M&T Bank Corporation (MTB) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Lynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Don MacLeod, you may begin your conference.

Thank you, Lynn, and good morning. This is Don MacLeod. I’d like to thank everyone for participating in M&T's Third Quarter 2012 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules, from our website, www.mtb.com, and by clicking on the Investor Relations link. Also, before we start, I'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 made 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: Thanks, Don, and good morning, everyone. Thank you for joining us on the call today. The third quarter was a busy one for us, including our announcement of the acquisition of Hudson City Bancorp near the end of August, as well as M&T's final exit from the TARP program through the U.S. Treasury's sales of its investment in M&T through a public offering. As we noted in the press release, this year's third quarter financial results reflect good progress from across most of our core banking businesses, as well as a very favorable mortgage banking environment. I'll begin by reviewing some of the highlights, after which, Don and I will take your questions. Turning to the specific numbers, diluted GAAP earnings per common share were $2.17 in the third quarter of 2012, up 27% from $1.71 earned in this year's second quarter and up 64% from the $1.32 earned in the third quarter of 2011. Net income for the third quarter was $293 million, up 26% from $233 million in the linked quarter, and up 60% from $183 million in last year's third quarter. Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisition activity. There were no merger-related expenses in the recent quarter's results. However, M&T's results for the second quarter of 2012 included related -- merger-related expenses of $4 million after tax or $0.03 per common share related to the Wilmington Trust merger. GAAP earnings in last year's third quarter included $16 million of after-tax merger-related expenses or $13 per share also related to the Wilmington deal. After-tax expenses from the amortization of intangible assets was $9 million or $0.07 per common share in the recent quarter, down from $10 million or $0.08 per share in this year's second quarter. After-tax amortization expense was $11 million or $0.08 per common share in last year's third quarter. M&T's net operating income for the third quarter of 2012, which as noted, excludes the merger-related expenses and the intangible amortization, was $302 million, up 22% from -- up 22% from $247 million in the linked quarter and up 44% from $210 million in last year's third quarter. Diluted net operating earnings per common share were $2.24 for the recent quarter, up 23% from $1.82 in the linked quarter and up 46% from $1.53 in the year-ago quarter. Net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders' equity was 1.56% and 21.53%, respectively, for the recent quarter, improved from 1.30% and 18.54% in the second quarter of 2012. As usual, in accordance with SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $669 million in the third quarter of 2012, up $14 million from $655 million in the prior quarter. The net interest margin expanded during the third quarter, increasing to 3.77%, up from 3.74% in the second quarter. Major items impacting the comparison in the linked quarter were as follows: An estimated 5 basis points of the improvement is attributable to a lower level of excess liquidity held at the Federal Reserve. Average funds on deposits with the Fed declined to $151 million in the third quarter, down from $1.17 billion in the recent quarter. One additional day in the third quarter as compared with the second quarter reduced the margin by about 1 basis point. And what I would characterize as core margin compression was about 1 basis point as lower yields on loans were largely offset by the benefit from a lower level of long-term borrowings, which were placed by low-cost core deposits. This is consistent with our expectation of in and around 2 basis points of continued underlying margin compression per quarter. Interest income recorded on acquired loans was little change from the amount in the linked quarter. I'll discuss our outlook for the margin towards the end of my comments. As for the balance sheet, average loan growth for the third quarter continued to be relatively strong, increasing by approximately $1.6 billion to $63.5 billion or an annualized 10% growth as compared with the prior quarter. On that same basis, compared with 2012 second quarter, changes in average loans by category were as follows: Commercial & industrial loans grew by $400 million or an annualized 10%. This included a seasonal decline in auto floor plan loans of about 5% annualized, which was more than offset by 12% annualized growth in other C&I categories. Commercial real estate loans grew by $257 million or an annualized 4% growth. Residential real estate loans were up by about $1.1 billion, reflecting the tail end of our program to retain conforming mortgage loan originations to hold on, on our balance sheet. We resumed our normal policy of selling the bulk of our conforming loan production at the beginning of September. Consumer loans declined an annualized 4%, reflecting the same factors we've been discussing for some time now, our reduced appetite for Indirect Auto loans given the low absolute returns associated with them and our customers' reduced appetite for home equity loan. On an end-of-period basis, loans grew by $1.3 billion or an annualized 8% compared to the linked quarter. Included in this figure was $7 million of annualized growth in C&I loans and the $1 billion increase in loans retained for -- in mortgage loans retained for investment. Average investment securities continue to decline as our appetite for purchasing securities remains very low based on extremely modest yields that are available. Average core customer deposits, which exclude foreign deposits and CDs over 250, were up an annualized 9% as compared with the linked quarter. The Upstate and Western New York region continues to benefit from the disruptions to customers and businesses impacted by the HSBC branch divestiture. Average loans in that region were up an annualized 14% compared to the linked quarter. Average commercial & industrial loans in that region were up by $291 million. And average CRE loans were up by $114 million. And while modest at 2% annualized growth, Upstate and Western New York was the only region with consumer loan growth. Average core deposit growth in Upstate New York region slowed to an annualized 5% compared with the linked quarter. And then core deposits -- sorry, average core deposit growth was an annualized 5% growth compared to linked quarter, and core deposits are up 13% compared to last year's third quarter. Turning to net interest -- noninterest income, noninterest income totaled $446 million in the quarter compared with $392 million in the prior quarter. The recent quarter's results included $5 million of securities losses including other than temporary impairment charges related to our investment securities portfolio, down from $17 million in the linked quarter. Excluding those losses from both periods, noninterest income was $451 million for the recent quarter, up 10% from $408 million in the second quarter. Mortgage banking revenues rose by $37 million to $107 million in the recent quarter compared with $70 million in the prior quarter. Residential mortgage loans locked for sales to third parties more than doubled from $856 million in the second quarter to $1.8 billion in the third quarter. Commercial mortgage loan activity also remained strong. Fee income from deposit services provided was $114 million during the recent quarter compared to $111 million in the linked quarter. Trust revenues were $116 million in the recent quarter compared with $122 million in the prior quarter. Recall that last quarter's results benefited from seasonal tax preparation fees of about $4 million. In addition to the decline in the seasonal tax-related fees, fees from managing our proprietary funds declined by about $1 million as a result of the rate environment. The remainder of the decline related to the timing of receivables. So looking back over the past year, we're pleased to note that trust and investment fees increased by 2% from last year's third quarter, reflecting our ability to retain customers throughout the integration of the 2 institutions. Turning to expenses, operating expenses, which excluded merger-related expenses and amortization of intangible assets, were $602 million for the third quarter, down from $604 million in the second quarter and $619 million in last year's third quarter. Included in the operating expenses for the third quarter was a $3 million addition to the valuation allowance for capitalized mortgage servicing rights and the efficiency ratio, which excludes securities, gains and losses, as well as intangible amortization, and the merger-related gains and expenses was 53.7% for the third quarter compared with 56.9% in the second quarter of 2012. While I would note that expenses were very well controlled during the recent quarter, the strong revenue growth trends were also a factor in the improvement in the efficiency ratio. Let's turn to credit. Credit continues to improve. Nonaccrual loans decreased to 1.44% of total loans at the end of the third quarter, down from 1.54% of total loans at the end of the previous quarter. Other non-performing assets consisting of assets taken into foreclosure of defaulted loans were $112 million as of September 30, also down from $116 million as of June 30. Net charge-offs for the third quarter were $42 million, down from $52 million in the second quarter of 2012. Annualized net charge-offs as a percentage of total loans were 26 basis points compared with 34 basis points in the linked quarter. This figure averaged 31 basis points for the first 9 months of 2012. The Provision for Credit Losses was $46 million in the third quarter compared with $60 million in the linked quarter, and the provision exceeded charge-offs, and as a result, the allowance for credit losses increased to $921 million at the end of the third quarter, reflecting continued growth in the loan portfolio. While the dollar amount of loan loss allowance increased, the ratio of allowance to credit losses to loans declined -- for credit losses to loans declined slightly to 1.44% compared to 1.46% at the end of the linked quarter. Total loan-loss allowance as of September 30 was 5.5x annualized net charge-offs for the quarter. We disclosed loans past due 90 days but still accruing separately from nonaccrual loans because they're deemed to be well secured and in the process of collection, which is to say that there is a low risk of principal loss. Loans 90 days past due were $309 million at the end of the recent quarter. Of these, $280 million or 91% are guaranteed by government-related entities. Loans 90 days past due were $275 million at the end of this year's second quarter, of which 93% were guaranteed by government-related entities. M&T's estimated Tier 1 common capital ratio improved to 7.47% at the end of September, up from 7.15% at the end of June. This reflects higher capital from retained earnings, partially offset by the larger end-of-quarter balance sheet. Lastly, I'd like to offer a few thoughts on our general outlook. We expect the net interest margin to be fairly stable over the remainder of 2012, with the caveat that new inflows of temporary trust deposits could diminish the reported margin but not the net interest income. The September year-to-date net interest margin of 3.73% is the same as we reported for the full year of 2011. We continue to believe the figure for the full year of 2012 will be comparable. That said, we continue to expect in and around 2 basis points of underlying core margin compression as we move forward. We'd expect to offer our outlook on the margin for 2013 on the January earnings call. Beyond mortgage banking, our lending pipeline remains healthy. That said, anecdotal evidence from customers is indicating that there may be some softening of demand as they await clarity regarding the election, as well as tax and fiscal policy. And it's difficult to offer an outlook on mortgage banking with any certainty. With rates where they are, we believe there will continue to be fairly healthy demand for refinancings for the next quarter or 2. As I noted earlier, we've begun selling the bulk of our conforming mortgage loan production again rather than to retain them for investment, which should support mortgage banking revenues in the fourth quarter. We were pleased to see further improvement of our efficiency ratio, part of which was due to strong revenues. We have achieved the bulk of our expected expense savings from the Wilmington Trust merger, with the possibility for some additional lingering benefits over the near-term. Our outlook for credit is unchanged. We expect continued improvement in nonaccrual and criticized loan portfolios, with charge-offs remaining relatively stable. Lastly, we continue to move forward with the Hudson City acquisition. The regulatory applications have been filed with the Fed and the New York State Banking regulators. And you probably saw the draft of our S-4 registration statement and merger proxy were filed on Monday. We continue to expect the closing of the merger in the second quarter. That said, we're still very early in the process and we will keep you informed as we progress. Of course, all of these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future. I appreciate your patience this morning. We'll now open up the call to questions, before which, Lynn will briefly review the instructions.

[Operator Instructions] Your first question comes from the line of Erika Penala with Bank of America.

I apologize, René, if I missed this in your prepared remarks, but could you give us a sense if in that mortgage banking number, if there were any unusually large MSR hedge gains? René F. Jones: No. No, no, because we don't hedge our MSRs actually.

Okay. So it's 100% production, I guess, is the best way to think about it. And in terms of the -- you mentioned that the origination level doubled in the resi mortgage. That had nothing to do with you choosing to sell off more of your production because you mentioned that, that happened late in September. That was all just volume? René F. Jones: No. So let me kind of give you those numbers again, and I'll give you some clarity there. So we did -- we locked $856 million in the second quarter, and it was $1.8 billion in the third quarter. Of that, there was about $500 million of that increase came from our decision right around the beginning of September to lock those for sale instead of our portfolio. So you'd still have a pretty big gain, but there's about $500 million worth of mortgages that we've kind of flipped and are planning to sell. So that gave you a bit of a boost. So when you look at the $37 million increase on a linked-quarter basis, I would guess that, my rough estimate is that $15 million sort of came from that -- $15 million of the $37 million came from that decision. And we still had -- I think we still locked maybe $350 million in the quarter for our portfolio, which, next quarter, we would not do.

Got it. And with regard to the cash balance levels, is this a more normal rate of cash balances for you going forward? Meaning, we don't expect any fluctuations higher even if those trust deposits are coming in, in the fourth quarter? René F. Jones: No. Actually, you don't -- it's -- you can expect continued fluctuation because of the nature of the business, which really came to us with Wilmington Trust. And the swings can be fairly large, but the earnings rate on those amounts are pretty low. So if I were -- my personal model, I tend to take a look at those and put a very, very, very low earnings rate on them because they move the printed margin but they really don't do much to the net interest income. So if you missed that, it can be a little confusing sometimes. But that'll continue to fluctuate. It's very hard to predict because as we get business related to our trustee work around securitizations and those types of things, oftentimes, we get paid in balances as opposed to fees. And that trend is relatively high, I guess, based on -- relative to past experience, so...

Your next question comes from the line of Bob Ramsey with FBR.

Just a follow-up on Erika's question about mortgage banking. So you said you all locked $1.8 billion in the third quarter and that without the portfolio activity, it could have been $350 million more. Based on your pipelines headed into the fourth quarter, is your expectation that you could do over $2 billion of volume? Or is there any shift in pipelines that gives you a different sense? René F. Jones: Well, we have what we call our mortgage pipeline, which is all the applications that we receive during the quarter minus anything that's been withdrawn or anything that's actually already closed, and that's still on an uptick. So in the first quarter, it was $1.4 billion; in the second quarter, it was $1.8 billion; and at the end of the third quarter, it was $1.3 billion -- sorry, $2.3 billion. So it still has a bit of an upward trend associated with it.

Okay. So it looks like you'll be doing more volume and selling even more of that volume in the last quarter. And is your expectation that margins will be relatively consistent third quarter to fourth, or any view there? René F. Jones: I think when you normalize for the amount, like it took a while for the HARP programs to kind of catch up and normalize at their levels so you saw margins rising, but I think that's probably right that until that program dissipates over time, I think you'll see the margins just kind of remain where they were, I would guess. So I don't think the fourth quarter's really all that hard to predict. I think the bigger question is, how long does this last? And then we're kind of thinking about it as, at the end of the day, it allows us to build our capital. But we're not thinking that this trend can continue forever.

Okay. That's helpful. And then on the resi loan front, I guess I was a little surprised by the amount of growth. I thought you all had scaled back the portfolio and activity earlier in the quarter than it sounds like you did. But given that you have made those changes in September, would your expectation be that from this level, that both securities and resi mortgages, that you don't see a lot of growth in either of those portfolios? René F. Jones: Again, the accounting has some effects that can get you a little confused, right? So the $1.1 billion that you saw this quarter was all -- were loans that we locked in the second quarter. So that means that the amounts, the $350 million or so that we originated for our portfolio in the third quarter still has yet to roll on and that will come in the fourth quarter. So you should still see some growth, nothing like the same size that you saw this quarter, but it takes about, in a normal time, it's about 45 days to go from lock to close. And with the pipeline so full, we've expanded our capacity sort of as much as we can, but that 45 days might be a little longer. Maybe it's 60 days, right? So I think you'll see it continue to rise a little bit in the fourth quarter and then, I would guess, it should level off. Okay?

Making that offer is, even on a normal basis, there's a certain amount of nonconforming that we originate and contain, prime jumbos, bi-weeklies and that sort of thing. And that's, typically, a couple hundred million a quarter. René F. Jones: Which sort of serves to sustain the portfolio. It maybe compensates for normal runoff.

Okay. Great. And then the last question, I'll hop out here. You mentioned that the Wilmington cost saves are largely in the numbers at this point or there could be some lingering near-term benefits, I think you said. Could you just talk a little bit about what some of those opportunities might be or how material they could be? René F. Jones: Yes. Think about it this way, we just -- last quarter, I guess, just completed our integration. So some of the remaining impacts of that, you're yet to sort of see. So I think near term, I wouldn't be surprised to see expenses controlled, maybe even slightly down. But then longer term, even though there will still be some benefit that lingers into the next year, as we begin to think about 2013, one of the things that we're thinking about is sort of our investments, our investments in technology. Obviously, our investments in the network associated with the pending deal with Hudson. So my sense is, is that I feel pretty good about '13, meaning that some of that lingering benefit will help us to pay for investment. It means our expenses will likely be relatively controlled in 2013, but not necessarily down, right? So we're beginning to think about it. I'll talk more about it in January, but that's sort of kind of my thinking today.

Your next question comes from the line of Ken Usdin with Jefferies.

I was wondering, René, if you can talk a little bit about that preparation for ACBK [ph] a little bit more. And as that balance sheet comes on, you gave us some color when the deal was announced about the expected, kind of longer-term shrinkage of that portfolio. I guess any updated thoughts with regards to how the M&T balance sheet will change in advance of closing and then any differences in terms of how you're seeing the runoff or anticipating the runoff of the Hudson City book to be either better or worse, especially given what we've seen in rates recently? René F. Jones: Yes. In short, as of now it's really early, but there's no change in what we're thinking about. And as we begin to kind of go through our normal M&T stuff, I think as you look out, some of the questions are difficult to answer about the size of the balance sheet. But I think the thing to think about is we tend to focus less on balances and more on profitability. So for example, we get questions about will you continue the jumbo program, and the answer is yes. Would we do it differently? I don't know. I mean it really depends on the profitability. We're going to focus on using equity in the best way. So I think it's hard to kind of comment on size, but I think we're probably same places we were when we did the announcement just a month or so ago. In terms of preparation on the people side, I think everybody's had their introductions to date. We've already begun our process of looking at the M&T folks who might want to spend some time in New Jersey and we've been out there recruiting. So it's nice to have a little lead time in anticipation of the sort of big distance between now and our anticipated second quarter close. So everything is going well, it's just not a lot of new stuff to really talk about. And of course, as time passes, that'll change, obviously.

Yes. Okay. My second question, René, just about the trust income of business. I know, again, this gets asked every quarter about the different machinations on how the business works from a revenue perspective, but there were some benefits last quarter as well. Can you just talk about just some of the subcomponents within trust income, how they acted this quarter? And are you anticipating growth from here? René F. Jones: Yes. I would say -- I mean, let's do it this way. Let's -- let me just give you an advertisement first. So I'm really kind of pleased, a bit relieved in the sense that a year has gone by and we were able to get through what arguably is a pretty complex integration, merging mutual funds, getting people introduced to each other, and then getting the 2 sales forces to work together. And when you look year-over-year, we had 2% growth in trust fees. So we got the institutions combined by the third quarter of last year, we've now had 2% growth. What we've seen on the wealth side of the equation is that the couple years leading up to, and then last year, we had probably about as much new -- about as much runoff in business as we had new business. In the first 9 months of this year, that's crossed over, and we've had more new business and -- than we've had runoff. And quite frankly, the runoff has slowed from what Wilmington experienced the last couple of years. The stories are very good, meaning that we have a number of cases where we had pre-existing M&T clients that were more interested in doing business with us, both on the wealth side, or that felt that they were more inclined to do business with us simply because we had that wealth capability. But there's work to do. It's a little clunky internally and we've got our reporting and our process to get going, and I think that's probably understandable given that whether you're directly involved in the integration or not, some way, shape or form, whether you're explaining the integration to your customers or being directly involved, everybody's a little bit distracted over the course of the year to try to make all that work. So I think we're off to a good start. The growth -- my anecdotal estimate is that more of the growth that we got came from the CCS business, which has been, as I've mentioned several times, relatively diverse. And so that has been still robust and strong, and I'd say more of the growth, the 2% growth, is probably coming from that side of the shop. But that's what we know, more to come.

Okay, great. And last quick thing is just the losses in OCI and the losses in equity in Bayview, any better sight just given where we've come in the environment and spreads and credit improvement on when we might start to see those 2 areas finally start to tail off? René F. Jones: Sure, sure, Ken. So a couple things. I think if I go to our core non-agency portfolio, that's about $500 million now, it's down to about $500 million, we saw early stage delinquencies on that portfolio come down in August. And so that tends to bode well for what we might see in our securities book, in our private-label mortgage-backed securities book, we'll have to see. Despite the stabling of housing prices over the last quarter or so, we've always kind of maintained a down assumption and are kind of as we look out today, we're thinking that maybe over the next year, there's a slight upward trajectory in housing prices. And that's part of the reason why you've seen the change in the size of that OTTI. So I think it depends heavily on housing prices, and it depends if we were to get a lag effect, which was a positive effect on consumers and consumer delinquencies, then that would bode pretty well for that securities book. If it were to go the other way, it would change, but slightly more positive there. And then no big change in Bayview other than the same underlying -- any underlying credit costs seem to be very stabilized. And on the asset management front, they seem to have more opportunities than not because they've been producing very strong returns. Obviously, absolute returns, but also relative to what you can get out there in the market today with low rates. So things seem to be good on those fronts.

Your next question comes from the line of Matt Burnell with Wells Fargo Securities.

You mentioned that you're continuing to see opportunities in Upstate New York and referenced some growth rates that were above the growth rate of the overall company. How much longer do you think that benefit can continue to help you in terms of your C&I loan growth and customer retention? René F. Jones: Yes, it's a good question. Well, I think the best way for me to do this is we've been talking about the growth for a number of quarters and the opportunities, and I think a lot of my comments have been much more about the opportunities and what we're seeing as we see customers join M&T. And now, what you've seen is you've actually seen those customers roll on and begin to get funded and so forth. So you kind of -- you're seeing the result of the work we've done over the course of the year now. I don't know. I mean I think, obviously, again, it can't last forever, but the trend is sort of at a high point today. We're still hearing very positive things particularly in our business banking area, also, you noted on the consumer side. So maybe a couple more quarters, I would hope.

And just a follow-up on the trust customer defection comment that you made earlier. Could you remind us what your expectations were for the trust customer defections when you went into the Wilmington Trust acquisition and sort of where they've ended up being? René F. Jones: Yes. I mean I don't think I can do that in terms of numbers, but I can tell you we were nervous because we never had done an acquisition or a merger where that type of business was engaged. And I'd say out of the gate, we were relatively pleased with the lack of any significant defection, big-name defection. But where we began to get an understanding was that as we looked back with the help of the Wilmington and their -- the Wilmington folks as to what happened when they went through their very difficult time on the commercial real estate side, their defections had jumped up, say 2 years ago, 2, 3 years ago, and then again, they were up again going into 2011. And the only thing that was different about 2011, particularly the second half, is that the M&T customers began to get engaged. So I don't think there was much of a -- we didn't see any increase in trends of runoff from when we joined versus before. But I would guess anecdotally, we would've anticipated that there would be some. My sense is I'd have been happy if we were only down a bit in trust income year-over-year, right? If you think about in terms of trying to protect that revenue base and that customer base, yes, we were up. So that's the best I can do for you.

Sure. And then just finally, your commercial loan yields were pretty stable, actually up a basis point quarter-over-quarter. How much pressure are you seeing in the structure on the C&I lending? We've heard anecdotally from a number -- from several other banks that their -- that customers are now looking to extend the maturities on their commercial lending. And I guess I'm just curious as to how you feel about that and if you've seen any pressure in that regard. René F. Jones: No big thing. In some cases, yesterday, I got an e-mail about something in Upstate New York where that was exactly the case, somewhat aggressive pricing and looking to extend maturities. But that is sort of the first I had heard about it from others. I know down in Maryland where our loan growth has been a little bit slower, particularly on the commercial real estate side, the life companies have sort of come back into play, along with the conduits actually slowly coming back into play as an alternative. And that puts a little bit of pressure on pricing and therefore, for us, volume. And then Pennsylvania, anecdotally, it's just that slow, steady improvement in the economy. And from time to time, you hear a lot about the smaller institutions being aggressive. This quarter, I really didn't give a lot of commentary about that. So when I look at our book, I have got a -- we've got a very robust thing here that we can see all of the amounts that we originated and what the margins are. Our margins have been up slightly each quarter, very slightly, and returns have held out pretty well. So overall, while I would expect the competition to be very aggressive, it hasn't been too bad relative to what we've seen in the past.

Your next question comes from the line of Todd Hagerman with Sterne Agee.

René, just quickly, one of the things we don't talk about too often is the purchase accounting and the effect on spread and margin. Obviously, there's been a couple of companies this quarter that have taken a pretty big hit with some of their underlying assumptions there. Just kind of remind us or kind of speak to how we should think about that on a go-forward basis. Just obviously, there's some timing differences relative to when you got Wilmington and so forth, but just kind of think of how you guys are thinking about that or how we should think about that kind of going forward, if whether you've made any changes recently or what the outlook is there. René F. Jones: No. So remember, so for us, we've treated the acquired loans, non-impaired and purchase impaired the same way. So today, I think you saw in our MD&A, we put a table in there which showed that the difference between -- on the acquired portfolio, the difference between what the customers' code M&T and what the carrying balance was is about $506 million. Versus the old days, it's funny accounting because the $506 million is basically not on your balance sheet, right? So when we look at this quarter, there's been no real change, I mean minimal, if any. I think last quarter, we had $90 million of benefit to total market from acquired loans, and that didn't change much at all. But as we kind of go forward, the way the accounting works now is that in essence, improvement in credit, to some extent, could come in and support your margin in the future if rates were to remain low, prices for -- or particularly with Wilmington, prices for land and commercial real estate, the construction projects were to sort of revive itself, you wouldn't see that come back and through the credit; you'd see it come through the margin. So what we do is we just look every quarter, we look at the entire book. We run -- look at the cash flow estimates that we have over the life of those loans. We run some screens to see if things are improving or getting worse or what it is. And then from time to time, meaning quarterly, if we were to think things are getting better with those cash flows or being able to collect some of that $506 million, which I think is about $470-million-something this quarter, you'd see that benefit into the margin. But there's no way to really kind of predict it, right? Because as of today, we think what we're basically saying is that we don't think the $477 million or $470 million is collectible. That's how it works.

Right. Yes. And then just as a follow-up to that, have you -- in terms of your initial assumption, in terms of the estimated life of those loans, has that changed at all? When you made ... René F. Jones: We don't change it from when we originally do the mark, but obviously, time is going by, right? So on that Provident transaction, it was in '09. So those portfolios are getting smaller. But we've not made any change in life estimates on the book.

Okay. And then just switching gears, just quickly on the reserve and credit, obviously, credit quality is pretty exceptional at the company. Historically, you guys have been pretty conservative as it relates to both your reserve coverage, as well as very modest reserve releases. How should we kind of think about that at this point given where credit quality is and going into the Hudson City, we're going to have a pretty significant mixed shift, and again, you kind of start at square one with the purchase accounting, and then you've got the repopulation effect. I'm just wondering basically how low could this -- could your coverage go effectively? René F. Jones: I love that question. I don't have a clue to the answer, especially when it comes to Hudson City. But let me start by -- look, our allowance ratio is coming down. I think that's a sign that our charge-offs have been improving at 1.44%. For the first time in a long time, our allowance ratio is actually the same, 1.44%, as our non-performing ratio, right? So it's 1:1. I think that my personal view is that more so than any big change in the inherent loss at our portfolio is the effect that delinquencies overall in the United States on real estate and delinquencies specifically on residential mortgages are really, really high. Still, if you go back -- we did a chart the other day that went back to the first quarter of 1985, they were very high. Why you're seeing improvement is because of the underlying rate environment, which is really being stimulated by the Fed and the policies. So we believe there really hasn't been a big change in the inherent risk in the portfolios, but there's been this sort of environmental factor with rates that's actually helped us be able to sort of move some of our non-performing loans and for some of the performance on real estate to actually improve a bit. So we still see -- we remain cautious as we kind of look at the underlying portfolio, but obviously, things are pretty stable. When it comes to Hudson City, the accounting rules are still relatively new, so we're going through to make sure we understand exactly how we'll treat those loans. These loans, loans at a discount versus a premium, may be different. So we're working through that, and it's hard for me to tell you right now what we'll do, but obviously, we'll try to be as clear as we possibly can regarding what we do there. But it's a little early for us to kind of give you clarity on that.

Your next question comes from the line of Gerard Cassidy with RBC.

René, can you tell us the loans, the mortgages that you put into the residential mortgage portfolio, what type of resi mortgages are those? Are they the 15- and 30-year fixed? Or are they adjustable? René F. Jones: This -- there was a mix of 15, 20 and 30. I don't know if I have the history of what we put on. We were, starting last quarter, we started moving. And so what you saw come on this quarter, we started moving much closer to the 15-year space, and we were going to -- our anticipation was to keep moving more and more in that direction. But then of course, we stopped on September 1 simply because we were about to inherit a lot more mortgages from Hudson City. Don, do you know the fixed, the variable split of what we put on, for example, this quarter? I don't -- Gerard, I'll have to get back to you on that. But I think it's mostly fixed because at the end of the day, we were trying to close down our -- some of our -- or slow down our asset sensitivity. So we didn't have a big demand for variable rate mortgages.

Sure. The other question, and you guys obviously do a very good job on managing your expenses as it showed this quarter, and I'm curious, you had such a great quarter in the mortgage revenue area, mortgage reduction. How do you compensate your originators? Because if it was a big variable comp, I would've thought you would -- I think salaries and compensation went down in the quarter. How do you guys compensate those folks? René F. Jones: It's industry-standard. I mean, well, it hasn't changed over time. They get a percentage on based on what they originate, and they do much better in environments like this than they do when things are -- when rates are going up. But I think what you're seeing is, I'll be just very frank, I mean our expense savings underlying for the core bank and for Wilmington and the combined bank has been very, very strong. So you did see we do have higher mortgage banking expenses in that number. Those costs are mostly variable. One thing that offsets it in the salary line is that your capital -- you're using SAS 91 to capitalize your salary costs, right? So the more that you originate, the more of your salaries that you defer over towards the life of the loan. So that's another thing that sort of dampens the effect there. But cash expenses are higher.

Sure. And then could you also give us a little further color on the auto? You guys have been doing the business for quite some time and you already identified that the returns really aren't as good as you'd like in that business, which is affecting the balances of consumer loans. Are you seeing underwriting standards that really are starting to make you nervous, or is it just purely rate? You just don't like the rates? René F. Jones: I mean, I guess I'll answer it this way, we could get a lot more volume at acceptable returns if we took a lot more risk. But is that -- I don't know if there's been a change in the industry. I would guess not. I would guess that most people are -- most of our competitors or people offering this service in the banking industry are focused on the same group of very highly creditworthy customers. That doesn't bode well for everybody in the U.S. to sort of share in the benefit of low rates. But having said that, that's what probably puts most of the pressure on us, is that we're kind of -- we remain in a relatively high quality space there. But I don't think there's been any real structural change other than rate.

Okay. And do your guys who are on the front lines come back and tell you folks that, boy, we're seeing more competitors now in this space of PNC or a Huntington, names that may have not have been as competitive 5 years ago or 4 years ago? René F. Jones: I think that's just generally true, more or less, Gerard, it's kind of funny. Our guys have been around here a long time. And so it tends to be stories about how, well, these guys are back in again, and so-and-so left again, right? I mean because one of the strengths of M&T in this business is that whether things are good or things are bad, we've never left, right? So we maintain our focus. And I think at times when people have started to get out of the business, that's when we've been able to take share and we've done very well in the business. Right now, it's just the sort of the opposite side of the cycle. Gerard, just back to your other question, if we did $800 million of locks, $700 million were fixed.

Okay, good. And finally, and this might be more of a Board of Directors question, but in your history in the last 20 or so years, 30 years, you split the stock a couple of times. We've all seen the studies done by folks that look at stock splits and dividend increases generally being positive for stock prices over a long period of time. Is that -- would that come up in discussion, do you think, at the board level if the stock breaks through $100 a share and moves possibly higher? René F. Jones: My guess would be, I doubt it. I mean, we're-- I'm not a board member, but we tend to focus heavily on economics. And unless someone could show us some value that's created for each of our shareholders in the form of cash, I doubt that we'd focus on those types of things. We have so much on our plate to do that I think those issues probably will go way to the back burner. But I thank you for that question because it's a long -- the first time we've gotten that question in a very, very long time.

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

So most of my questions have been answered, but just, I know you mentioned that it's hard for you to sort of predict growth and overall size of balance sheet post Hudson City, but I guess, and maybe this is just a question for you to remind us what your strategy was, how you guys laid it out when you announced the deal. But so if I look back and you guys generally have managed or maintained between securities and residential mortgages as a percent of running assets, that 23% or 25% range, and then obviously, post Hudson City, that shoots up to 40%. And I know you're thinking about profitability and thinking about the jumbo business, but just knowing all that you know now, knowing the way you guys have run the bank for the last 20 years, where do you think you could manage that level down to? René F. Jones: A couple of things. Let's just start with where we are today. So I don't know that anything has really changed in our appetite for discretionary assets. So if I look internally through the first 9 months at our plans, we are about $1.7 billion over in residential mortgages than what we thought when we built our plan. We're $1.7 billion under in securities, right? So we kind of look at those fungibles. So I would always look at the existing book right now as the difference between the -- I'd add resis and securities. And you'd see that some of that change is just muted because of substitution. Then as we go forward, we did say we'd open up with the balance sheet, I think, at $27 billion of resi mortgages. And that, over the course, maybe 18 months later, that would be somewhere tapered down into the low 20s. I think our -- remember, at the time you're getting familiar with an institution, what you're trying to do there is manage mostly risk, right? And then you've got to kind of get in and get comfortable with it. There's a portion of that business that I would guess also will serve to be -- to flip over to originate and sell like we do today. But there's also a couple of new -- or a couple of products that are probably -- that are new to M&T but that are very, very appropriate for that footprint around the jumbo mortgages, right? And our intention is to continue those businesses and to spend our time trying to understand the profitability, and the profitability of those will dictate the size. So I don't take away my comments that we'll-- 18 months after the acquisition, we'll have some $20 billion and more in resi mortgages. I don't know that I would treat all those as discretionary assets. We'll have to kind of think about how that mix breaks out, right? But that's how we think about it. And if it changes, we'll tell you, but we're learning.

Okay. Okay, that's helpful. And just what was the amortization speed of your own residential mortgage portfolio this quarter? René F. Jones: It's been rising and it kind of moved up pretty quickly, past 15%. I don't remember exactly what the number was, but it was -- it moved past 15% this quarter, I believe. So maybe in the high teens.

Okay. So that's way -- I mean, because I think Hudson City's was running at like 27 or something. So it's... René F. Jones: Yes, I think it was 22, 20, yes.

Okay. So you're lower than Hudson, okay, okay. And then just on the -- and I think I can probably infer from your comment, but when you were talking about Wilmington Trust and trust revenues up 2% year-over-year and kind of giving your ad or whatever you said it was, did that 2% that you guys posted, is that better than what you expected, in line with what you expected or a little bit light, having gone in when you first went into the budgetary process? René F. Jones: My guess is it was better than I expected, less than the Wilmington Trust team expected. I mean they were pretty optimistic, they're still very optimistic, and doing deals, you know that things don't always go really smoothly. Things have just gone better than average, so it's better than I expected.

Your next question comes from the line of Craig Siegenthaler with Crédit Suisse.

René, just wanted your perspective on 2 kind of separate issues. One is we've been hearing there's more regulatory scrutiny around bank reserve levels, and I saw your reserve went up a little bit and that makes sense because you had good loan growth, but any thoughts there? And the second piece was the CFPB is considering giving mortgage lenders protection from legal risk. I'm wondering if you see any impact there. The industry getting maybe more aggressive in extending credit at that point or maybe any specific points for M&T there? René F. Jones: No real outlook on the CFPB. But on the allowance front, look, I think we've all learned a lot from the last crisis. I think on hindsight, many reserves were just too low. And I think that the trend is that there's more emphasis on the banks to be very, very focused on identifying the underlying inherent risk in their portfolio. I think the stress testing actually probably adds to that, right? People are expecting us to really understand and think about the risk, where it could be lying within our portfolio. The one big trend though is just more and more documentation for whatever your position is. We're seeing that from every front, whether it be the audit industry or various regulators that come to see us. So that's what we're doing, and we're trying to make sure that we explain what we see and be very, very clear on it. I know there has been a lot of chatter, but I -- at the end of the day, you got to stick to your process and make sure you've explained it well.

And there are no further questions at this time.

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