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M&T Bank (NYSE:MTB)

Q3 2011 Earnings Call

October 19, 2011 11:00 am ET

Executives

Donald J. MacLeod - Vice President and Assistant Secretary

René F. Jones - Chief Financial Officer, Executive Vice President, Chief Financial Officer of M & T Bank and Executive Vice President of M & T Bank

Analysts

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the M&T Bank Corporation Third Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Don MacLeod, Director of Investor Relations. Sir, you may begin your conference.

Donald J. MacLeod

Thank you, Paula, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's third quarter 2011 earnings conference call, both by telephone and through the webcast.

If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link.

Also before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

Now, I'd like to introduce our Chief Financial Officer, Rene Jones.

René F. Jones

Thank you, Don, and good morning, everyone, thank you for joining us on the call today. As you know, M&T's results this quarter reflect Wilmington Trust for the entire quarter, as opposed to a partial period during the second quarter.

In some ways, this is a baseline from which you can understand where M&T is prior to any synergies realized from the merger and also where we're headed.

Let's cover the highlights on the earnings release and then I'll take your questions.

Turning to the specific numbers, for the third quarter 2011, net income was $183 million or $1.32 per diluted common share, compared with a $192 million or $1.48 per share in last year's third quarter.

Net income for the linked quarter was $322 million or $2.42 per common share. Recall that the second quarter's results included $51 million of after-tax securities gains amounting to $0.41 per common share.

These gains were the result of our program to reposition the balance sheet so as to enhance both capital ratios and the liquidity profile for the combined M&T and Wilmington Trust.

M&T's results for the recent quarter included $16 million or $0.13 per common share of after-tax merger-related expenses arising from the acquisition of Wilmington Trust. Recall that M&T's second quarter results included the net after-tax gain of $42 million or $0.33 per common share related to the merger. That gain was comprised of a nontaxable gain of $65 million, which was partially offset by after-tax merger-related expenses of $23 million. There were no merger-related expenses in the third quarter of 2010.

Also included on our GAAP earnings for this year's third quarter was after-tax expenses from the amortization of intangible assets amounting to $11 million or $0.08 per common share. This compares with $9 million or $0.07 per common share in the linked quarter, an $8 million or $0.07 per common share in the year ago quarter.

Net operating income, which excludes the amortization of intangibles, as well as the merger-related items I mentioned, was $210 million in this year's third quarter, up 5% from $200 million in last year's third quarter.

Diluted net operating earnings per common share were $1.53 for the recent quarter, down 1% from $1.55 in last year's third quarter.

Net operating income was $289 million or $2.16 per diluted share in the previous quarter. In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.

The annualized rate of return on tangible assets and average tangible common equity was 1.14% and 16.26% for the recent quarter, compared with 1.69% and 24.4% in the second quarter of 2011. Those figures were 1.24% and 19.58%, respectively, in last year's third quarter.

Next, I'd like to cover a few highlights from the balance sheet and income statement. Taxable equivalent net interest income was $623 million for the third quarter of 2011, up 5% from $593 million in the second quarter of 2011, primarily reflecting the impact of the Wilmington Trust merger. Excluding the impact from that merger, we estimate that net interest income for legacy M&T, increased by about 1% unannualized. Driven by a 1% linked quarter increase in average earning assets, which is also not annualized.

The net interest margin was 3.68% during the quarter, compared with 3.75% in the sequential quarter. We estimate that 3 basis points of the decline are attributable to the full quarter impact of the merger. This excludes the impact from high level of excess liquidity that we've held since the acquisition date back on May 16th.

The higher combined levels of cash held at the Fed and resale agreements resulted in a net negative impact of about 2 basis points. Those balances rose from $1.4 billion on average in the second quarter to $1.9 billion in the third quarter.

The day count of 92 days in the third quarter versus 91 days in linked quarter accounted for an approximate 1 basis point of the decline, and the remaining 1 basis point decline is attributable to core margin compression.

At this point in time, we believe the balance sheet is positioned for a very slight downward pressure on the margin based on the forward curve. However, our ability to deploy cash into loan growth or additional purchase of investment securities should tend to mitigate that pressure.

As for the balance sheet, average loans for the third quarter increased by approximately $2.7 billion to $58.2 billion, as compared with this year's second quarter, reflecting the remaining impact of the Wilmington Trust acquisition.

Average loans, excluding Wilmington Trust were down about 1% annualized, as compared to the second quarter on that same basis. Commercial & industrial loans declined by $126 million or an annualized 4%. This includes $174 million decline in loans to auto dealers, which is something that we expect in the third quarter of every year as inventories depleted in advance of the new model year. Other C&I loans grew an annualized 2%.

Average commercial real-estate loans declined an annualized 1%. Consumer loans declined an annualized 2%, reflecting a lower level of indirect auto loans and continued soft demand for home equity loans. Residential real-estate loans grew an annualized 5%, largely due to the levels of mortgage loans retained for our portfolio.

On an end-of-period basis, also excluding Wilmington Trust, we experienced annualized growth in loans of about 1%, reflecting a rebound in activity late in the quarter particularly on the commercial side. For example, C&I lending, grew stronger as the quarter progressed reflecting 10% annualized growth on an end-of-period basis.

It is also worth noting that we began to retain the bulk of our mortgage production again on July 1st. We locked just under $800 million of new loan volume for delivery to our discretionary portfolio during the third quarter.

We won't see the majority of the impact from those loans coming on to the balance sheet until the fourth quarter.

As you might expect from my comments on excess liquidity and cash held at the Fed, M&T continued to see growth in deposits during the third quarter. Average core deposits, excluding the impact of Wilmington Trust, were up $1.1 billion or an annualized 9%. Substantially, all of this growth was a noninterest bearing demand deposits.

Finally, M&T purchased approximately $880 million of investment securities during the quarter, however, despite these purchases we still have some $2.2 billion of cash held at the Fed at the end of the quarter.

Turning to noninterest income. Noninterest income was $368 million for the third quarter of 2011, compared with $502 million in the linked quarter. As I mentioned, the second quarter's results included the $65 million nontaxable gain arising from the Wilmington Trust merger.

In addition, the third quarter results included $10 million of net securities losses primarily due to other temporary impairment charges relating to our portfolio, private label MBS. While the second quarter included $84 million of net pretax securities gain.

Excluding those items, noninterest income was $378 million for the quarter, compared with $353 million in the linked quarter. That increase was largely due to the full quarter impact of Wilmington Trust compared to the partial quarter effect in the prior period.

Also excluding those items, noninterest income for legacy M&T was down about $20 million from the linked quarter. Reflecting a bit of softness in most of our fee income categories, which was linked to the disruption in the capital markets back in July and August and a general slowdown in activity.

Overall, service charges on deposit accounts were $122 million during the recent quarter compared with $120 million in the linked quarter, largely attributable to the merger.

On the legacy M&T side, the result was somewhat soft as a result of the lower debit card volumes from the higher levels that we saw on the second quarter. Trust income was $114 million during the recent quarter, up from $76 million in the second quarter. The increased from the linked quarter was substantially all attributable to the full quarter impact of Wilmington Trust. And trust fees particularly on the Wilmington side were weaker due to the lower valuations in the equity markets and the general slow of pace of activity in the capital markets.

Mortgage banking fees were $38 million for the third quarter, down from the $42 million in the linked quarter. This largely reflects our plans to retain the majority of our residential mortgage production. We estimate that our decision to retain the mortgages cost us to forgo some $14 million of gain on sale revenue during the recent quarter, to instead be realized overtime as interest income.

The other noninterest income category was down about $6 million from the linked quarter on the legacy M&T side, and this category was negatively impacted by lower levels of loans indication and other credit-related fees, as well as lower levels of gain on leasing residuals.

Turning to expenses. Excluding merger-related expenses in the amortization of intangible assets, operating expenses were $619 million for the third quarter, compared with $525 million in the second quarter of 2011. The increase, again, largely reflects the full quarter impact of the merger, and does not include the benefit of any merger-related cost savings, which will begin to materialize next quarter.

The conversion of the Wilmington Trust branch platform in the core banking systems occurred over the weekend of -- over the last weekend of August. While we've added staff positions to essential operations areas, savings arising from those conversions and the elimination of certain back-office and headquarter positions won't become apparent until the fourth quarter.

During the third quarter, M&T recorded in addition to our impairment allowance for capitalized residential mortgage servicing rights of $1 million. There was no change to the allowance in the second quarter of 2011. The efficiency ratio, which excludes securities gains and losses, as well as intangible amortization and merger-related gains or losses was 61.8% for the third quarter, compared with 55.6% in the second quarter of 2011.

Next, let me turn to credit. Credit trends, while continuing to show improvement, reflected some impact from the merger. As we discussed in the press release, as of the third quarter, we've begun to separately report other acquired impaired loans. These are acquired loans that were not impaired as of the date of the acquisition, but which are no longer performing in accordance with their contractual term.

In accordance with GAAP, these loans are included in pools of loans which accrue interest -- which continue to accrue interest based on an estimated cash flows. Nevertheless, we've always felt that despite the technical accounting rule, it's important for investors to have a clear picture of how the underlying loans are actually performing.

Following our latest acquisition, we further segregated these loans to make that picture even clearer. We believe that breaking these loans out separately will help investors better understand M&T's accounting for acquired loans.

As presented in the table on Page 12 of the press release, these loans aggregated $218 million as of September 30th, compared with $141 million at the end of the second quarter. And had previously been included in the nonaccrual loan figures that we reported. We would expect the level of other acquired impaired loans to continue to increase over the near to immediate term before leveling off.

Nonaccrual loans, which exclude other acquired impaired loans, were $1.1 billion as of the end of the quarter, little change from the end of the prior quarter. The ratio of nonaccrual loans as a percentage of total loan was also unchanged at 1.91% as compared to the second quarter.

Other nonperforming assets, consisting of assets taken into foreclosure of the defaulted loans were $150 million at the end of the third quarter down from $159 million at the end of the second quarter.

Net charge-offs for the third quarter were $57 million, improved from $59 million in the second quarter of 2011. The annualized net charge-offs as a percentage of loans were 39 basis points, down from 43 basis points in the linked quarter.

Provisions for credit losses was $58 million for the third quarter, compared with $63 million in linked quarter. These provisions exceeded charge-offs by $1 million, and as a result, the allowance for credit losses has increased to $909 million as of the end of the third quarter of 2011.

The ratio of allowance to credit losses for legacy loans, which excludes acquired loans, was 1.79%, down slightly from 1.80% at the end of the linked quarter. The loan loss allowance as of September 30th was 3.6x annualized year-to-date net charge-offs. Loans past due 90 days or more, but still accruing, were $310 million at the end of the recent quarter, improved from $373 million as of June 30th.

The improvement largely reflects the acquired Wilmington Trust loans, which went in the process of being re-documented at maturity. Of the loans 90 days past due and still accruing at the end of the third quarter, $212 million are guaranteed by government-related entities. This figure was $207 million as of June 30th.

Finally, while we will publish the final level of criticized loans in our 10-Q filing, we anticipate that we've brought further improvement from the levels at the end of the second quarter.

Turning to capital. M&T's capital ratio at the end of the third quarter continued to improve reflecting earnings that comfortably exceed -- reflecting earnings comfortably in excess of our dividend.

M&T's tangible common equity ratio was 6.46% at the end of the third quarter, up 18 basis points from 6.2% at the end of the linked quarter. Our estimate of Tier 1 common ratio as of September 30th is 6.89%, improved by 22 basis points from 6.67% at June 30th. And our tangible book value per share was $38.11 at the end of the recent quarter up 3% from $37 at the end of the linked quarter, and up 18% from $32.23 at the end of the earlier quarter.

Turning to our outlook. It appears to us, based on feedback from customers, that the news headlines over the federal debt ceiling and the U.S. credit rating downgrade, the eurozone uncertainty and the Fed's comments about the necessity of keeping rates low for another 2 years, all had the effect of slowing down the level of commercial and capital markets activity early in the third quarter.

As the quarter progress, activity seemed to pick up somewhat. But at this point, we don't see anything to suggest that commercial loan trends will be much different from what we've seen throughout most of 2011, that is to say steady activity on the C&I side with pipelines continuing to build.

Also, auto floor plan activity should pick up as dealers build inventory of the new model year. On the CRE side, modest growth in commercial mortgage activity will continue to be masked by the net contraction in construction lending, particularly residential construction from our acquired portfolios.

We expect consumer loan growth to remain tepid. The benefit of our program to retain residential mortgage originations will become more apparent in the fourth quarter, as mortgage that's originated in the third quarter are funded and come onto the balance sheet. We believe the net interest margin should be relatively stable at the current level. As I noted, the balance sheet is positioned for slightly near-term margin compression. However, I'd note that growth in loans and securities is being funded by the cash we're holding, which is serving to limit margin compression.

As we noted on the last quarter's call, with the so-called Durbin Amendment becoming effective on October 1st, we expect lower debit card interchange fees to negatively impact service charges by some $15 million to $20 million in the coming quarter.

At this point in time, we expect that the loss revenue will be outpaced by expense reductions, particularly as the impact of synergies from the merger begin to materialize.

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

We'll now open up the call to questions, before which, Paula will briefly review the instructions.

Question-and-Answer Session

Operator

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

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

René, I guess, certainly, the one item that really stands out in the quarter is expense levels, particularly as you mentioned the August conversion. I believe, if memory serves, I think you realized about $80 million of cost saves when the deal closed in Q2. If you could just kind of walk us through really some of the moving parts this quarter on the expense side, particularly between legacy M&T versus Wilmington, the impact? And again kind of reconcile that with kind of your outlook at the 15% cost savings goal for 2012?

René F. Jones

Sure, Todd. Let me just sort of -- if I just interpreted what you said wrong. But we actually, through the third quarter, have realized no expenses. So at the close of the deal, we had half of the quarter, because we closed the deal on May 16th. And then, what is a little atypical of this transaction versus to all of the habits we've created overtime is that we didn't do simultaneous merger conversion. And so because the bank was sort of running on its own all the way through the last quarter of August, we won't begin to see any of the expense savings or the $80 million that you mentioned starting until next quarter. But beyond that, really, if you think about it, what happened is we've added to our staff to be able to have peak positions in the back office that will ultimately help us run the institution, but because we haven't begun to get the savings, the run rate that you need to come down from where your today, is probably greater than $80 million, right? Because that's the net number of the total impact of the merger. So it's just sort of -- you're really kind of seeing, I'm going to call it baseline, at least with the Wilmington being in our numbers, and now, you're going to begin to see it's going to do what we typically do.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, and again, just, could you reconcile just in terms on the linked-quarter basis, just in terms of core M&T relative to Wilmington, just the relative contributions. And again, it just seems like M&T seems to be higher?

René F. Jones

It is. It is higher. I'd say, a couple of things -- Let me say it again, so the M&T piece is higher and there are a couple of things there. We had a swing in all ROE expenses from a net gain last quarter, because of that New York City property that we talked about to actual costs this quarter. And quite frankly, that is, how do I say, maybe even a little high in the current quarter. And then, we also had an extra day or so, right? So the salaries are up, and I don't know, $4 million, $5 million higher than the second quarter. And then, just in general with sort of gearing up and preparing for the transaction, I'd say some of the expenses at the M&T side are really sort of geared around dealing with the transaction. So you're right, the M&T piece is up and as well as just having the impact of the merger.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Can you share, just in order of magnitude, how much it was up?

René F. Jones

We're over $20 million. The swing in ROE was probably $18 million. And the way I think about it is just look at the efficiency ratio, it's 61.8, last year it was 53, and 53 looks more like M&T.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

That's correct. That's why the question, and then if I could just follow up, the comments that you made in terms of the excess liquidity, excess cash at the Fed, I think you mentioned in excess of $2 billion. Could you just talk about, as I think about the 2012 balance sheet, the long growth momentum that you talked about, that liquidity, specifically, I mean, how much is delivered versus how much is kind of regulatory market driven, just kind of given all that uncertainty that you talked about?

René F. Jones

Well, I guess the way I talked about it anecdotally in terms of cash is that we were not in an excess cash position before we brought on Wilmington. So really, we're trying to catch up a little bit from that, I guess, in hindsight, maybe we could've put on a few more investments securities before the deal closed, but we didn't, so that's where you start from. And then, what's happened is the growth in deposits has pretty much kept pace with the amount of investments that we've been doing on the securities side. So if you -- hence, the position that we're still, around $2 billion. The final thing is that, I think we'll be able to utilize those funds. Particularly because if you look at M&T, the one thing that's a little different on our profilers is we're way, way below the industry average both in mortgages and investment securities, where we've sort of held off for a very long time on growing those portfolios. So if you kind of think about that, that kind of gives you some picture of how we're thinking about absorbing some of that excess cash. But one other thing I would say, is that we also now have -- when you bring in Wilmington Trust, we are going to see lumpiness, and a mighty big lumpiness. It's not unusual to get a customer on a corporate trust side that grants [ph] $1 billion with us for 30 to 60 days, right? But if you just put that aside for a minute, you kind of get a sense of what our plan is and sort of what's happening with the cash.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

So if I could just follow up on that. Again, when you talk about the expectations for loan growth, securities growth, going forward, funded by cash, I'm assuming on the securities and in a stable margin, if you will. I'm assuming then that with the cash funding, again, you're effectively margin accretive even though you're purchasing presumably lower yielding securities.

René F. Jones

Yes, I think so. I mean, it's just sort of rule of thumb and we're being very cautious how we put securities on, but if some securities are going on, that's plain vanilla securities that's say 320 to 340. And then residential mortgages are going on, just the neighborhood of 4%, right? You kind of get very little impact on your margin. If we were starting from a place where we had those 2 books were very large and we're having runoff, you'd see a lot of churn and you get the dilutive effect of the old stuff rolling off, but we don't have that position, right? So this is net new stuff coming on.

Operator

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

Bob Ramsey - FBR Capital Markets & Co., Research Division

Just to touch a little more on expenses, have you sort of look at where you guys are this quarter at $619 million taking out the intangibles and merger costs. And looking at Wilmington cost saves of about $20 million a quarter once fully implemented? I mean, is it fair then to say, that means that M&T by the end of next year will be closer to kind of like a $600 million number? Excluding amortization?

René F. Jones

How did you get from $619 million to $600 million?

Bob Ramsey - FBR Capital Markets & Co., Research Division

I went to $619 million and then take $20 million a quarter for Wilmington cost savings, which is about 15% of Wilmington's cost save or Wilmington's cost base.

René F. Jones

I think, one, you're going to probably center around the way you're doing that, the $80 million. And then, you've got to remember that the expenses are probably net a little high right now, right? So we're probably starting from a higher point, so it's probably $80 million plus. And then -- so that's the expense answer. The other thing is if you look at M&T, we've got the whole issue of the general efficiency ratio, which is sort of the changing dynamic of where fees are coming from with regulation and those types of things. And I guess, the way I'd say it is as you look out as far as you're looking out, at 1 full year, our focus will be to drive the efficiency ratio back to normal spaces for M&T, and some of that means that we're going to be have cautious on expenses and looking at expenses. But it also means that we're going to be looking at both sides, fees and expenses to drive the efficiency ratio, right?

Bob Ramsey - FBR Capital Markets & Co., Research Division

And then when you say something that's more normal for M&T, given all the changes as you say in fees, that we've seen, something 54%, 55%, sort of where you are hoping to get it, is that the right range?

René F. Jones

I mean, I think, I can't tell you about timing on that, but I mean, I think, that just make sense, because if you think of what our operating model is, it's very, very plain vanilla, right? And we've always held that in a long-term and a consolidating industry where you're offering commodities, you have to have a strong efficiency ratio. So we haven't changed our view that we've run the company down in those levels. Again, I'd point you to last year, we were at 53%, and that's where our work is.

Bob Ramsey - FBR Capital Markets & Co., Research Division

And then, maybe last question, if I shift gears, I know you all did highlight that you are now following more the resi mortgage reduction. Can you just sort of review how you all think about the sale versus portfolio decision? And I know there have been many times that you all didn't like resi mortgages or didn't like the portfolio resi mortgages. Is it because you've got the cash on the balance sheet now that it's a more attractive option?

René F. Jones

I think, there are 3 things. I think, one, is because our profile is very asset sensitive, all right? Which I guess is nice if bet on interest rates are sort of going up, but we tend to be neutral. So because of the lack of general growth, and the slowness in the economy, the deposits coming on, we just need fixed-rate assets. So rather than buy them from somebody else, you just save on the transaction costs by just keeping your own, that would be one. Two would be that there's kind of a change that's gone on, right? I mean, there's a lot of uncertainty in the mortgage market, every loan you book has got some sort of repurchase risk. And quite frankly, that repurchase risk is a selection bias, because there's never really anybody calling up and say, "I'd like you to buyback this loan, it's performing really well." So when you look at that, the dynamics have changed. The value of those mortgages has gone up relative to sort of treasuries, right? And so the spreads are higher. So it just makes a little bit more sense for us to put those on today. The third thing is that, we do get a risk rating benefit from it, which is not something that M&T, we ever really think about very much. But the regulatory constraint that's put on us has not been tangible, but it's been something called Tier 1 common. So we have to think, down the road, whether we want to optimize the balance sheet by putting on more of those lower risk weighted assets. So that's a change, but it's a change brought on by regulation. So all of those 3 things are kind of pointing us in the direction of retaining our mortgages.

Operator

Our next question comes from the line of Ken Usdin of Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Just a follow-up on the mortgage thing, so when you think about the continued trade-off between keeping mortgages and not selling it, and you mentioned that that looks more out to the fourth quarter. So do we assume that we see more via net interest income in the loan growth side as those come on, and does that mean that mortgage banking naturally just comes off, or has the mortgage banking effect already been felt because you've decided to hold them?

René F. Jones

So this quarter, as we said, we think our income, our fee income was about $14 million lower because we lost those loans for our own portfolio. And then, you should see the lion's share of that impact of this quarter sort of little less than $800 million of volume bit in the fourth quarter, and obviously, it should improve net interest income. The one one thing I would say is that like many of the other banks you saw this quarter, I mean the mortgage volume was really, really high, right? So it's hard to predict whether if we have the same amount every quarter, but sure, the net effect should be that we're building our balance sheet side. And if you're thinking about if all the volume of activity was the same, you wouldn't then see another drop in mortgage banking income going to the fourth quarter. So that's sort of volume dependent.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

That's definitely part of what I was getting at. But, I guess, the other part of it is just the time disconnect, right? Where you take the absence of the gain on sale in one quarter, but then the NII will be more layered out more overtime, is that a fair way to think about it?

René F. Jones

Yes, fair way to think about it. It's also exacerbated by the fact that you record gain on sale when you lock the loan, but you -- so that it's early, and you don't get interest income until you actually own the loan.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

And then the second thing is just on the -- a couple of other would be just broader fee question. So we have the full quarter of Wilmington this quarter, and I just wanted to understand if you can give us some color on the underlying trends within service charges, as that deal has come on, if you changed anything with regards to the fees that you're assessing on Wilmington customers as a welcome onboard type of thing even though you haven't converted?

René F. Jones

Yes, I don't have a real specific detailed answer for you, but generally speaking, we've been very cautious in that space, and so we are waiving fees across different product types. Some of it is for convenience, some of it is just because the nature of the conversion. So there is -- I haven't thought of this but there is probably a little bit of an effect of that in this quarter's results. And that -- if we were going to change that in any particular area, say service charges or something else, it will work its way out over time. Because our big issue is retaining customers, we're very focused on that. I'm trying think if there's anything else -- and then the other thing I would say is that we've got market sensitive fees, and we're sort of batting it around, I guess the idea here is that overtime you guys are going to ask us how sensitive we are to a move in the SMP. I don't really know the answer yet, but I know that if it had not been for the market disruptions, I guess I was expecting that we would have made $5 million to $8 million more in fee income this quarter out of the combined trust businesses. So it gives you some sense that the downturn in the SMP has probably had an impact on the quarter's fee income.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Yes, that was actually going to be my last question, and maybe you can answer it a different way and saying, do you know the mechanism by which of those fees are priced whether they're done on averages, or period ends or some type of lag, that could help partially answer that question.

René F. Jones

The short answer is no. But let me explain to you why. The wonderful thing about Wilmington Trust is, as you've learned about, it's a very robust business. And so as you walk down the different things that they do, some of them, yes, are based on fees off of assets. But in the wealth business, there's also a significant portion that are actually not based on fees of managed assets. You've got businesses like the retirement business, which are sensitive to it. But then again, you've got businesses that are simply based on services we perform like being the agent on success or loan agency services where you got a conflict between the lender and the borrower and then the shared national credit. So when you look at it in total, it's really hard to point to one thing and say, "This is how it works." It's actually much more of a diverse base. So that's why -- again, as I look through all those, and I saw the quarter, SMPs maybe it's somewhere in that $5 million to $8 million that we're down. But it's hard to really give you a formula on how to get there.

Operator

Our next question comes from the line of Kevin St. Pierre of Sanford Bernstein.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

I have a question on capital, with Tier 1 common sort of inching toward 7% here, could you update us on how you're thinking about ultimate [indiscernible] repayment and what those ratios will be beyond that?

René F. Jones

As we charged ahead with our capital, you're right, we're sort of on target to see somewhere in the 7% range at the end of the year, and on the Tier 1 common. So I think, obviously, in a month, within a month, probably the capital rules will be out. Obviously, you probably to have some cushion over that. But the way I think about it is that a portion of that probably could come from changing the mix of the balance sheet by having the lower risk weighted asset. So it was kind of where I was talking about before. I don't know that -- I can't tell you what the level of our tangible common equity will be, I like the fact that right now at 646, it's sitting about 1% above our normal long-term target, right? And from there, I think we'll just sort of figure that mix out. But I don't have an exact number for you. I think we'll focus on those sort of risk in the balance sheet more than anything else.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

And separate, unrelated. As we look quarter-to-quarter, we sort of get used to the negative contribution from Bayview here, do you still feel good about future positive contributions there?

René F. Jones

Yes, I do. It's the nature of the business and where the revenue streams or the cash will come from. It's different that when we originally made the investment. But you kind of see through that line that, that piece of the original business is very predictable. And now, you've got an operating -- most of the valuation is coming from this Bayview asset management, which is an operating unit that does a lot of either mortgage purchases or mortgage servicing, right? And from time to time, we flip back and forth between being a good time to purchase assets and accumulate assets. Now, it's actually a better time to be doing mortgage servicing. But we like their capabilities and we feel good about the way we value the investment.

Operator

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

John G. Pancari - Evercore Partners Inc., Research Division

In terms of the retention of Wilmington Trust customers on the wealth management side, can you just talk a little bit about how that's gone and how the trend in the AOM have gone as well?

René F. Jones

We've been, as you say, it's very simple, we've been extremely great with both the retention of the customers and the retention, probably most important, of the employees, which you know they're directly linked. And nothing has really changed since I answered the question on the last call. It's been above our expectation. The other thing, I guess, I would say is when I look at the asset management, and the assets under management, most of the decline is simply -- it seems to be simply the market decline and the numbers. I think these are rough numbers, so you bear with me, but I think we went from somewhere around $80 billion to $72 billion, right? Which is very symmetric with what you saw happened in the market, in the capital markets -- in the equity markets, I should say.

John G. Pancari - Evercore Partners Inc., Research Division

Right, that's exactly what I was getting at. Just to see that mainly there's no other -- there's no loss of business and that's impacting that trust line.

René F. Jones

Things have gone very well, and I'm knocking on my table here.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then separately on the margin side, I know you had indicated that you expect a stable in 4Q, and then there's a downward bias just given how the balance sheet is structured. Can you talk a little bit more about the components of the margin, like what are you seeing right now in terms of loan pricing, and then also do you have some incremental ability to lower deposit costs?

René F. Jones

Well, the first thing that sort of underpins those comments is the fact that I was just kind of looking at that forwards, if push goes to shove. I mean, the forward is flat for the next 15 months, you never really see that in any sort of rate when you look at the spread between LIBOR in 2-year or just anyone of the absolute rates, nothing is predicted to change out there. So if you kind of hold that there in that environment, you've got the role effect that everybody else is likely to see, but it's smaller for us because our lower yielding securities in residential mortgages are smaller, right? So that's what behind it. I mean, assuming if you had any sort of change upward, the answer would be different. Just give me the last part of your question again?

John G. Pancari - Evercore Partners Inc., Research Division

Yes, I was just wondering if you still have some ability to lower your funding costs as well?

René F. Jones

Yes, I don't know that, that's the case. I mean, I think that, generally speaking, maybe there is prices to tweak it here or there, but that's probably not a big lever that we have. And if you go back to the other part of the question on the loan side, we seem to be doing pretty well, generating decent yields. In fact, if I look at the commercial loan book, we sort of track like a full P&L on every deal that we've done in the quarter. What we kind of see is that after a number of quarters of coming down in the margin that we're able to get by booking the loans, we've now seen 2 or 3 consecutive increases. And actually, 1, 2, 3 -- 3 consecutive increases in the margin that we're getting on loans, right? So that's been pretty stable and kind of the history of sort how we think about pricing.

Operator

Next question comes from the line of Matt O'Connor of Deutsche Bank.

Matthew O'Connor - Deutsche Bank AG, Research Division

A couple of independent questions. Just first, as we think about the sensitivity to the trust fees from the market, is there any good rule of thumb there, in terms of SMP changes by 10%, impacts revenues by x?

René F. Jones

I just don't have it yet. It's not that I feel comfortable with. And this maybe is a bad answer, but I'll talk about it every quarter, I gave you the $5 million to $8 million, and maybe we can sort of from our opinion as we move along.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. And remind us, for those of us that didn't cover Wilmington, the mix of, say, equities versus fixed income?

René F. Jones

That really differs by business. Let me see if I can get something here. But I mean -- so if you look at the end of the quarter, assets under management may be, so 21% cash, 36% equities, assets to fix income is 34% and then other -- I'm not sure what other is, probably alternative, it was 9%. So pretty evenly distributed, and then quite frankly, quite a bit of cash, which is sort of if you look at the revenue streams today, they're really, really muted by the fact that interest rates are low on the money markets and the waving of fees.

Matthew O'Connor - Deutsche Bank AG, Research Division

All right, that's helpful. And then just switching gears here, thinking about the underlying loan growth at M&T legacy on a period end basis, which I think should get rid some of the noise, loans were relatively flat. Mortgage was up just a little bit, even though you're retaining. The commercial piece, I think, is impacted by the some of the auto floor plan. And if you can give us a sense of the auto floor plan drag? And then just generally speaking, we're seeing loan growth for the industry overall and it seems like a little bit less for you guys?

René F. Jones

Yes, I think, I had in my comments, I think -- we have to double check this, but I think the number was like $179 million or $176 million down in the floor plan lending, which will come down a little bit more in the next month or so before it begins to rebound as you kind of you work your way into the beginning of the year. So, but then the C&I loan growth was pretty consistent with what it's been, all the other stuff. And then, as I said, even including floor plan, the end of period growth was 10%, if you take out floor plan at the end-of-period growth in the other categories of C&I were almost 12% annualized growth. The other thing I can tell you is that on the commercial side we've now seen somewhere between 8 to 10 consecutive months of buildup in our commercial pipeline. So there's a lot of activities there. I do think that as we come along, maybe we'll try to do a better job of this. But for us to be down 1% annualized on commercial real-estate, having brought on K Bank, Brad Ford and Wilmington, with all of their residential mortgage stuff that we're working out, really tells you that, that business is actually moving as well right on the real estate side. The one thing I would say, a little bit of anecdote, while there has not been a change in the rate of runoff in our consumer book, it does kind of seem logical that, that's going to begin to moderate, right? Because for example, we've been doing $100 million of auto loans a month for a long time now, and net book is hovering around $2.5 billion, right? And so it seems pretty logical that the runoff we've seeing steadily, should start to abate in the next couple of quarters, right? So I think loan growth, actually looks pretty decent.

Matthew O'Connor - Deutsche Bank AG, Research Division

And then just lastly, the change in the TDR accounting, was that meaningful? Have you disclosed what your TDRs are and what they've, might as well...

René F. Jones

We do -- yes, I don't have the number for you, because it will be in the call report when it comes out. But there really wasn't much of any change, maybe 1 or 2 loans. But really, the way to think about is that the new TDR guidance was, in our minds, more of a clarification of the existing standards. And so we did go through and we reviewed some of the loans and, really, there was no change to us. But you'll see that those numbers in the call report when it comes out.

Operator

Next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

The reinvestment rate on securities you referenced earlier seems to be higher than a lot of other banks out there. Even Comerica this morning said they were investing in like a $180 million to $240 million range, although you said you were at $320 million to $340 million. Can you talk about, one, what duration securities you're buying to get that kind of yield? And two, are you taking the view that if rates stay lower for longer, it's a window, here to take more duration risk?

René F. Jones

I think, you must -- I mean, I think to get a rate what you're talking about, the bond treasuries, the other parties must be buying something like treasuries or something, but they're just mortgage-related Fannie and Freddie securities. So the duration, which I want to get for you now, but I mean in our securities book, has always been around 2, maybe hundred 230, I'm just thinking off the top of my head. And I wouldn't expect that, that's going to change significantly. We are buying, the mortgages we're retaining, we just bring in the mortgages into that number. Some 15, some 30. But again, the position can take it. Because overall, the position, in terms of duration, is pretty small. I'll find that for you in a minute.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

So Rene, we should we think about bottom end of the securities yield [ph] that are in that 320, 340 range from the 365 this quarter?

René F. Jones

Well, our treasurer is very, a very cautious guy in the sense that he doesn't like to book stuff at really, really low yields. So we've been waiting and unfortunately, the rates just keep going lower and lower. So anytime we see an opportunity where something steps up a little bit, we'll get into the market of it. But it's why we've been cautious, and we really haven't made a dent in the level of securities versus earning assets today.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

While you're looking for that, how much of the...

René F. Jones

Yes, the duration of our securities portfolio is 2.23. And I think that might go up to something like 280 when you bring in the mortgages, as well, or 2.8, I should say.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Rene, on the $80 million that Wilmington cost saves, how much of that should we expect to be realized in 4Q, and how much is 2012?

René F. Jones

I think you'll see a meaningful impact next quarter. And then, I think it'll come down a bit, and then you'll see another impact close to second quarter because of the trust conversions that are taking place somewhere in that timeframe, all right? So it will be 2 levels, but I think, a lot of -- you'll see a meaningful impact probably this coming quarter, and then kind of business [ph] .

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Too aggressive to assume that you get half the cost saves in the fourth quarter?

René F. Jones

No, it's not too aggressive to assume that we -- whether you see it or not, but assuming there at the end of 12/31, you should see a meaningful. We should have done a lot of meaningful work by 12/31.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

And then just one final question, are you now originating loans out of the Wilmington footprint, or is that portfolio a bit of a drag here?

René F. Jones

We definitely are originating loans in there. We spent a little bit of time talking to investors on the road with Woody Collins. And we spent most of our time in the first part of the deal just sort of engaging the employees and the RMs and getting out with them to the client base. So I think we've done a very, very nice job of that. We were sort of -- the loan book was in a bit of runoff mode for a fairly long time. And we think we see signs of that particular thing slowing. It's just going to take a little bit of time, but that's sort of out there in the M&T way, which tends to be in front of the clients quite a bit. And from everything I hear, that's going pretty well.

Operator

Your next question comes from the line of Matthew Clark of KBW.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

On the -- A quick question about the Basel III Tier 1 comment, can you give us an estimate of the Tier 1 common post Basel III adjustments and whether or not that number considers your non-investment grade securitizations.

René F. Jones

No. I assume when they come out with the actual rule that the U.S. rule, then we'll go to the calculation, But we haven't spent much time on it at all, because if you think about it, yes, maybe you get a little bit on the resi's but that's sort of fixable. And If anything is non-investment grade, you're already getting tax for it, right? On dollar for dollar in most cases, right? So that's in there. And then the other issue that are sort of bantering [ph] around are the whole unrealized losses. And you know, in my sense, we'll have to wait and see what comes out with that. We're not above the mortgage servicing rights piece, we're probably right about at the limit when you take -- if it turns out that the rule ends up being with the MSRs, the equity and the mortgage -- and the deferred taxes were probably right about at the limits. We haven't done much with it today, and I can't see it being an issue for us.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

Are you guys -- I guess can you quantify your non-investment grade securitizations and whether or not you guys will try to work down that exposure in the meantime?

René F. Jones

Well, somewhere, we might have that for you, but we probably have it somewhere here in the securities book. It is the queue, so it hasn't changed much. Remember, as we kind of went through and thought about repositioning our balance sheet, it didn't make any economic sense to sell those securities because there's just too much of a liquidity difference in there. So we went out and looked at places where we were modeling our securities. And the market was willing to give us more than our models actually suggested was value there. In the case of those securities, it doesn't make economic sense for us to move them. So if something comes up that suggests in the new capital rules that it makes sense to do it, I'll be surprised if there is something, then we'll think about it then.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

Okay and then just lastly, in terms of the first Niagara HSBC branch deal in upstate New York, and I guess along those lines, you talked about the growth buy, product type, but just curious about some of your submarkets where you saw maybe more of the outside growth and maybe some shrinkage? And again, any follow-up commentary about the HSBC deal that's going down?

René F. Jones

Yes, sure. The 2 strongest -- if you think about loans for a minute. The 2 strongest markets that we saw on loans, in upstate New York, and in the metro area, which serves anything from Tarrytown to New York City down to Philadelphia, those were the 2 strongest. Upstate New York was 4% annualized growth and metro was the same. And was really nice about upstate New York and this sort of stretches from Buffalo all the way through to Albany, is there were just a lot of -- there's a lot activity and a lot of activity in different industries. So we seem to be doing very well in being able to sort of pick up customers. I'm presuming that maybe some of it is also sort of pick up in general activity. But that's faired very well. If you kind of just move away for a second, I'm kind of indirectly answering your question around the upstate markets. We were down about 7% in the mid-Atlantic. Most of that was the fact that in the second quarter, we did a number of syndications. Right? So you saw high commercial fees in the second quarter. So a lot of that came from syndication of loans, and so the average balance effect is kind of in here today. And then if you kind of flip over to the deposit side, we had 2% annualized growth in upstate New York, but more importantly, we had 20 -- almost 22% annualized growth in demand deposits in upstate New York and that came from every area we're growing consumer accounts. In upstate New York, we've taken on a number of commercial accounts, so we feel very good about that. Metro was flat, PA was up at 8% annualized, Mid Atlantic was up 3%. And if you look at just demand deposits, we seem to be doing a nice job in western New York. So we're pretty optimistic about what's going on, we've been here for a very long time and we've been very consistent at the way we operate, so we think that should be a nice benefit to us from all that's going on there.

Operator

Your next question comes from Gerard Cassidy of RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Coming back to the efficiency ratio that you talked about where you guys were last year and having a goal of getting back to the mid-50s, is the efficiency ratio maybe permanently changed now that you have a higher component of the trust business, which has historically run at higher efficiency ratios?

René F. Jones

A couple of things. One, I don't know that it's all that meaningful. It's a nice big business, but it's still not the biggest part of where our income comes from. And I think over time, what I like about that business is that we just, think of it from the Wilmington side, we've taken what they've been able to do really, really well in the Delaware footprint and in some parts of Philly and Pennsylvania and we now are actually able to extend that to our existing footprint, right? And the way in which that actually happen, I think over time we'll find some ways so the Wilmington folks will now have an opportunity to maybe a little more efficient than they were. Just because you're doing all of that, you're extending those services to existing clients, so that's 1. But generally speaking, Gerard, the biggest issue is that our business model has now been changed. It's changing or has been changed for either way you want to look at it. So our task is the kind of go out there and figure out exactly how we're going to deal with the fee issues that we've all seen and in some part of that issue, it's going to being focusing on the revenue side, but it also means that a lot of the way we think about our expenses and our distribution are going to have to change over time. So that's sort of a long way to say that like, no, I don't think it's permanently changed. I think there's going to be a lot of energy around keeping that efficiency ratio close or near to where we've been historically simply because in the broader context of things, it's relatively consolidating industry, and we think if you can't run very efficiently then that's probably not a good thing down the road.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

I totally agree with you. Do you think once you get the cost savings out of Wilmington, of course, that you guys are expecting. And obviously, if my math was correct, I don't think you get down into that mid 50% efficiency ratio. So to get there, will it come more from revenue enhancements or just a continued focus on the cost controls?

René F. Jones

Yes, I think, you're right. If can do some math which you guys can do, and you come up with where you end up with Wilmington, you don't get down to 54%, 55%, if you think of discussion[ph] . Because a lot of things are gone, right? But that doesn't mean that we won't, over time, figure out ways to get some of those back so that we can get our customers to pay for the services or that it will right size it. This will take some time for the industry to do that. The way I think about it is, we focus for a very long time on trying to be the best bank we can for investors but also for our communities. And to the extent that we continue to offer services and products that they value, then we should be able to sort of operate the bank the way we always have. We're in a little bit of a period of disruption, but I think there were banks a thousand years ago, there'll be banks a thousand years from now, hopefully, we'll be one of them.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

On the assets under management, I think he gave a breakout on the answering to the question about the Wilmington percentages. And I think, if I heard correctly, you said about 21% of their business was in cash, money market, mutual funds. Some of the bigger trust banks have given us the dollar amount of fee waivers of what they're losing today because of the low rate environment. And of course, once rate starts to rise at some point in the future, these fees will come right to the bottom line. Do you guys have an estimate of what you're giving up in fees for fee waivers on that money market, mutual fund side of the business?

René F. Jones

Someone's handing a copy of our Q right now. I'm being told that it's in there. But why don't we just do that, and we'll make sure we keep publishing that in our Q, and if you'd like, Don can tell you where it is, you just give him a ring.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Sure. And then finally on the increase on the credit issue for the impaired acquired loans that you broke out this quarter, where did it come from, what types of loans, and was it a surprise that it jumped up the way it did. Is it mostly Wilmington loans or was there other loans that drove her from prior acquisitions?

René F. Jones

Yes, I think the numbers it are something like -- the increase in that category, something like $76 million, $79 million was from Wilmington. So the way you think about that is, there were some loans in our system, it's a 15-grade system. So when you get to 13, you're nonperforming, if you're not an acquired loan. So anything that was deemed to be 13 or an impaired loan of acquisition, we put in the SOP. Then we assume, as we kind of look at all those sorts of other loan, that we're going to -- some percentage of them is going to migrate to us, right? And that's how we come up with our mark. So no surprises. And in fact, what you would see is as long as loans are rolling into that category, what it means is that the total pool, that the loan is, is still accruing according to the cash close that we originally thought. And that's why I can't get into the nonaccrual loans because, even though it's impaired, it's being viewed as accruing because it's in a pool where the cash flows are exactly as we expected.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

And you mentioned that this loan number could -- or this portion could rise a further in the near term? Near term, meaning, just next quarter or next 2 quarters?

René F. Jones

Yes, I mean, I guess, I wouldn't be surprised to see it rise next quarter and maybe into the first quarter before it starts leveling off. Just in terms of -- you think about what that book is, right? You'll still see a little bit of migration continue to happen for a couple of quarters. The same thing will happen -- the same thing happened in Provident if you kind of go back at your notes, but it was much smaller, right?

Operator

The next question comes from the line of Collyn Gilbert of Stifel Nicolaus.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Just a question, I know you've been beating to death on this expense issue. Maybe not a menu-sha [ph] question but kind of bigger picture, and you sort of touch on in your comments about, if the business changes, sort of thinking, rethinking about distribution. But, what -- are there ways or do you see sort of definitive opportunities within your business, Wilmington Trust business, whether it's processes or systems, other branch at work where kind of over a longer term, if we see revenue pressure continue at this level that you guys would be able to bring costs down, or change the way you're doing business?

René F. Jones

Well, I definitely think that we have a lot of ability to change it. And again, we think about Collyn, and it's almost 62% efficiency ratio. It's a bit of an aberration, right? So I'm pretty confident that as the things that we're talking about doing and testing out, we've probably gone slower than those other individuals, other banks I should say, and in this sense because we'd like to watch and see, we're very focused on the customer, what matters to them. But over time, yeah, absolutely, I don't see any reason why we shouldn't be able to adapt our business model to the new rules and the new environment.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay, but there's nothing that's being discussed specifically right now within the boardroom in the executive level that you could see implemented over the next 6 to 12 months?

René F. Jones

Yes, I mean, what you'll see over the next 6 to 12 months is you'll see new product launches, you'll see new versions of our checking accounts and you'll see all of that stuff. So yes, absolutely. Just talking about and speculating about the details today over that doesn't make much sense, but we're talking about it all the time. So stay tuned, I guess, is what I'd say.

Operator

I'll now turn the call over to Mr. Don MacLeod for any closing remarks.

Donald J. MacLeod

Thank you, everybody for participating in today's call. And if there are any questions or any further clarifications of news release as necessary, please contact our investor relations department at (716) 842-5138. Thank you.

Operator

Thank you, this concludes your conference, you may now disconnect.

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