M&T Bank Corporation (MTB) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the M&T Bank’s Second Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answers session. [Operator Instructions] I would now like to turn the conference over to Mr. Don MacLeod, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Paula, and good morning, everyone. I'd like to thank everyone for participating in M&T's second quarter 2015 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you maybe 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 Jones: Thank you, Don, and good morning, everyone. As we noted in this morning's press release, M&T’s results for the second quarter reflect a number of positive factors, including strong commercial loan growth, as well as a rebound in commercial lending related syndication fees. Expenses during the quarter were well-contained, net charge-offs remained at historical low levels and capital and liquidity positions were further strengthen. Overall, I would say our results stepped up nicely from the prior quarter. As we usually do, I'll start up by reviewing a few of the highlights from the recent quarter's results after which Don and I will be happy to take your question. So turning to the results, diluted GAAP earnings per common share were $1.98 for the second quarter of 2015, up from a $1.65 in the first quarter and unchanged from the second quarter of 2014. Net income for the quarter was $287 million, up from $242 million in the linked quarter and $284 million in the year ago quarter. There were two noteworthy items in the recent quarter's results, first, in connection with the previously announced divestiture of the trade processing business within Wilmington Trust Retirement Services division. We reported a pretax gain of $45 million. This amounted to $23 million of after tax or $0.17 per share; now second, included in the operating expenses for the quarter of $40 million in contributions to The M&T Charitable Foundation. Taken together, the two items reduced net income by about $1 million or $0.01 per share. As you all aware, since 1998 M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis, from which we exclude the after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions when they occur. After-tax expenses from those -- from the amortization of intangible assets were $4 million or $0.03 per common share in the recent quarter, relatively unchanged from the prior quarter. The net operating income for the second quarter, which excludes intangible amortization was $290 million, up from $246 million in the linked quarter and unchanged from last year second quarter. Net operating earnings per common share were $2.01 for the recent quarter, up from $1.68 in the previous quarter and down one penny from a year ago -- from the year ago quarter. Net operating income yielded annualized rates of return on tangible assets and average tangible common equity of 1.24% and 13.76% in the recent quarter, comparable returns were 1.08% and 11.9% in the first quarter of 2015. In accordance with SEC guidelines this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Turning to the balance sheet and the income statement, taxable equivalent net interest income was $689 million for the second quarter of 2015, an increase of $24 million from the linked quarter. The net interest margin was 3.17% during the quarter, unchanged from the first quarter. The offsetting factors driving the flat margin were as follow: Redemption of $310 million of high cost fixed rate TruPS in mid-April provided a benefit to the margin of about 3 basis points. Offsetting that benefits -- that benefit was about 4 basis points of pressure from additional actions taken toward reaching our LCR compliance, including purchases of high quality liquid assets and the associated debt. The core margin was a little change from the prior quarter. Average loans increased $1.1 billion or 7% annualized compared with the first quarter, stronger performance relative to that we've seen in the recent periods. Looking at each of the portfolio categories on an average basis compared with linked quarter, commercial and industrial loans increased an annualized 11%, commercial real estate loans increased about 9% annualized, residential mortgage loans declined an annualized 6% and consumer loans grew an annualized 3%. This category included continued growth in indirect auto loans, offset by a decline in home equity loans and lines of credit. Average core deposits, which exclude deposits received in M&T’s Cayman Islands office and the CDs over $250,000 increased an annualized 6% from the first quarter. Turning to non-interest income or fee income, non-interest income totaled $497 million in the second quarter, which includes the $45 million gain on the trade processing sale that I mentioned earlier. Excluding that again, non-interest revenues were up $12 million compared with the prior quarter, but down about $4 million compared with last year’s second quarter. As noted in the press release, this year that the year-over-year decline reflects foregone trust fees as a result of the divestiture. Mortgage banking revenues were $103 million in the second quarter, up $1 million from the prior quarter, slightly softer residential mortgage banking revenues were offset by higher commercial mortgage banking fee, driven by higher commercial mortgage loan originations for sale -- loans originated for sale. Service charges on deposit accounts rebounded to $105 million, up from $102 million in the seasonally weak first quarter and trust income was $119 million in the recent quarter, compared with the $124 million in the previous quarter. The decline reflects lower revenues as a result of the trade processing sale, which were $9 million in the first quarter, partially offset by a seasonal tax -- of seasonal tax preparation fees of about $3 million. Commercial lending related syndication fees increased by about $10 million from somewhat soft first quarter. These fees are driven by transaction volumes and can vary from quarter-to-quarter. Adjusting for the impact of the trade processing sale, both the -- and -- that is both the again and the divested revenues total fee revenue was up 3% through the first half of 2015 versus last year. Turning to expenses, we are beginning to see good progress in managing our expenses, particularly in professional services. Operating expenses for the second quarter which exclude expenses -- expense from the amortization of intangibles were $641 million, including the $40 million donation to the Charitable Foundation. Excluding donations to the Foundation from all periods, operating expenses declined $23 million from the prior quarter and were down $3 million from a year ago quarter. Salaries and benefits were $362 million in the recent quarter, down $28 million from the first quarter. Of course, the decline reflects a return to a normal level of expenses from the seasonally high level in the first quarter, which also reflects some -- it also reflect some impact from the trade processing divestiture. Professional services costs were down $4 million from the previous quarter and down $15 million from the year ago quarter. The decreases reflect lower levels of spending primarily consulting services related to our reaching certain of our BSA/AML milestones, partially offset by higher legal costs. The efficiency ratio, which excludes the -- excludes intangible amortization was 58.2% in the second quarter, improved from 61.5% in the previous quarter and about flat with a year ago quarter. If we’d exclude the divestiture gain in the charitable contribution, the efficiency ratio in the second quarter was 57.0%. On that same basis, the efficiency ratio for the first six months of 2015 was 58.9%, 128 basis -- sorry, 120 basis point improvement from the 60.1% in 2014’s first half. So next let's turn to credit. Nonaccrual loans were $787 million (sic) [$797 million] or 1.17% of total loans at the end of the second quarter, a 1 basis point decrease from the end of the first quarter. Net charge-offs for the second quarter were $21 million compared with $36 million in the first quarter. Annualized net charge-offs as a percentage of total loans were 13 basis points for the second quarter, improved from 22 basis points in the previous quarter. The provision for credit losses was $30 million for the recent quarter, exceeding net charge-offs by $9 million. The increase primarily reflects loan growth. The allowance for credit losses was $930 million at the end of June and the ratio of allowance of total loans was 1.36%, down just 1 basis point in the prior quarter. The loan loss allowance as of June 30 was 8 times 2015's annualized year-to-date net charge-offs. Loans 90 days past due which we continue to accrue interest on excluding acquired loans that had been marked to fair value at acquisition were $239 million at the end of the recent quarter. Of these loans, $207 million, or 87% are guaranteed by government related entities. In the heart of our annual loan review of the commercial portfolio during the second quarter and given our very low exposure to the energy sector, we’re not seeing any patterns of weakness with respect to either industries or geography. However, we expect that review will result in an increase in criticize loans when we file our 10K for the second quarter. Turning to capital, our common equity tier 1 ratio under the transitional Basel III capital rules currently in effect was an estimated 9.92% at the end of the recent quarter, up from 9.78% at the end of March. Now turning to our outlook, halfway through the year, our view on the lending environment with respect to both demand from customers in the competition from peers is little change. With average loans in the first half of 2015, up 5% over last year, we’re running slightly ahead of the 4% projection that we gave you on the January earnings call. One change is that all of our regions participated in the growth in loans in this past quarter. We are still accumulating high quality liquid assets to meet our target of 100% compliance with the liquidity coverage ratio by the end of the year. And we expect to issue additional unsecured bank notes in the coming months, with the proceeds to be invested in additional high quality liquid assets. Our outlook on the net interest margin remains intact and consistent with past comments. The margin held up nicely in the second quarter. The two primary sources of pressure steps towards LCR compliance in the core compression from loan and deposit pricing remain in play and increase in short-term interest rates will likely act as an offset to those pressures, should that occur. We remain on track to grow net interest income on a year-over-year basis. We’re still looking for low single-digit year-over-year growth in fee revenue in line with recent trend. Next, I'd like to give you an update on our outlook for expenses. You know, we remain focused on producing positive operating leverage. Adjusting for the divestiture gains and the charitable contribution revenue grew by 1.5% for the first half of 2015 against the 1.1% decline in expenses. This past quarter professional service expenses associated with BSA/AML compliance declined at a healthy pace as certain milestones have been achieved. And we made progress towards a sustainable and repeatable process in all areas. Looking ahead, those reductions in expense will be partially offset by continued investment in the plumbing that Bob Wilmers referred to in his annual letter to shareholders. The investments include customer-facing technology, our data warehouse and continuous improvements in our risk management infrastructure, while our spending this year on professional services will decline from last year. Total GAAP expenses may grow modestly from the full year 2014. And our goal is to demonstrate continued improvement in the efficiency ratio over time. Our outlook for credit is little changed with continued low levels of charge-offs and of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national, regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future. Now let's open up the call to questions, before which Paula will briefly review the instructions.

[Operator Instructions] Your first question comes from the line of Ken Usdin from Jefferies.

Hi René. Good morning Don. René, it’s wondering if you could just follow-on on that comment about the full year expenses and the kind of moving parts, especially within that other line. So are you saying that you're still seeing an escalation that would perhaps even more than offset that nice final delta that we've seen in some of the consulting and regulatory related? René Jones: Yeah. I think my wording, Ken, is driven towards the difficulty of predicting any given quarter. And I think when you think about what we've been saying, we've kind of provided you with the trend that a lot of the consulting in higher levels of expenditure that we've been seeing more than a year have begun to come down. And we’ve begun to make those investments that we've seen in the technology and we’ll continue to do that. Those expenses will ramp up. I think one of the things that difficulty is, you know, for example, in this particular quarter, we had a high amount of legal fees. And much of those fees are associated with the hangover of dealing with the cases that are still outstanding from when we acquired Wilmington Trust. But those are kind of temporary in a sense and so those eventually will go away as well. So we take the whole thing together. I'm very, very positive about our ability to continue to improve our efficiency ratio. Just hard to predict any given quarter there. But I think my comment is -- you can take my comments and so think about them over not one quarter but several quarters. I have a pretty high degree of confidence that we’ll manage expenses pretty tightly.

Okay. Understood. And secondly, just on Wilmington Trust and the trust department, so the -- could you just help us understand that the sale of the transaction business, how much that took out of that line and just the underlying growth trajectory on that in the trust department? René Jones: Yeah. I mean, I will start with -- we are in within Wilmington Trust. We’re still in retirement services business. This was a specific function that we didn't think was core to sort of -- core to the business or core to our future and which we felt that another party probably could make more of that, who had the necessary infrastructure that was there. So I think we gave somewhere maybe in the press release what the earnings were a year ago in the second quarter and in this past first quarter and I think the number is somewhere between in either case between $9 million and $10 million. When we look at the whole, there's very little impact on net income or earnings per share when we remove that business. So it wasn't something that was an engine of growth for us, but it was economically very attractive to others who had that infrastructure already. So it’s just made sense to kind of move on and divested that particular business.

And then just on -- on this core trends underneath, what you're seeing in terms of Wilmington Trust growth and outlook? René Jones: Yeah. Things continued to be relatively steady. If you look at -- there's really couple components, right. If you think about it in a very broad level, we have income from the Wealth Advisory Services and we have income from the Institutional Client Services. Those are the two big businesses. But the third thing is that we have fee income from some of our affiliated managers that again are not really core to our business. We inherited them to Wilmington and with the sort of lower performance that the industry has seen in active managers in 2013 and ’14, the balances from that erratic category and therefore the fees are down for affiliated managers. If you remove that, our Wealth Advisory Services and Institutional Client Service businesses are growing very nicely. Both from a topline, I’d say we are somewhere in any given quarter between 2% and 5%. And from a bottom-line perspective as we sort of rationalize and build out our capabilities on the backed office, we are seeing nice growth in the bottom line there. So that is going very well. We've got a lot more that we would like to do there but everything is functioning very well from our perspectives and with Wilmington Trust.

Great. Thanks, René. René Jones: Yeah, sure.

Your next question comes from Sameer Gokhale of Janney Montgomery Scott.

Hi. Thank you. Good morning. Hi. Just a few questions. I was wondering, René, you touched on the additional investments that you want to make in some areas such as customer facing technology, data warehousing, infrastructure. Can you give us a sense for how far along you are in these specific areas? Because over time, the comment we generally that I have received and others have received is M&T is a bank that operates very efficiently and clearly you are investing in BSA/AML and beefing up that part of your processes and technology. But in terms of these other areas if one were to, if you were to put a percentage of completions, sort of metric across these different areas, again customer facing technology, data warehousing, other infrastructure, how far along are you in those areas? René Jones: Sameer, it would be difficult for me to give you a percentage of completion because I view these things as sort of long-term trends, right. And what I would say is that we're making -- we had a pace to make certain investments over time. But a lot of that, I'd say was slowed down over the last couple years by the shift to restructure our risk management environment along the lines with all the changes that came from Dodd-Frank in the industry. And as a regional bank, I think too much of the technology that we wanted to do, let's just say for our customers was being drowned out a little bit. And so we're trying to make a shift in that direction. And so as we do that, the way we are thinking about a technology investment is to make sure that we're making enough investments in the Foundation -- enough foundational investments that allow us to get customer facing technology out there at a faster pace as things change over time. So this would be things like looking at the 360 view of the customer, looking at the idea that we had not had mobile check deposit for our retail customers. And so on the customer facing side, I think you'll continue to see a steady rollout but we are hoping to increase the pace at which we deliver examples to our customers, the things that make their lives a little bit easier. That’s one component.

Okay. René Jones: The largest component, I would argue are investments that we need to make that will ultimately improve the efficiency at which the way we run the business. Getting a 360 degree view of our customers, no matter which channel they come into the bank, looking at our on-boarding and account opening processes and making sure we have the right technology infrastructure so that things talk across the bank. And then last example would be improving our data quality in the control environment around the data in a way that is maybe a little less manual in some places and gives us better information. So, those last ones are all about efficiency in the long-term investment.

Okay. So then in terms of the shorter term investment initiative, would you anticipate for lack of a better term, if you think it was catch-up to a certain extent that catch up component of it, do you think you would be done by the end of this year or say the first half of next year and then there is an ongoing, of course investment initiative as you try to look at mobile apps and some other things? Is that a fair way to think about it? René Jones: Your general trajectory is right but the timeframes, I wouldn't focus on. I would focus on the idea that M&T is going to be talking more and more about technology infrastructure as we go forward. And I think what you are going to see as we focus on efficiencies in other areas, the bank over time, those will tend to offset that higher-level of technology spending.

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

Okay. That’s helpful. And then just a couple other ones. The first one was on credit. You did mention that you were looking at the portfolio and kind of evaluating the individual credits, about the halfway mark. And I think your comment was that as you complete that review, you would expect there to be more criticized loans. So, I was just hoping to get a little bit more clarity there. Is there a particular area, which has not undergone review where you feel that there could be more criticized loans coming out of that area? Just if you could help us give some additional light on that, that would be helpful? René Jones: Yeah. No, it’s slightly different. So, I’m not talking about the future. I’m talking about the work we've done today. And the way I would say it is, things are good on the credit quality front but we do see a lot of competition. We see competitor stretching. So it's a great time to begin to look harder into your portfolio now because you have the capacity to do so and so that's what we sort of did. We took our annual reviews that we typically do over time. We said, let’s take a harder look and maybe accelerate some of that. So that’s why we think as we look at second-quarter results, we will see some increase in our classified loan book but that would be work that we typically, we do annually every year. But we just sort of made a bit of a concerted effort to do it. You saw criticized go up, I would guess mostly because of energy loans in the first quarter with the industry. So it's not about time as you know to just make sure you are diligent and it’s pretty classic for M&T to do that in the off cycle so to speak.

Okay. And then just the last question was similar to your trade processing business that you sold. Are there any other areas that you sort of marked for strategic review as you think about it, or do you feel that with the rest of your businesses that you don’t see anything that you identify and the near-term horizon is something that you might want to divest? René Jones: Yeah. Let me start by saying nothing material, but there are probably a few things here and there associated with businesses that we've inherited over time that we're looking at. But most -- I feel like most of that work has been done now and so the whole of what we're doing now is focusing on investing I think.

Okay. That’s all I had. Thank you, René. René Jones: Sure.

Your next question comes from Frank Schiraldi of Sandler O'Neill. René Jones: Good morning.

Good morning. Just I have one more -- well one more expense question first. Just trying to, as we think about 2016 now and we think about BSA-related expenses rolling off, I mean would you say a majority of that will be captured by the bottomline, René? Or would you say that a majority of that will sort of be reallocated into technology spend? René Jones: I think it’s a bit staggered, a large portion should be reinvested in technology spend. But I think it gives us the ability to sort of ensure that we’ve got our revenues growing faster than expense is the way I would say it. And to give you some sense, we talked about last year that we spent in total or ramping up our BSA/AML program and with the consultants and $151 million in 2014. I would expect that to be somewhere in the 90s when we get done with the end of this year. But on the flip side, we spent $30 million improving our CCAR results and process in 2014. We will spend $33 million this year. So in some areas, you are still making those investments. And I think what you will see is stagger over time that those two will come down, but it’s a bit staggered. So I just feel like we’ve very, very good ability to manage our expenses prudently while making the investments we need from the point we are at here.

Okay. And then so is the message more positive operating leverage year-over-year rather than necessarily quarter-over-quarter as we go through the remainder of 2015? René Jones: Yes. Someone had asked me the question how fast you’re going to get to 55. So it’s just not the way we think about running the business here at M&T, we think long term. And our goal would be, we would be very happy if we continue to make progress on the efficiency over time. And if it happens in that manner, what’s nice about is it’s sustainable, but it’s healthy, right. It’s done in the right way. So we’ve got good momentum. You see it in our numbers already. We’re going to keep that momentum going. And I think we will get to where we need to be to make sure the bank is efficient as it always has been relative to our peers.

Okay. Great. And then just -- just on asset sensitivity, as we think about the Hudson City balance sheet coming over later this year. As we think about I guess your shock analysis, how much of that asset sensitivity would you say maybe in percentage terms would be lost once Hudson City balance sheet comes over? René Jones: I mean, this is a big estimate. I am not even going to look at my numbers. I would say half of it is has absorbed, maybe slightly more, but there is still a very -- there is still an asset sensitive position where those two balance sheets to come together. Don is writing on a piece of paper, one-third.

Okay. One-third to have, got it. Okay. Thank you.

Your next question comes from David Eads of UBS.

Hi. Thanks. Hello. So maybe kind of following up on kind of its core banking inefficiency thought. I am curious just to hear a couple of thoughts on where you guys feel like you are in terms of the branch footprint. You obviously have seen an industry wide trend towards shrinking branch. You guys have done as well. But sort of it seems like you guys are fairly productive when it comes to your branches. So I am just kind of curious where your thoughts are on branch count? René Jones: I think it feels to me like we did a lot of work in that space over the last couple of years very quietly I guess. We didn’t really talk about it much. We’re hearing a lot more people in that space today. I think we are ahead on that front. And then if I speculate a little bit, I think it’s hard to rationalize in that space more without the right technology platform, right. So that goes back to the other issue is that if we focus on our capabilities for the employees there and the way we do business with those customers, they will probably roam again down the road. But I think we are pretty close to as far as we’re going to go in that space.

Okay. And then you guys have maintained really quite solid CRE growth here despite everyone else. There is a lot of talk about how competitive that market is. Is there anything you guys are seeing that’s letting you kind of gain share there? Or can you comment on CRE? René Jones: The number one thing for me is that, if you’d look at the last year over the quarters, while we had decent growth, 4%, 5%, it was being supported by one or two regions, particularly the metropolitan New York City area, Tarrytown, and western New York. And what you’re seeing a little bit last quarter and definitely this quarter is just growth everywhere. And so Baltimore has gone from slightly decline to positive numbers. I think if I kind of go through them, annualized growth this quarter was 4% in upstate and western New York and the metropolitan area, which is New York, Philly, and just up north of New York was 8%. Pennsylvania was 12%. Baltimore was 7%. And our other regions in total were 5%. That’s total loans. And in the real estate, it’s not really that different. But what you did see was a little bit more growth than we had been seeing in Pennsylvania and Baltimore, Washington, Delaware areas, right. So that was probably the differentiating factor and why our loan growth was a little bit higher.

Did that just feel like increased demand from borrowers, or was there a pullback from competition? Or kind of give us any sense for what allowed that growth to accelerate kind of in the southern part of your footprint? René Jones: I would say predominantly additional credit with existing relationships that we had for a very, very long time. We are putting money to work. Not a lot of new, like if you think of market share in terms of customers, it’s not like we’re collecting lots of new customers.

Sure. René Jones: I think our existing relationships are pretty mind to work.

Great. Thanks.

Your next question comes from Bob Ramsey of FBR.

Hey, good morning. Just to follow up on that. To the extent its existing relationships with or growing existing relationships, is this customers increasing the line utilization, have you seen any improvements there? Or is the customers consolidating business at M&T or what’s kind of, are they net borrowing more? René Jones: Yes. So give me a second here. So if you look at usage, it’s been up, utilization has been up the last two quarters slightly. If you look at the -- I guess the way I would think about it is, the first place I would point as you think about some of the loan fees that were up in terms of the syndication fees, right. So we are getting a fair amount of volume from existing [Technical Difficulty] with the size of the credits are increasing, so that's why we’re getting higher syndication fees, right. So for us, we only want to take so much exposure, so we tend to sell down the amount. Remember, we typically don't do anything very little. In my terminology, it would be participations in, we’re not the lead underwriter. So I think what you're seeing from -- particularly from existing customers is people are doing some larger projects and that's why we've got -- they’re doing more, we got more loan growth, but you’re also seeing in the fee line as we sell down some of those and sort of mitigate the amount of volume that we see there. I don’t know if there is anything else particularly that I could clarify for you there.

Okay. Shifting gears a little bit, could you maybe provide us any update on Hudson City and how that process is evolving? René Jones: As you know, I mean, it’s been a long process since back in 2012 where we’ve been kind of do whatever it takes to sort of get to the stage where we can complete an acquisition with Hudson. In terms of what we’ve talked about in the past, our progress in improving our BSA/AML compliance program is all on track with our expectations. We've made significant progress. We’ve enhanced our processes and our systems and all those things are running and in place. And so, at this point in time, I mean, there's not much more that we can really say or do, we have to let our regulators the time to work through their process and to work through the application. But it's really not in our control to be able to speculate as to whether or when the approvals for our merger would be received. I wish it was different, but that sort of where we are.

Okay. Fair enough. And then last question, I know you asked earlier about rate sensitivity. Just kind of curious, I mean I know you all give some rate disclosures in the Qs and Ks, but have you think about the impact of that first 25 basis point move? Is there a proportional lift in earnings on 25 bps or is it less on the initial increases because of floor or some other reason? Or how are you thinking about kind of the initial move in rates whenever that happens? René Jones: I think this impact right away. I mean, it wouldn’t be very delayed at all because we’re very sensitive particularly on the short end. The one of the things that when I look at the result as you say beyond the Q, when I look at the results on a flattening or steeping, what surprise me a little bit is that in a flattening, which is typically not great for us, today it would be better than actually a 25 basis point across the board raised. And the reason for that is that so many of our loans, particularly commercial loan, C&I are price off of LIBOR, the short-term LIBOR rates. But in the past we never had all of this long-term debt that we had to issue into the market, which is fixed. And so, when you look at our profile, if anything has really changed is that a parallel increase of 25 basis points would begin to affect us. But if that was an increase in the short end and no change in the long end, it would probably impact us more.

Okay. All right. Thank you. René Jones: Yes.

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

Good morning, René and Don. René Jones: Good morning.

So René, on the expenses, maybe we’ve had a lot of conversation about it today on this call. I guess just thinking about the turnover contribution expense that you're able to invest this quarter. I think from looking at your current report it was about a $6 million attributable expense in the first quarter and I think that's probably what you find in quarterly? So is there any thinking about that maybe this contribution expense may have funded the rest of the year is contribution to the Charitable Foundation, maybe there's some room for that to be cost savings when we think about the next couple of quarters? René Jones: It changes overtime, I mean, I think, if you kind of fall some of the things that we've done, we had a gain from -- we had a gain or you could call windfall from buying Wilmington Trust in this particular business that was embedded and that was in core. And it just made sense to us to take those proceeds and put them into something that's really important to us in the Foundation. You go back, you member when we recovered from lawsuits $50 million to $60 million from the CDOs litigation that we had. We kind of felt that it just made sense, right, to take those proceeds, which were windfall out of our core operating, that were not part of our core operating and put them into the Foundation. So it would be lumpy. So we could continue to do that if we think it makes sense from time to time. So we wouldn’t over funded if it was fully funded and clearly usually after you’ve done something as large as this, you might see a pause, hard to say.

Appreciate that. Okay. I guess, shifting over to the revenue side. You talked about the large syndication fees. If I look at the line items that you guys disclosed in the 10-Q, there is the -- the line of credit and other credit fees that, I would imagine that’s where the syndication fees and it was only $26 million in the first quarter versus an average about $33 million? So if this was $36 million in the quarter, that mean maybe next quarter you wouldn’t expect the $10 million to go away, but maybe it's kind of in that sort of $33 million, $32 million quarterly run rate, is that what we should expect? René Jones: I hate thing the words I’m going to say. But I can’t, I actually can’t predict. We got lumpiness there and there seem to be a lot of business. I don't know that that slowed. So it's hard. At some point you’ll see lumpiness as you look at that line overtime, but quarter-by-quarter I would -- a year ago was $34 million. It seems pretty consistent. And as I think about it, we had a strong second quarter of last year coming off the first quarter. So it’s hard to me to say what its going to look like.

Okay. All right. And then, I guess, last question, the margin guidance that you gave, it did seem ex the LCR impact from what you guys did in the first quarter that there was a core margin actually was somewhat stable. So, I guess, thinking about it for the third quarter your guidance was the continued sort of core compression, which you’ve always kind of said in the couple of basis point range? Should we expect then the LCR activity to be something that would compress the margin again on top of that? So, I guess, just want to make sure I’m understanding the guidance for the third quarter on both what’s core and the LCR piece? René Jones: Yeah. The LCR will compress in margin, but we see very little impact on NII when we look at the forecast from it.

Okay. Okay. And is that something that’s kind of be in the same neighborhood of what you did in the first quarter, when you think about the HQLA purchases, you might be win bond issuances that you do upon that? René Jones: So are you going to the asset side, first, because we've …

Yeah. Yeah. So, I guess, a couple of purchase, I guess, yes. René Jones: The, first, I expect the second half to be maybe slightly less than the first half in asset purchases.

Okay. René Jones: And I expect the funding to be somewhat similar to what we issued in the first six months.

Got it. Very helpful. Thanks for your time. René Jones: Yeah.

Your next question comes from David Darst from Guggenheim Securities.

Hi. Good morning. René Jones: Good morning.

Rene, do you feel like you are at a point where your service charges on deposit will begin to stabilize, or do you think there is still more pressure to come? René Jones: I don’t know. I think we are thinking about that quite a bit. I think that what you’ve seen has been a change in customer behavior. And I think we’ve got to spend sometime thinking about how we react to that. I don't think it is necessarily a bad thing. I think we just got to -- we have to make sure that we’ve the products and services that are meeting their needs. So, I would look at the current trend and say it probably continues for sometime. But I know we're looking at that heavily. Don't really have an answer for you there.

Okay. Then what might be the timeline for you to deploy mobile check deposit? René Jones: I think will be out -- that's one example of things that we are doing. It will be out next year.

Okay. And then anything you can add to the discussion of growth around your organic initiatives in New Jersey? René Jones: I can tell you things are going well. We feel good about the progress that we are making. The team is working very well together almost -- and pretty much on all fronts. Obviously, there's not much you can do in certain areas without branches but we are really, really pleased on all fronts, credit quality. Everything seems to be going very nicely. So no hiccups there at all.

Okay. And I guess your comment on Hudson City, is that -- at this point you have done everything you can do and you handed it over. You are just truly waiting for a response at this point. René Jones: I think we’ve made a tremendous amount of progress. And we're very, very pleased with the progress we've made and in timeframe we've made it. And that’s sort of what we committed to do. So now we got to see what happens.

Okay. Great. Thank you.

Our final question comes from the line of Gerard Cassidy of RBC.

Hi, René. How are you? René Jones: I’m great. I’m happy to hear you.

You are kind. Question for you. You mentioned that you're going through this deeper dive in your loan portfolio, which in the Q will see a likely increase in the criticized assets. Should we expect then that the reserves could be built up in the third quarter to reflect this deeper dive, or are the reserves already set for this deeper dive? René Jones: Anything that we would have seen would be reflected at the June 30th date. And you saw we added about $9 million to the allowance and majority of that was the loan growth. But anything else we would have seen in there would have been also reflected. So, I don't expect any additional impact from what we've learned today.

Okay. And then in terms of growth in your loan portfolios, are there any regions within the footprint that standout over others, whether it’s Upstate New York versus Maryland, or parts of Pennsylvania or et cetera? René Jones: What stands out to me is the Mid-Atlantic. It is the second quarter in a row where we are seeing loan growth after quite a few quarters where things were slowly, even slow to down, and so that that was nice to see. We’re not seeing any impact in any particular area but I could tell you that if you go across the footprint, the largest growth we saw would be in healthcare and healthcare associated type businesses. Real estate and rental and leasing businesses and retail trade those also saw growth. But we will also saw growth in education services, construction, and manufacturing. So it seems pretty broad base.

Very good. And then finally to follow-up on some of the Hudson City questions, if I understand it correctly, obviously, you guys work very diligently in updating your systems for the BSA/AML issues that were identified. It seemed like those were pretty much resolved and then at Layfield, came another issue on CRA directed. If I understand it correctly more Hudson City cited the equation. If that is correct and what I just said, who is responsible for resolving that CRA if there is a issue that the consumer financial protection gear or whatever agency is addressing it? Is it the Hudson City responsibility or is it an M&T responsibility to resolve whatever questions they may come up with? René Jones: I think first, Gerard, we were definitely two separate entities today. So we run our own franchises and we manage our own franchise that's really important to know. I think the second thing I would say is that, the issue that you saw on the newspaper regarding the CRA issue were not new to us. They were long and old things we saw way back when. So I think it is just sort of some how became news, and put in the newspaper and became news.

Okay. In terms of so if there Hudson City issues, we should expect Hudson City to address them and deal with them before the transaction closes, I assume? René Jones: They deal with their issue. We deal with ours.

Okay. Fair enough. I appreciate your time. Thank you. René Jones: No problem.

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

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

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