we noted on both the January and April earnings conference calls, we continued to expect the full year net interest margin of 2012 to be modestly lower than the 3.73 reported for the full year of 2011. Combined with the continued growth -- continued loan growth, we also continue to expect growth in net interest income throughout 2012. As a result of the stronger-than-expected mortgage banking activity over the past year, we are thinking about our internal targets for the retention of conforming residential mortgage loans. And we've already begun retaining a lower proportion of our 30-year fixed rate originations beginning in this year's third quarter. We would not expect our overall retention of mortgage loans to remain at current -- at the current elevated levels much beyond the end of 2012. While pleased to see our efficiency ratio decline to 56.9% in the recent quarter, we do expect that expenses will continue to be well controlled through the remainder of the year. The conversion of Wilmington Trust systems is complete, and realizing the remaining merger synergies will serve to offset the continued pressure from new regulatory mandates. As we mentioned, we do not expect any additional merger-related expenses. Credit continues to strengthen. We expect continued improvement in the non-accrual and criticized loan ratios, with charge-offs remaining stable. Of course, all of these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. I appreciate your patience. We'll now open up the call to questions, before which, Paula will briefly review the instructions.

[Operator Instructions] Your first question from comes the line of Todd Hagerman of Sterne Agee.

A couple of questions, René, just in terms of the Wilmington Trust acquisition. First, you mentioned a couple of things on the trust revenue benefit this quarter. Could you give us a better sense just with some of the components, as I think about the legacy Wilmington, the private client business and in particular, like their corporate services business, how that may have contributive for some of the strength in the quarter? René F. Jones: Yes. I think that, for the most part, most of the businesses held up very, very well on a linked-quarter basis, and as I talked about, the largest portion of the increase then came from some tax services that we provide, tax-related services that we provide to our customers, and that tends to be seasonal fees. We also had a bit of a lift because as you bring together the 2 entities, particular things like the funds, as you merge the funds, you begin to get synergies on net revenues. So net of fees, you're paying to service providers. So those things helped. If you look into the business, we saw a little bit of an uptick in the retirement services space. We saw that the capital markets group was a little weaker, continued weakness is probably what I would say because there hasn't been much issuance. Having said that, I guess as I think about corporate America and I think about what's out there, there's a lot of pent-up demand for refinancings, and so I think down the road, that probably bodes pretty well for us. But that was slightly weaker than maybe where it typically would run given the capital markets. And then also, we're seeing a little bit of a slowdown in where the agent brought in on syndicated loans because, obviously, credit is working out better. So we have the engagements we have, but in terms of new business, I mean, that's slowing, which is probably a good sign for the rest of the business. But overall, we're on track. We're sort of above where we expected to be and that's nice, and I think things are going pretty well there.

Okay, that's helpful. And then perhaps, if you could just give us a sense now with the integration complete and particularly, as I think about like the wealth management business and trust overall, could you give us just kind of the mix now, how that may have changed or how that, again, just generally breaks down as I think about private client, traditional trust, that sort of thing? René F. Jones: I guess at some point -- I'll break that up for you. I don't have it with me right now. In part because we don't really think about it in exactly that same way, right? So at some point, if we break out CCS, which is the largest portion of the revenues from wealth, when I think about the wealth, right, again, I think about what's going to happen on the wealth side as an addition to the existing customer base. Much of that growth is going to be coming from M&T's preexisting clients, right? So as we offer them services whether they be cash management, wealth transfer or helping them exit their business, we kind of think of them in that way. So in part, I tend to look at some of that as how we're doing on our commercial bank side, right, and how is that working with our private bank. So we don't really break it out separately that way. But things are pretty stable. I'd say that if you think that a year has passed, I think our marks are probably good for keeping the portfolio relatively stable, but we still have a lot of work to do in order to go out there and penetrate the M&T customer base.

Yes. The only reason I asked is just to get it from a modeling standpoint with some of the seasonality in some of the businesses, just to get a better sense of the mix and how to think about it. René F. Jones: Yes. At some point, I guess, we'll lay that out maybe in our Q or not, but I haven't done that yet, so...

Okay. And then just quickly on the mortgage and the benefit this quarter, could -- was there any uptick at all in terms of the reps and warranties, some of what we're hearing from some of the other companies this quarter in terms... René F. Jones: in terms of repurchase request?

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

Right. Can you disclose where that reserve position ended at the quarter? René F. Jones: What we do is we keep disclosing how much we've charged in the quarter. I think, this quarter that was $10 million. Last quarter, it was $4 million. A year ago, it was about $10 million.

Our next question comes from Craig Siegenthaler of Credit Suisse.

Just looking at the commercial real estate growth, which is really the opposite of what some of your peers are seeing. Can you talk about which geographies and industries are supplying this and maybe why your growth is stronger than peers? René F. Jones: In commercial real estate?

Yes.,right. René F. Jones: Yes. I can talk a little bit about it. I mean, I think the growth is also kind of split between Philly, New York, Hudson Valley at about annualized growth of 5%. All of our Pennsylvania market saw about 2% annualized growth. And then in Baltimore, Washington, which includes Delaware, which is important, we're seeing about 4% growth. I mentioned this is important because you got to remember we've got he acquired portfolios underneath that are probably still running off, right? So one of the things that you saw in the addition of our move of stuff from non-accretable to accretable yield is simply the fact that in Delaware, we have higher prepayment fees than we probably initially thought. So that kind of gives you a sense that at least in the quarter that it's not really concentrated in one area. I would guess maybe part of the issue is that we probably still have less run-off in real estate because our book is pretty good, pretty clean.

Got it. And then when you think about pricing, terms, LTVs, can you talk about how they trended over the last 6 months here and especially on LTVs. I know it's tough because it's a wide range, maybe several [ph] average -- the average LTVs have been trending? René F. Jones: Average LTVs have been trending. Well, we -- let me start by saying, we haven't seen a significant pressure. First of all, last quarter, I said that there wasn't much change in terms of pricing pressure over the last 6 months. This quarter, that continued and quite frankly, even though we had higher volume, our pricing and our ROEs held up very nicely. So I thought that was very impressive. As you know, we track every deal we do both in terms of margin but also in terms of a full P&L. What it tells me is that a lot of the business we're getting is not just loan business but it's probably the operating business as well, which is the only way that you can really get in this environment pretty strong internal ROEs on the business. So if that helps, my sense is that we're doing a nice job of capturing full relationships. The LTVs, I don't think have changed. And I would guess, if you think of our total book, it sits in the 60s in terms of loan to value on commercial real estate. That hasn't changed at all.

And how about terms, are terms extending at all in terms of duration? René F. Jones: We -- how do I say this? We could have increased volume by moving in that direction, but we chose not to do that. So not for us.

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

Your next question comes from the line of Brian Klock of Keefe, Bruyette & Woods.

René, I was just wondering, I guess, with the NIM guidance that you give of, again, still sticking to the modestly lower than the 3.73 in 2011. Obviously, the second quarter included the $14-million impact from the accelerated accretable yield. Now are you expecting -- maybe you can just remind me what you just said earlier about. You expect that same level of accelerated accretable yield to be in the numbers, so therefore, in your guidance for the margin for the second half of the year. René F. Jones: Yes. So let me think about it this way. So the way I would think about it is we said $14 million was in this quarter. I don't expect that to change significantly next quarter or the quarter after because that's real cash, right? And what you should know is that as you think about it over time, the number will come down because the loan book prepays, right? So you won't keep at that pace. But as I sort of look out just a last couple of quarters, we feel pretty confident that those cash projections will continue for that period of time, and then we'll have to give you better estimates as we move out.

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

So that mean, there was $95 million in the second quarter if we use that $14 million of the increased cash flow impact? René F. Jones: I think it was more -- I mean, I'm going to -- it might change to something more like $90 million, somewhere in that range, but you're pretty close.

Okay. And then last question on the NIM guidance, thinking about opportunities in the second half of the year to maybe refinance some higher costs, CDs and then you've also got quite a bit of high-cost capital trust preferreds out there. So do you think about -- you have the $3-billion shelf you filed earlier in the second quarter. Is there a possibility of looking at trying to use that shelf to refinance some of those high-cost capital trust preferred as well? René F. Jones: Well, I mean, the shelf is there because you got to have a shelf. In particular, we actually have to have a shelf technically because we have the TARP. So you got to have that. We did, for example, finance -- I should say, pay off about a $400 million borrowing of sub debt that was past disqualification, so it ran out of capital treatments so we prepaid it. And we have the opportunity to do things like that from some time so we did that, I think, beginning, I think it was July 1. So you have benefits from that. And then, ultimately, I think you've got it on the hybrids and all that. There's a lot room there, but I can't figure out the timing, all right, because it all has to go in sequence with whatever we end up doing with TARP and all the hybrids and the whole thing together. So I'm just not quite sure on timing, but as I look into the future, I have some benefit. That is not counted in my fact or those hybrids and those things are not counted when I think -- when I say I think our margin should be relatively stable for the second half of the year from where we are today.

Your next question comes from the line of John Pancari of Evercore Partners.

Can you give us a little more color on the loan growth that you saw in the quarter, for example, how much of that consumer real estate growth was actual retention of the one for family originations? And then separately just a little more color on the commercial growth that you saw. René F. Jones: Yes, so I'll have someone check that. I don't think our -- I think almost all of that growth was the -- was what we held for the portfolio as opposed to increases in the pipeline. But I can get that for you. And then, really, again, if you think about it, I mean, if I look overall, on the C&I side, we had really strong growth in Upstate New York, 18% compounded -- annualized growth, but it's kind of across the board, New York, Philadelphia, Tarrytown -- or Hudson Valley, we saw the same. Pennsylvania, we saw growth. We saw a slight decline in C&I in Baltimore, Washington, Delaware. I think part of that is the prepay on Delaware, but it's also we had the payout of a large non-performer that would have been in the Baltimore area, so those -- the declines are coming from a positive thing. And then I talked about commercial real estate. There is nothing concentrated about it. It's not in one segment. It's not just in auto. When you kind of listen to everybody across the regions, it comes from a multiple different types of businesses. I don't think it's a big change. It's actually up slightly from where we've been running. But I think year-over-year, we probably have very similar growth. So for example, we had almost 10% annualized growth in C&I, but on a year-over-year basis, we had 10% growth in C&I. So I think things are holding steady, but they're going pretty well.

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

Yes. In your MBS portfolio, sorry. René F. Jones: I don't think -- I think I understand what you're saying. I don't think that concept applies. So let me say this, that if you were -- give me a second. Let me -- if you look at our loan yield, most of our loans prior to this quarter, our acquired loans were recorded at a premium as opposed to a discount. And just said another way, we had acquired loan yields were lower than our legacy coupon. So after making the change, it's changed slightly. So give me a second. I think what I'd say is that you saw that our loan yields were 4.42 for the quarter. I would say we're about 40 basis points or so higher than that. Oh, I'm sorry, are you asking about our MBS?

Yes, actually, I indicate on the MBS portfolio. I was interested in getting a gauge for your premium amortization expense. René F. Jones: Most of what we do or putting on the books is 101.3, right? So there's not a lot of prepayment risks in the sense that if it prepays, we end up just replacing them at very similar yields. I kind of didn't quite get what you were asking. The other thing to think about when you stay with that topic is that as you think about what's happening out there, we don't have some of the same risks as everybody else when you move to our securities book, which is MBS, because last year, we sold a couple of billion dollars of our securities book, and we sold most of the higher-yielding securities, right? So we have less concern about seeing high prepays that we couldn't replace.

Okay, that's helpful. And then lastly, can you just give a little bit of color on the impact of the new Basel III NPR on your Tier 1 common ratio? What -- how much of a basis point impact that would bring about? René F. Jones: I got to tell you, we were looking at it -- we're looking at what all you guys are calculating. I think at some point beginning in next year, we'll probably have to publish it and put it on our Q as to what we think the impact is. But we really haven't finalized what our calculations are. I think at the end of the day, we'd rather be more certain than to do a speculative number there, but with the new NPR, we're beginning to do that. And I think by the beginning of or end of this year, beginning of next year, we'll be publishing something. Whatever we publish though, I think, will -- doesn't really reflect the fact that of anything that we'd be able to do to mitigate the impact, right? So whether it'd be MSRs, whether it be the deferred tax position that we have or the types of loans that we have on our books, I mean, there's -- or securities, there's probably a lot that we can over time to mitigate whatever the impact will be. But we'll -- in about 6 months, we'll be disclosing that -- those numbers.

Your next question comes from Ken Usdin of Jefferies.

So just coming back to the margin outlook, I think we're all clear now that the step-up from the accretion benefit, that kind of run rates. But what I want to try to understand is over time, obviously, that benefit will decline. Can you help us understand from the current run rate of all things acquired loans of this $90 million or so, what the pace of runoff would be over the next couple of years? Is it fairly ratable? Or is there a really long duration of these assets that will kind of keep it in somewhat extended out? Any color just on the kind of role and the duration would be helpful. René F. Jones: Yes. Let me give you a couple of things. So I'll try to make it as simple as possible, but I'll start with a caveat, which is we have to look at these things every quarter, and we look at all the cash flows. So barring any changes, generally, we talked about where we thought it would be for the next couple of quarters. It's a rough rule of thumb. I would say that the amount of change that would be in our numbers next year for 4 quarters would be equivalent to what we saw in the 3 quarters this year, give or take a few million dollars. And then it starts to run down further from there.

I'm sorry, René, that the amount of change? Can you just -- that's... René F. Jones: Well, so we talked about a $14 million change, right? So -- and then we said that, that amount that we're adding is probably fairly similar in the next couple of quarters, right? So you take those 3 quarters and you get an amount. I would guess in the next year, 2013, our fourth quarter amount will be very similar to that amount, right? So it's coming down, but we've got 4 quarters instead of 3. And then from there, it continues and it's paced out, I mean, predicting it out many more years than 2013, I think, just probably doesn't make much sense.

So you're saying that -- so I'm sorry, that's still a little confusing. So you get 3x $14 million and stays, but then next year, you're basically saying that $42 million would be the whole year? René F. Jones: That's probably -- I mean, I'm not giving you the $42 million, because I -- I mean, these are rough numbers, but generally yes, you've got the right concept, right?

Okay. So it starts to drip down, and then it's fair to look at it as if that kind of drips down sort of by that proportion as we go forward? René F. Jones: Yes, as loans pay off. So why I'm so cautious is the prepayments fees pick up the changes, right? If they slow down, it changes, and -- but that's generally what we have modeled to date as we sit here today.

Right. Okay. So it's not an incremental positive. It stays at this level for the next few quarters and then has a gradual roll over the next few years presuming that the book is prepaying as you kind of expect it. If in fact, it prepays faster, you can always redo the cash flows like you did this quarter? René F. Jones: Yes, exactly, and it's because -- you got it exactly, Ken. And the reason that, that's the case is because we're talking about cash, right? So as those loans prepay, then the next question as we through analysis is did it pay on loans -- did we get paid on loans that we thought were impaired, is a good thing. Obviously, we get paid on loans that we thought were clean, right? So there's a lot of moving parts that come into it, but you've got the concept for it.

Okay. And then my second question is if we just -- I heard your comments again about being able to hold up loan yields versus -- or the decline in loan yields would kind of track the ongoing decline and funding costs, again, for the next couple of quarters. I guess the question is how competitive is it on the loan side and then also how much room do you think you can continue to reduce deposit costs, again, in the out year in the next year couple -- next year or so. René F. Jones: You know we tried to be very diligent in saying that we've got a couple of basis points of compression almost every quarter, right? So I think that there that exists in my sense is, is that as we ran out on the liability side of repricing, which we know we're getting pretty close, so beyond the 2 quarters, I think that's the number that I would throw out there that we're going to see a couple of basis points of slowly [ph] margin compression. You've heard the earlier question Brian Klock raised is -- well then the question is can you refinance anything else in terms of hybrids and those types of things. We haven't thought about that. It's too far away to think of it.

So when I bring it all together, we'll have a natural decline in accretable, in the accretion benefit over time, and then there's this -- and unfortunately, with the rate environment, there'll just be a little bit of a drip on the core as well? René F. Jones: Yes, I think that's right. And the thing I keep in mind as you think about revisiting acquired loans, I mean, I was about to say earlier when I was on the wrong topic that if you look at our loan yield today 4.42, I think, they were, we're about 30, 40 basis points higher now on the acquired book. But I think the biggest book is Wilmington, and on the Wilmington-acquired loans, I think our yield is roughly 4.44. So again, we don't have a lot of replacement risk there, right, which is a real positive thing. And quite frankly, if there's any change in the rate environment, right, we probably can replace those at higher margins, higher yield end margin, right? For where you take in the funding cost side. So with no change, I think, you've described the state of affairs, which is basically no change in the rate environment, no change in anything, but we're always trying to position ourselves to make sure that we're okay in all rate environments, right?

Our next question comes from Steven Alexopoulos of JPMorgan.

Maybe I'll start -- is the C&I loan growth the sign that the loan pie increased in the second quarter? Or is the market share gains particularly given a relatively large transaction in your backyard? René F. Jones: The latter is true. We picked up a few more clients, but I think we've got -- the activity we see is a lot from our existing clients. I think the Upstate New York is a whole different thing, and that's where a lot of the growth came from. But in other markets, I'd say it's just a little more quiet out there. So again, it's not a big change. I mean, it feels a little stronger this quarter, but I would guess if you took away the Western New York parts of things that it wouldn't be. Don is pointing out to me that the usage in outstanding is up a little bit as well, right? So it seems like outside of Western New York is coming from more usage.

Okay. So despite even the macro backdrop, you're not seeing any signs yet of corporate borrowers getting more cautious? René F. Jones: They're still cautious as far as I'm concerned. Cash balances are really high, and they just haven't changed, right?

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

Got you. And maybe, René, where are we on the cost saves now with Wilmington? I know we have talked about $90 million to $100 million. Can you give us a sense what percentage is now in the run rate? René F. Jones: I'm going to guess and all -- everybody in the room is going to get queasy. I think it's around 16%. I think, we'll be around 20%. And I think you'll see in the second half, I can't -- really I think -- I think we'll see some benefit next quarter, but I'm sure we'll see benefit in the next 2 quarters from the conversions and things that we've done and actions we've taken and then maybe a little bit after that. But if I were to guess, I'd say, we're at 16% now, and by the end of the year, we'll be maybe not quite at 20% but pretty getting close or 18%, something like that. But turned out pretty well.

Got you. That's helpful. And I just want to clarify, in your comments about retaining mortgages, did you say you plan to still retain in the second half but to a lower degree and then go back to selling fixed rate production in 2013? René F. Jones: Yes. So what we did is we, starting in the month of June, maybe even in the second half of the month, we decided to discontinue retaining a number of the 30-year programs. So we might have -- in the second quarter, I think the number's probably like -- about 63% of our production in the second quarter that we put on the books was above 20-year. And now we're on pace for that number of 30-year to be -- to go below 50. 20 -- 20 plus to go below 50 because we're discontinuing programs. I think we'll continue to do that. So the longer stuff will slow down by the time we get to near the end of the year, beginning of next year. I -- my guess is that what we'll be doing is using more 15-year-type paper and maybe 20-year paper to sort of replace runoff, right? But we had -- we started the program, I don't know, a year ago or so. It's -- we've had more volume than we thought we would get, right? And as I said all along, we only have so much appetite there. We really don't want to totally change the profile of our book, and we really only did this in part because we weren't taking on investment securities. So that's what I think will taper it off a little bit as we go, moving -- focusing on duration first and then volume.

Our next question comes from Erika Penala of Bank of America Merrill Lynch.

I just wanted to ask Steve's expense question another way. So I feel like because mortgage banking revenues are so strong. There are some distortion in terms of the dollar number. I guess, could you give us a sense of what you expect the efficiency ratio on your mortgage banking unit to run for the rest of the year? And separately, your expectation for the efficiency ratio for the rest of the Bank x mortgage banking? René F. Jones: First of all, it's a great question. I don't know that I can answer the question because I would say whatever the efficiency ratio is of our book , which -- do we have it in the segment? I don't know if we have it in the segment either. It's just abnormally high today, right, because we've got a lot of volume coming on high margins, and you don't have the ability to ramp up your production enough, so it's abnormally high. So I think if you remove that or put it this way, what's happened really is we've got a nice benefit from mortgage banking, which will be somewhat short term. I don't know how long. But in the interim, we're going to have to really continue to focus on the expense side because of the core bank hasn't seen the full improvement yet that we need -- we probably need to see to sort of sustain a low to mid-50s efficiency ratio when the mortgage banking kind of subsides. But as you think about the Wilmington side, we're in pretty good position because we've got more expense savings that it will kind of flow in and the work is done. And the other thing, Erika, that I'd tell you is that in our expense space today is a fair amount of expense. I don't know how to characterize it. I don't want to say it's nonrecurring, but it's expenses related to gearing up for the new regulatory environment, whether it be consultants on -- that we use on capital policy or whether it be other expenses that we're using to sort of build out our new compliance structure and so forth, that over time, we'll settle down a bit. So even though you can kind of see when you look year-over-year -- and I think next quarter, you'll see year-over-year -- when you look, you'll be able to see the impact of Wilmington Trust. I think that there's still probably some room to at least to be able to sort of contain expense growth because our regulatory costs are high. One of the areas that's very high these days is professional services, right? And I think that's primarily because of all of the change that we're going through.

Got it. And just one last question. I know you've been asked the accretable question many ways in this call and I appreciate the color that you gave Ken. I'm just wondering did what happen in the quarter -- was that a reclassification from non-accretable to accretable, so the credit experience over the lifetime is better and that's why it's not a clipped [ph] vest? And if so, I guess clearly, the prepayment levels are going to be a big swing factor in terms of how much it drops off, but potentially if credit expectations continue to be better relative to the mark, you could just be refilling that accretable tank so to speak. René F. Jones: I think everything you said the way you said it was true. So let me go back through. So first of all, yes, it was. After looking at the cash flows, we reclassified -- and this will be in our Q -- about $140 million from non-accretable, i.e. cash flows that were owed to us that we didn't expect to collect, we now expect to collect and were moved to accretable yields, right? And then -- and that comes from 3 factors. One, we worked out some deals in a more favorable way than we thought. The environment seems a little bit better but also because prepays are faster. Those aren't -- usually, those are pretty consistent in a sense, right? And so I think the last part is you never know. It depends on what happens to the economic environment, and if we see the current trends continue or continue to be more favorable than we've projected from now, yes, we could have more. And I think the way to think about it, again, is I point to the yields. I think, we've been doing that since we did the Provident acquisition, That's the way to look at this. That yield on the Wilmington Trust is almost spot on our -- what we're originating loans at today, basically, our legacy loans book. So that tells you that unlike most acquisitions you've seen in the past, those yields have been at a -- the loans have been booked at a significant discount. In our case, to the extent that we continue to see improved results even beyond what we see today, yes, there could be more, but it's hard to tell, right? The other thing I would point out is that to the extent that we look at any particular loan in our book and it goes the other way where the cash flows are worse, then we take that charge immediately into the provision. And we've done that over time. We had some of that this quarter as well, right? So it kind of goes both ways. But the accounting forces you to be conservative on the positive side.

Our next question comes from Matt Burnell of Wells Fargo Securities.

René, a couple of quick ones I guess. How long -- you mentioned some benefit from the disruption in the Western New York market. I guess I'm curious as to how long you think that, that might provide an upside benefit to your loan growth. Is it a one quarter issue? Is it a 4 quarter issue? Is it -- how should we think about that? René F. Jones: I -- one, I really don't know. I only could assume that what's really happening is people are trying to settle in to the change that's happened in the marketplace, and that change is not just driven by the HSBC sale. It's driven by the physical conversions. You know that recently the names on the branches on -- another set of branches changed to KeyBank. And then if you go further to other places in Upstate New York, that's continuing to happen. So the best I could say is just through this year is people kind of settle in and try to figure out where they want to keep their lasting banking relationship.

Okay. And then a question on the provision. Given that you saw a 10% quarter-over-quarter decline in the NPA balances, it certainly sounds from the -- from your earlier comments that you're expecting credit quality to continue to get a little bit better, how should we think about the potential for reducing reserves over the next 2 to 3 quarters? Isn't that just driven by lower losses, lower delinquencies? Or is there something else that you're adding to your analysis that makes you a bit more cautious? René F. Jones: I think the first thing to look at is our -- the allowance to loans is coming down, right? So you see it there. So the inputs to the allowance are, yes, there's improving credit. I think in part that's somewhat offset by the loan -- what we need to add for the loan growth, so if loan growth subsided, that would be -- you might see something there. And the other piece is that as we look at the acquired loan book, while we have $140 million of cash flows that as Erica said, we moved from non-accretable to accretable, from time to time, we'll see credits that go the other way, right? That we'll have to add to the provision immediately. So those are the components. But if you look at it last year, this time, our allowance to loans was 155, we're down to 146, so it's a fairly -- I consider that a meaningful decline.

And just one final quick question. You mentioned HARP 2.0 was a bit of a benefit to the mortgage business this quarter. What amount of your total originations this quarter were related to HARP 2.0? René F. Jones: Yes. Let me look for that number. I don't know the number. 57, and just to make sure, I think, I believe that number. so it -- well, let me give you the numbers. I mean, that's probably easier. So we originated new locks, which were a total of $1.7 billion, okay? Only $864 million went to Treasury, okay? So take those out. So if you think about the gain on sale, you just take the $1.7 billion. Take out the $864 million, and you're left with the total. $492 million of that was HARP, and I think that gets you to a 57% of what we're selling, okay? We sell all the HARP.

Right. But in terms of total -- but in terms of HARP relative to the total originations, it would be the roughly $500 million divided by the roughly $1.7 billion, correct? René F. Jones: Yes, correct.

Your next question comes from Collyn Gilbert of Stifel, Nicolaus.

Just to -- want to follow up on that reserve question. So you've indicated obviously that's a fairly meaningful drop to date. But I guess I'm looking at it maybe a little bit differently. And I heard you on the moving parts in terms of the non-accretable component and swings in that. But I guess if I look at it -- I mean, at the peak of the crisis, you guys saw losses. I mean, your losses peaked at 1%, so in my mind, it seems as if your reserve could go quite a bit lower especially given where we are in the overall cycle, economic cycle than where you stand now. I mean or are you suggesting that kind of keeping in this 145 level is where you're going to be? René F. Jones: You always ask great questions. So first of all, I would characterize it differently. In a single year, we had 1% losses, right? And our job is to look at the losses inherent in our book that we can identify over time. And then to some extent, there's a portion that we might not be able to identify, right? So you can't use the 1-year loss estimate against the -- that process. I don't know, I guess if we continue to see the loan growth -- and I think there's going to be downward pressure on the allowance to loan levels. As we've seen, I don't see anything that's going to change it. I feel pretty good about the integrity of our process because the way I look at it, Collyn, is that the depth of the crisis, we had coverage of about 1.2% or something like -- actually, 1.5% of our charge-offs, 1.5x I should say, right? And so the idea that after the depths of a crisis, you're sitting there with a year's worth or a 1.5 years' worth of coverage, tells us that we did a pretty good job in our allowance methodology of identifying the risks that were inherent in the portfolio. I don't know how to think about it any different but...

Okay, okay. And then just on the resi Mortgage strategy, so when we think about kind of the funding of the growth at least for the back half of this year, is that going to come out of kind of your cash balances or your interest-bearing deposit balances? And then how should we think about the relationship between -- if we're not going to see growth in resi mortgages next year, does that mean we see -- start to see some growth on the MBS side? Or how are you thinking about it in totality? René F. Jones: Yes. Well, I think the way I look at it is -- first of all, straight answer, I think, we've been funding everything with deposits because deposit balances have been very high. As we look forward, I think that the underlying loan growth is not bad, right? I mean, look at the stats we gave you today. And then I think really we kind of hit our -- we're getting close to what we think is a natural limit on the amount of resi mortgages we have on hold. So I'm not sure that even if rates stay low, that we'll be able to sort of go -- jump in and start buying securities again. We'll have to look at that. I think to date, it's been a nice substitute, but I think we're just very cautious. We don't tend to put a lot of long duration on. I don't know, we're kind of nearing about $10 billion. We're getting closer to $10 billion in the resi books. And I just think the best way to think about it is we probably, for at least for now, maybe hitting our tolerance level. I don't know how to -- I think that's the best I could tell you.

No, that's helpful. That's helpful. Okay. And then just 2 quick items. The -- did you say or do you have the number what the seasonal tax items were in that trust line? René F. Jones: Oh, no, but it was about $3 million.

Okay, okay. And then the $14 million in accretable yield that you saw, how did that break up between C&I and CRE? René F. Jones: I think it's mostly CRE and because a lot of it's coming from Wilmington and actually Provident, right? I don't know the exact number but most of it is CRE.

Okay. And then the final question, did you say on the temporary trust deposits, was that - what was the dollar amount of those 2 that kind of inflowed in the quarter? René F. Jones: Absolute dollar amount was really high. The average was about just under $1 billion. But at one point, I think we peaked at like $4 billion during the quarter. Right. So you just got the -- but they were there for 30 days or something like that or so.

Your next question comes from Bob Ramsey of FBR.

You just mentioned that you guys are getting close to the natural limit on the amount of resi mortgages you want on your balance sheet. How do you think about that limit? I mean, is there a percent of assets, a percent of earning assets? Kind of what factors into that decision? And then what is the yield at the margin on mortgage production today versus MBS that you might purchase? René F. Jones: Yield on the margin -- well, I think I'll get that number for you, but somewhere in here, something like 380 was what we put on. Just give me a second. Let me find that. We put on -- well, I have to ask someone to find it for you, but I think it's somewhere in the high 3s in terms of -- yes, I'm looking at 360, somewhere around there. It's not too much change from where we were last quarter, so that's that. And then just give me the first part of your question again.

Well, in that 360, I guess, is on originated loans, how does that compare to mortgage-backed securities that you would be buying in the market? René F. Jones: We're not buying them. I don't know. We're not buying them, so they would -- I would guess, they'd be 50 basis points lower, but that's a guess. And to your other question on how we think about the natural limits, I mean, we look at a lot of things. We look at our asset sensitivity. We look at our duration and our exposure to any one class. We also think that about the profitability of those loans over long periods of time. And I don't know how to say it but I'd say that we're not reached any internal technical limit but we sort of [indiscernible] appetite today before putting it on pause, because remember for 20 or 30 years, we never retained mortgages, right? So we've moved the position of debt. I think we're going to probably sit on it after a while and sort of see how it feels and watch the risk metrics and then go from there.

Okay. And in the mortgage-backed securities portfolio, what is the CPR that you all are seeing on the portfolio you have today? René F. Jones: I don't know if someone has it, but I think we've -- it's been creeping up a bit. But the last quarter, maybe it was around 10%, not very high. And I think it might be in the low teens, maybe 12%, somewhere in that range. It's even at an annualized basis.

Yes, that's slow [ph]. That's good. René F. Jones: The new -- just so you know, the new 30-year MBS yields would be 250.

Okay. And then in the mortgage backed, what were the gain on sale margins this quarter? And do you think, looking at it next quarter, they'll be more or less stable? And sort of how does the pipeline today look versus last quarter? Obviously, as you said, you'll all be selling more of whatever production there is. René F. Jones: Yes, the gain on sale margins were relatively stable. We -- they move a little bit depending on the percentage that you have of HARP and the -- so in a sense, the actual number was higher because more of what we are actually selling is HARP, right? I don't know if I have the exact number. In total, the gain on sale, new losses, around 3%, right? And so that's definitely elevated because of HARP. I think, typically, we'd be lower 2s, maybe 2% if we were just talking about normal production.

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

So it sounds like volumes should be stronger, the percent that you sell should be stronger and the margin should be stable. Is that fair? René F. Jones: I mean, my guess it's a lot of moving parts in that business, but yes, I mean, I don't see a lot of things changing.

Great. Last question for you, the FDIC assessment expense was down pretty meaningfully this quarter. Any thoughts there? Is this quarter a good run rate? Or what drove the improvement? René F. Jones: It can be -- let me just say, asset mix and then we continue to try to think about ways in which we can change our behavior to make sure that we're optimizing that, and so our goal will be to focus on that number over time, whether it'd be on sort of looking at the amount of construction lending we've done or looking at how we -- making sure we're properly classifying loans and a whole host of other things. We look at it pretty closely. Again, I say it every time. We're the 90th percentile. That's not a good thing for us, so we're going to focus on that line.

Your final question comes from Gerard Cassidy of RBC.

Question for you is in terms of the improvement in credit quality that you've seen and what you expect to hopefully see in the next 6 to 12 months, is there any particular asset class that's improving better than expected or faster than expected? And geographically, are there any parts of the footprint that are performing better? René F. Jones: Yes, I mean, we saw improvements -- most of the improvement I would say is in the commercial real estate space. So a slight improvement in C&I, but one of the things you're seeing, Gerard, is that I think it has a lot to do with the low rate environment. I think it's also very much akin to what we talked about on the acquired book, which is that we're finding that we're able to either restructure or work out transactions more favorably than we might have thought. And part of that is because other lenders or the markets are actually willing to sort of step in at the prices that we've got, sort of the non-performing loans on our books at this point. And so we're seeing a lot of these things work out. I'm not sure if there's a real change in the inherent risk as much as there's a change in the market and appetite for actually taking on these assets that now have been written down at pretty heavy discounts, right, which on the flip side with the low rate environment, one of the places you can go to find yields is on these projects that were stalled and failed in the past that have been written down. So a lot of it is in the commercial real estate space. Also, prepayments being higher, when you look at our net interest income, when you look at the prepayments being higher, it's very consistent with that same theme.

And speaking of credit quality, can you give us an update on the Bayview impairment? Where is it now? And how is it looking at this point? René F. Jones: I think a basis on our balance sheet in Bayview is about 104, somewhere around 104, I guess. And then there's been no change. We don't -- we're not -- we don't have any great concern. I think that the Bayview Asset Management seems to be doing fairly well in this environment. And it's an environment where they have access to servicing portfolios, maybe without some of the burdens that some of the banks have. And they also have the ability to purchase assets and higher yields than you're getting out here in the low rate environment. So they seem to be doing very well and fine, no real change to anything there.

Okay. Final question on the funding side of the balance sheet, you may have touched on this and I apologize. In your CD book that you have, how does that reprice over the next 12 months? I think there's about $5.5 billion in that CD book that I think you just pointed out. It's about 90 basis points. That's what it's costing you. How does that reprice going forward over the next 12 to 18 months? René F. Jones: I look at the yields as I looked at them some time ago, but they seem to be down a couple of basis points in a very consistent flip [ph] every quarter. Let me just take a quick look at that again but...

There's no high rate -- so as you're looking for it, there's no real high rate falling down near that 3% or something that might reprice in the third [ph] quarter or anything? René F. Jones: No. No, there's not -- oh, go ahead, Don.

There are still some brokered CDs on the books from Wilmington, and there wasn't a lot of runoff this quarter, but there'll be a little more in the next 2 quarters.

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

Yes, but not outrageous. René F. Jones: Think about it this way, Gerard. You say Provident, right?

Wilmington. René F. Jones: Wilmington, Provident, so you mark those, right? So a year ago for one, I think some of them are Provident, so that's 3 years ago. So you can look maybe to the Provident to see there's something. But as someone just pointed out to me, I mean most of -- the majority of our time deposits are within inside a year, so I think you're going to continue to see the same sort of steady trend that you've seen over the last several quarters.

And one final question on this, on the funding cost, what environment -- considering that the Fed has pointed -- has stressed that this rate environment's going to stay this way through the end of '14 with the low end of the -- the short end of the curve close to 0 or at 0, and the long end of the curve currently is about 1.49%. Deposits for you and your peers are coming in quite strongly. What kind of environment do you need to see where the deposit costs actually go down to 5 or 10 basis points considering money market mutual funds today are paying one and 2 basis points? Do you guys -- can you envision an environment where the deposit costs for now accounts and savings accounts can fall to 2 or 3 basis points? René F. Jones: Never say never, but I hadn't really thought about it. I mean, even so, think about it this way. It doesn't give us that much boost. I think on now accounts we're at 7 basis points. In savings, we're at 18 basis points at the end of quarter. So I guess my answer is it seems like we're almost there now.

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

Again, thank you all for participating today. And as always, if clarification of any items on 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 call. You may now disconnect.