Jan 14, 2011
Operator
Good morning. My name is Wess, and I will be your conference operator today.
At this time, I would like to welcome everyone to the M&T Bank fourth quarter fiscal year 2010 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I'll now turn the conference over to Mr.
Don MacLeod, Director of Investor Relations. Please go ahead, sir.
Don MacLeod
Thank you, Wes and good morning everyone. This Don MacLeod I'd like to thank everyone for participating in M&T's fourth quarter 2010 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 at 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 10-K, 8-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. Thank you for joining us on the call today.
I understand that both we and our much larger friends downstairs are reporting our results this morning, hopefully both of us will set a positive tone for the coming earnings season. I'll quickly review some of the highlights from our results and then we'll take your questions.
As slight break from the past I'd like to start by summarizing M&T's performance for 2010. Overall our results for 2010 were driven by steadily improving credit trends, that saw net charge-offs fall 33% to $346 million or 67 basis points of average loans and provisioning for loan losses fall 39% to $368 million.
Losses on investment securities including other than temporary impairment charges presumably fell 39% to $84 million. Taken together these two factors contributed significantly to our strong year-over-year performance.
M&T's liquidity position continued to improve in 2010 as the slow pace of economic recovery contributed to balance sheet contraction for much of the year. While core deposit growth remained robust.
Encouragingly late fourth quarter growth in our commercial loan and commercial real estate loan portfolios resulted in a positive linked quarter loan increase for the first time in several quarters. Additionally expansion of the net interest margin coupled with good expense control contributed to improving operating efficiencies and higher returns, enabling M&T to offset the reduction in consumer service charges caused by the mid-year implementation of changes to regulation E.
Turning to the specific numbers, for the full year of 2010 diluted earnings per common share were $5.69, an increase of 97% over $2.89 in 2009. Net income for 2010 was $736 million which represents 94% increase over the $380 million in 2009.
GAAP basis net income for the full year of 2010 expressed as a rate of return on average assets and average common shareholders' equity rose 1.08% and 9.3% respectively up from 0.56% and 5.07% in 2009. M&T consistently provides 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. Included in GAAP earnings for 2010 was net after tax merger related gain from the K Bank acquisition of $16 million or $0.14 per common share.
This compares to $36 million or $0.31 per common share of net after-tax merger-related expenses in 2009, reflecting costs arising from the Provident and Bradford Bank mergers, partially offset by the gain on the Bradford transaction. Also included in these earnings for the past year was the after-tax expense from the amortization of intangible assets amounting to $35 million or $0.29 per common share compared to $39 million or $0.34 per common share in 2009.
Net operating income for 2010, which excludes those items I just mentioned, was $755 million or $5.84 per common share for 2010, an increase of 66% from $455 million or $3.54 per common share in 2009. In accordance with the SEC guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results including tangibles assets and equity.
For the rate of return on average tangible assets and average tangible common stockholders' equity was 1.17% and 18.95% respectively for 2010, up from 0.71% and 13.42% in 2009. Turning for the most recent quarter, diluted GAAP earnings per common share were $1.59 in the fourth quarter of 2010, improved from $1.48 earned in the third quarter of 2010.
Net income for the recent quarter was $204 million, up from $192 million in the linked quarter. GAAP-basis net income for the fourth quarter of 2010 expressed as an annualized rate of return on average assets and average common equity was 1.18% and 10.03% respectively compared with 1.12% and 9.56% respectively in the prior quarter.
As I noted earlier, the net after-tax merger-related gain in the recent quarter arising from the K Bank acquisition was $16 million or $0.14 per common share. There was no merger-related activity in the third quarter of 2010.
After-tax expense from the amortization of core deposits and other intangible assets amounted to $8 million or $0.07 per common share in both the third and fourth quarters of 2010 and M&T’s net operating income for the quarter, which excludes those items, was $196 million compared with $200 million on a lined quarter. Diluted net operating earnings per common share were $1.52 for the recent quarter compared with the $1.55 in the linked quarter.
The annualized rate of return on average tangible assets and average tangible common equity was 1.2% and 18.43% respectively compared with 1.24% and 19.58% in the third quarter of 2010. Next, I’d like to cover a few highlights from the balance sheet and the income statement.
Taxable-equivalent net interest income was $580 million for the fourth quarter of 2010, up an annualized 3% from the $576 million in the linked quarter and also increased 3% from the $565 million in the fourth quarter of 2009. The net interest margin contracted slightly during the fourth quarter averaging 3.85%, down 2 basis points from the 3.87% in the third quarter.
As we discussed on the earnings call in October, we held higher levels of short-term money market investments on the balance sheet during the fourth quarter to collateralize the seasonal surge in municipal deposits. This program negatively impacted the net interest margin by 5 basis points.
Besides from this temporary issue, the net interest margin expanded slightly, reflecting a 2 basis point benefit from prepayment penalties and cash-basis interest recognized on non-accrual loans. An additional one basis point benefit came from the favorable shift in our funding mix with deposits replacing both long-term and short-term wholesale borrowings combined with a favorable shift on the asset side as loan growth was funded by run-off in lower yielding securities.
I'll discuss our outlook for the margins in a few moments. As for the balance sheet, average loans for the fourth quarter increased by approximately $300 million or annualized 2% to $51.1 billion from $50.8 billion in the third quarter.
On an end of period basis, loans grew by an annualized 9% or approximately $1.2 billion from the linked quarter. Compared with this year's third quarter, changes in end of period loans by category were as follows.
Commercial and industrial loans grew by an annualized 19%. Loans to auto dealers to finance inventory contributed $258 million of that increase while remaining C&I loans increased by $344 million on annualized 12%.
Commercial real estate loans grew by an annualized 12%. Residential real estate loans grew by an annualized 12% as well reflecting actions we've taken at the end of the third quarter in which we discussed on the October call, specifically we began attaining a significant portion of our performing mortgage loan production.
This increase in residential loans was largely offset by 6% decline in consumer loans driven primarily by lower levels of indirect auto loans reflecting the limited returns available on these loans in the current environment. The acquisition of K Bank added approximately $93 million of average loans for the quarter and $149 million to the end of period loan balances.
While it seems clear that economic activity continues to improve, the strong commercial loan growth we experienced in December was not matched by similar inflows into our current pipeline for new business. In other words, a portion of the growth seems to have reflected a desire on the part of our clients to compete with financing needs near or around the end of the calendar year.
With that said, adjusting for this, we have seen a slow but steady increase in demand for credit over the last six months of 2010. We continue to see strong growth in core deposits.
Average core customer deposits which exclude foreign deposits and CDs over greater than $100,000, increased in the fourth quarter by an annualized 17% than the third quarter. Excluding the seasonal surge in municipal deposits that I mentioned previously, core deposits grew on an annualized rate of 13%.
Turning to non-interest income, excluding securities gains and losses and the $28 million pre-tax gain from the K Bank acquisition, non-interest income was $286 million for the recent quarter, compared with $298 million in the third quarter. Mortgage banking fees was $35 million for the quarter, down from $61 million in a linked quarter.
Approximately $11 million of this decline can be attributed to our decision to attain a higher percentage of our mortgage production, while another $5 million can be attributed to the decline in origination activity during the quarter. The remainder of the declines relates to expenses associated with our obligation to repurchase certain mortgage loans previously sold.
Service charges on deposit accounts were $111 million during the quarter, compared with $118 million in the linked quarter. This 6% decline reflected the full quarter impact of the implementation of the new Regulation E, which began halfway through the third quarter.
Securities losses in 2010’s fourth quarter amounted to $27 million, predominantly reflecting additional other than temporary impairment charges on private label mortgage-backed securities held in our securities portfolio. This compares to $8 million of securities in the third quarter.
Turning to expenses, operating expenses continue to be well-controlled during the recent quarter. Excluding merger-related expenses and amortization of intangible assets, operating expenses were $455 million, down from $467 million in the third quarter of 2010.
The fourth quarter results included a $6 million reversal of the valuation allowance on capitalized residential mortgage servicing rights and this compares to an addition of $3 million to valuation allowance in the third quarter of 2010. As of the end of 2010, we have reversed all of the valuation allowance for capitalized residential mortgage servicing rights.
The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and the net merger-related gain, was 52.5% for the fourth quarter, improved from 53.2% in the third quarter of 2010. Let's turn to credit.
Overall credit trends remained stable, though consistent with what we've seen over the course of this year included some volatility. Nonaccrual loans increased to $1.24 billion or 2.38% of total loans at the end of 2010 from $1.1 billion or 2.16% of total loans at the end of the previous quarter.
The increase is predominantly related to an $80 million loan to a residential builder and developer and $66 million of commercial construction loans to an owner operator of retirement and assisted living facilities. Other nonperforming assets consisting of assets taken into foreclosure of defaulted loans were $220 million as of December 31 compared with $193 million as of September 30.
The vast majority of the increase came as a result of the K Bank acquisition. Net charge-offs for the fourth quarter were $77 million, improved from $93 million in the third quarter of 2010.
Annualized net charge-offs as a percentage of total loans were just 60 basis points, down from 73 basis points in the linked quarter. The provision for credit losses was $85 million for the quarter compared with $93 million in the linked quarter.
The provision exceeded net charge-offs by $8 million and as a result, the allowance for loan losses increased to $903 million as of the end of 2010. The ratio of allowance for credit losses to legacy loans, which excludes acquired loans against which there is a credit mark, was 1.82%, down slightly from 1.86% in the linked quarter.
The loan was allowance as of December 31 was 2.6 times net charge-offs for the past year. We disclosed loans past due 90 days but still accruing separately from nonaccrual loans because they are deemed to be well-secured and in the process of collection, which is to say that there is low risk of principal loss.
Loans 90 days past due were $270 million at the end of the quarter, of these $214 million or 79% are guaranteed by government-related entities. Gross figures were $215 million and $194 million respectively at the end of September.
M&T's tangible common equity ratio was 6.19% at the end of the fourth quarter, an increase of 23 basis points from 5.96% at the end of the third quarter and 106 basis point increase from 513 at the end of December 31, 2009. Unrealized pretax losses on our available for sale investment portfolio were $81 million as of the end of 2010 compared with $69 million at the end of the third quarter largely reflecting the backup and interest rates late in the quarter.
Our estimate of Tier 1 common ratio as of December 31st is 6.52% up 10 basis points from 6.42% at September 30th. Turning to our outlook.
As most of you know we don’t have much in the way of earnings guidance but we’ll share our thoughts on some general trend. While the rate of recovery is slow the levels of economic activity certainly appears to be improving.
As I noted earlier loan demand seems to be firming but as we look out over 2011 we’re not expecting anything dramatic. As a result our outlook is for modest single digit year-over-year loan growth prior to any impact from our pending acquisition of Wilmington Trust.
We expect that net interest margin for 2011 to be relatively consistent with 3.84% that we reported for the full year 2010. At this point, it is our expectation that Wilmington Trust could have a slight downward impact on the net interest margin for the combined company but we’ll talk more about that as we get closer to a closing date.
As we have suggested for some time, we would expect our nonperforming loan trends to be a bit lumpy as evidenced by this quarter’s results. Our net charge-off expense in 2010 improved by 34 basis points from 2009, while unemployment remained very high.
Overall, our outlook for credit cost to only improve marginally relative to 2010 unless there is a noticeable improvement in unemployment than the overall economy. Even the headwinds from Dodd-Frank and other pending regulations we remain cautious regarding top line growth and so as we've always done, we'll continue to place a priority on operating efficiency and discipline around discretionary spending.
Overall, our goal for 2011 on this front is to sustain the improvement that we gained in our efficiency ratio during 2010. Finally, we will remind you that normalized for unusual items, the first quarter's results have tended to be seasonally low for us reflecting fewer days and higher expenses associated with the spike or reset accelerated recognition of equity compensation and on the 401(k) math.
As always, of course, all of these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future. We'll now open up the call to questions before which Wes will briefly review the instructions.
Operator
[Operator Instructions] Your first question comes from John Pancari of Evercore Partners.
John Pancari
On the credit side despite what you saw this quarter you still seem somewhat cautious particularly in terms of the lumpiness. I mean, what do you see in terms of potential employees in non-performers.
Can you give us some color in terms of what are your early stage delinquencies and watch list is telling you?
René Jones
I mean, I guess I'll start with, we did see the increase in non-performers, we mentioned two credits moved in, actually both in some way housing related but when you look at the whole, I tend to look at the whole criticized loan book, which is sort of in our system there is everything 11 and above, and that didn't change materially. In fact, the criticized loans on our balance sheet probably declined slightly during the quarter.
So when we say we expect credit to be lumpy, there are going to be things that move either way from time to time. I think probably the best example to look at the two credits that we mentioned, the first is one in our residential development portfolio that we've been looking at for some time and we had been working with to make improvements.
But at the end of the day, we saw that based on the valuation of the properties and so forth that it was warranted to move to nonaccrual. In that particular loan there will be some loss content that we've provided for.
You flip that around to the other credit, which is assisted living and quite frankly, there it's much more of a technical issue. We don't see much loss content there, but technically the client wasn't able to extend even though we're in the process of putting an extension in.
So at the end of the day, we just sort of follow the letter along if tripped over. So I don't really look necessarily at just the nonperforming number, when I look at, as you stated, the overall criticized book, it's pretty stable and in this particular quarter, it was down slightly.
John Pancari
So is that why just given that outlook is why you pretty much kept the reserve relatively stable relative to loans and despite the year over provisioning of charge-offs. So you didn't really up the reserve in anyway despite this lumpiness that you're seeing in the surprising jump in the nonperformers of the sales corps?
René Jones
That's a good description and I think you obviously will have to consider that we added $1.2 billion to the commercial loan book as well. So I think that your description is fair.
John Pancari
Then one other question. In terms of – I know you're probably evaluating this as combined with the merger here but in terms of potential TARP repayment, can you just give us an update in terms of the dialogue you may have had during the quarter with the regulators and the government in terms of the timing of TARP repayment and the potential capital raised to do so?
René Jones
Nothing really has changed. Again, we go through our risk management practices.
I think in January when we get to that point, we go to our Board and we talk about what our stress tests are and what we think for the outlook of the plan and capital and all that. So we'll get through that governance and then some time post that, as we always do, share it with the regulators.
We are free to do all that. But I think what we said still stands as we evaluate when we can stress in the long run we're not looking to be a TARP accumulator and in the near term we'll come up with some plan to how we want to pay that back.
From our perspective, our capital ratios, again, continue to grow very, very strong and I think really the sooner you move the TARP out, it actually increases your tangible generation, but no real updates on it. But when we have, we'll let you know.
Operator
Your next question comes from Todd Hagerman with Collins Stewart.
Todd Hagerman
René, just wanted to ask you a little bit more about the mortgage retention strategy, particularly in light of the pending Wilmington Trust deal. This quarter from my perspective what you added to the balance sheet was a little bit less than what I was expecting and similarly, the drop in kind of the flow sale gains on the mortgage side was a little bit more than what I was expecting.
In light of Wilmington, how should we, in your outlook for the margin and interest rate sensitivity if you will, have things kind of materially changed in the course of last couple of months, meaning that are you now little bit more optimistic in terms of rate environment going to 2011, and thinking that kind of your margin is going to be relatively stable year-over-year? I mean how should, we think about how that mortgage retention strategy in light of the coming year in kind of that modest loan growth outlook.
René Jones
Sure, Todd. So, let’s just take them in order.
So, jokingly, I think I estimated that, it might be $10 million or is $11 million. So, it was kind of what we expect in terms of volume and in terms of the margin that we lost.
Remember, we don’t deliver those loans, don’t get delivered to our balance sheet until late in the quarter and in fact this sort of first half of January. So, what you saw was the – all you saw was the impact to the gain on sale, which is upfront.
In fact, remember, the way the mortgage revenue works, is you get it when you walk alone, you book the revenue. So once that delivered, you’ll begin to see the positive impact in the first quarter of 2011.
I don’t know, when we thought about it, we didn’t see anything that changed during the quarter that would suggest that we would flip back. So, right now our plan is to continue to portfolio those mortgages.
As you know, we don’t have large residential mortgage portfolio, particularly relative to our peer group. So, no problem there.
What you’ll see when we kind of putout our case that we sort of marginally were able to – we definitely were able to slow that migration to the sort of asset sensitive. So, so we need those fixed rate assets.
I don’t know, I think loan growth will continue. I obviously don’t expect to have $1 billion a quarter.
I think we’ll wait and see for another quarter if whether or not that makes sense to continue doing that. With respect from the margin, if you do have some loan growth and you offset that with securities – what otherwise would be securities purchases, it probably does do a lot to offset any natural decline that you might have in your margin.
So, when we put everything together and we look at where we are, we don’t really expect rates to move for about three quarters. It just gives us a flat to stable margins.
I was actually a little surprised to see that normalized; we were probably up 1 basis point this quarter. That was all driven by the type of loan growth that we had.
Todd Hagerman
I was just thinking of it in terms of that the bond portfolio continues to runoff at a pretty healthy clip and again it did this quarter. As you think about just, again as you mentioned, adding some of that fixed rate products to the balance sheet, I would have expected or – again as I think about my 2011 impact and the consolidation of Wilmington Trust, then there might be a little bit more compression within that margin, and kind of the mix of assets if you will.
René Jones
We don’t see it. It’s a good question.
I’m not quite sure why, but I think our yields are pretty stable on the asset side. If you remember, when we say we’re asset sensitive, we’re kind of mismatched, and we don’t like to be.
So for us putting those assets on, this quarter they're all funded probably with core deposits which is great and if they're not, we probably would put on some additional wholesale funding. That spreads, they're going to be pretty wide relative to our 3.84% margin, right.
Todd Hagerman
What's your outlook in terms of the rate environment for 2011 embedded in your forecast?
René Jones
We’ll use the forwards. So I think it comes somewhere late in 2010, there is a set increase embedded in the forwards or something.
I am sorry, late in 2011 if I could say that right.
Operator
Your next question comes from Matt O'Connor of Deutsche Bank.
Matthew O'Connor
As we think about Basel III and what that means to M&T, have you run through some of the numbers on the RWAs? Because I think if possibly RWAs will go down given your historical losses are so low and I was just wondering how meaningful that decline might be if that is the case?
René Jones
That would be wonderful. I have done a little bit of work on that and I can't give the theories about it and sort of better than the idea that in Basel II, you got credit for your actual performance.
I just personally find it hard to believe that in the current environment but that's going to be case in Basel III. I know a few people are talking about it but we're not counting on any of that.
But I would agree with you. I think what we tend to do is we tend to look at the risk of our portfolio, how well it's collateralized against the capital.
But my guess is, I don't expect much relief from that.
Matthew O'Connor
I know there is some upward pressure on the securities book, perhaps that the loan book could help there and understand. So, I guess the question comes back then to the capital ratios.
In the past, you've probably been able to run a little less capital than other folks just because the credit is so good; the earnings power is so good, it seems like with Basel III they kind of standardize it, right. So if everyone's going to be running, I don’t know, if it’s 7% or 8% and it seems like when it comes time to repay TARP, they don't really care about the 7% number because a lot of banks are in the 9% range.
How do we reconcile that with you guys?
René Jones
I'll give you my thoughts. I mean, if you sum up everything we've heard, capital ratios are going to be higher than they were in the past.
But there is nothing that's ever been said, that there shouldn't be different capital ratios among different banks based on the risk and the quality of your portfolio, and that would be hard for us to think that anybody would suggest otherwise. So I tend to take a practical safety and soundless view and if we changed the mix of our portfolio then that would mean that we probably need to be well above 7%.
But if we're not changing the risk profile of our portfolio, maybe we don't have to as high as some. You can see the change already.
I mean, when you think about – just go back quickly, if you go back a year ago to Provident; we bought Provident; we took our tangible down to 449 and then we grew it back. Then in 2002, I think it was '03 [ph] we bought all of First and I think then we took it down to 468 or something like that and then we built it back over time.
When we announced the Wilmington deal and we gave you a general target range, that range, the numbers didn't come down at all. So our view of capital internally has changed as well and we're just more conservative about it, but I don't think that that means that all banks will have the same capital ratio down the road, just doesn't make sense.
Matthew O'Connor
I would agree with that. Then just separately, as we think about the size of your securities book and then just call it from the other liquidity that you have in the balance sheet, securities books have been coming down a little bit, came down a bit further with the auctions this quarter.
How should we think about that roughly $7 billion of securities going forward?
René Jones
We look at the mortgage repurchase program as – I mean, retaining the mortgages as a direct substitute for the securities purchase. So, if you will look internally, our reports don't say securities and residential loans internally, they say discretionary portfolio.
If we were to stop doing something on retaining the residential mortgages, we'd probably have to start buying securities, because we're overall – and discretionary assets we're historically low.
Matthew O'Connor
I would agree on that. I mean, from a liquidity point of view, is it okay if it's in the loans versus the securities, that's not an issue for me?
René Jones
Well, they’re very securitizable. So we just haven't taken the second step.
Your point is really good and over the course of the year and years to come, we're going to have to start thinking about dealing with the new liquidity rule. So even though we're much more liquid than we were over the last several years, that's sort of one of the outcomes that you might have to hold more securities, but it's too early to say those rules aren't out.
We feel pretty comfortable where we are now.
Operator
Your next question comes from Matthew Clark of Keefe, Bruyette & Woods
Matthew Clark
Just on interchange, I think based on the numbers we've seen in Nielsen report which are a little stale. Would you mind maybe quantifying how much in the way of interchange revenues you guys had in 2010 and might be at risk in 2011.
Plans to mitigate it, obviously you have Wilmington Trust coming through with Wealth Management and Corporate Trust business I'm sure will help out. But just any other plans to help mitigate the impact midyear?
René Jones
We have to-date avoided talking about or speculating about what the impact of that legislation will be. Just because we can’t get our hands around what's likely to happen.
So we haven’t disclosed any of that and we probably won’t change that until we get clearer guidance on what the actual rule is what I hear this April timeframe. What I will say is with the pulse that was out there in our minds is probably the worst case scenario for the banking industry and we're part of it.
I would also say that the dividend in a changed revenues under the proposed rule that's out there would be probably well below costs and what that means is that the business model would have to take a dramatic change in some new direction. We're talking about a big event for the industry and if you sort of legislated a way, the profitability of all of those activities the whole industry would have to change.
I can’t tell you we will be part of that but I can’t tell you what the impact is. I think I would say that the kind of off your question but the sad part about it is, there is really no clear win for the consumer either.
So too much uncertainty for us but as we get to April we'll be happy to then talk about what it means to.
Matthew Clark
Then just on in terms of the repurchase request on mortgage I think you said the balance but in terms of the impact this quarter if you don’t mind quantifying to the extent the whole thing?
René Jones
Yeah, we had the impact on it the increased quarter-over-quarter was like $10 million.
Operator
Your next question comes from Bob Ramsey of FBR Capital Markets.
Bob Ramsey
I appreciate the color about the loan pipeline heading into the first quarter so I understand there is some seasonality in the growth you saw maybe this quarter but could you just talk a little bit about maybe why neutralization trends or how the pipeline into the first compares to what you saw coming into the fourth and more generally what’s in the pipeline today is still C&I and CRE and with the fourth quarter, do you think you all saw the benefits as peers or was some of that picking up market share or just broader fall term on growth?
René Jones
Let me just give you the line utilization percentage. I have that but I just can’t see where it is.
So what I do is, I look at the pipeline and then I go back to February and I do a line way across to normalize it and what you see is the pipeline is steadily growing. There is a little bit lumpiness from time to time, a fair amount towards the end of the quarter.
But when you normalize for it, you see a steady increase. There is no difference in – how do I say this, you see it everywhere so I’ll give you some feel.
But if you look at our middle market business, right, we had growth in the portfolio and in the pipeline in Buffalo, Albany, Rochester, Southern New York, Northern PA, Central PA, Philadelphia, Hudson Valley, Washington D.C. and our commercial real estate book, it was in Buffalo, Albany, Central New York; New York City had good growth; Philadelphia, Hudson valley and a little bit in Washington D.C.
So you can see it across the board. Then when you look at overall what we saw in terms of the big increase in the pipeline during the fourth quarter and then some of which extended over to our loan growth, you had some 30% of it was in the real estate and rental space and then remember for us that would be a lot of owner occupied.
Then we probably had another 10% in healthcare, another 10% in manufacturing, and then retail trade was probably a close second. So, it's kind of much what you saw in the Fed report actually, in that, manufacturing and a number of different sectors actually saw the increase.
So, I looked at it, if you sort of normalize the way the $1.2 billion for a minute that generally most of the sectors are seeing an increase. The one that's not, as you can see by our charge on our private label mortgage-backed securities and the two real estate-related loans that went to nonperforming, that's the same story.
If projects are having trouble in housing that really hasn't improved in any way shape or form. Utilization went from 51.7% up to 52.12%.
Bob Ramsey
Maybe could you talk about some of the opportunities you all are thinking about in terms of the Wilmington Trust wealth products and sort of plans and early auctions that you all are taking to capitalize on that?
René Jones
At this point we're heavily into the integration process. I think we thought and have sort of proven out is that as we meet the clients on the wealth management side and the trust business, we continue to see that the customers fit into our real house and there is a lot of opportunity for us, particularly as we look to the M&T footprint, we've already seen responses and enquiries from our own customer base asking us about Wilmington and what the prospects of the business and opportunities are there.
I think when you look at our basic business, which is where the lender to middle market and small business companies, which means that you have – a lot of the people that we're doing business with are owner operators, or having a lot invested in their business. It kind of done to have nicely; sort of at end of the day, we see a lot of prices where we'll be able to add that sort of higher service wealth management capability to that group.
When you think about it, they operated in Delaware and some folks at other places on the wealth side. Really, our distribution in Baltimore with a number one distribution there, and quite frankly, our market share in the other places we do business creates a lot of opportunity.
The challenge is going to be just what you saw; it's on the credit side. So there is a lot of work that we have to do there, and we'll continue to work out that with our partners.
I guess what I would say is that the one bright spot on the credit side is that if there was any concern about lending that had gone on in the year past before we showed up. We would suggest that that's probably abating because that Wellington now has sort of the strength of M&T behind it.
That's also very positive for their customers in the commercial side. So, we see a lot of positives, but I would also say that we had a lot of work to do.
Operator
Your next question comes from Steve Alexopoulos of JP Morgan Securities.
Steve Alexopoulos
Could you just clarify the comments you made on the smaller of the two credits that moved into nonaccrual. Just wondering, is this renewal issue that should be corrected here in the first quarter and taken out of nonaccrual, or is this a distress loan modification issue?
René Jones
Well, we'll find out I guess. It’s a wonderful question.
Today, based on all the facts, it looks like more of a technical issue, but then have you actually got it and secure it, you don't know that. So that's why we put it in non-performing.
We sort of turn to air on the positive side of things. I mean, you’re right in this space.
So, it would be a credit where we’re hoping that that the renewal takes place. There's some possibility that it might not.
But, again, as we look at it, we don't see much lost content there. So, technically I guess it could go either way.
Steve Alexopoulos
Do you own these, outright these two credits or these participations?
René Jones
Do we own them outright?
Steve Alexopoulos
In other words, are you participating with other banks with either of these credits?
René Jones
I don't recall these being participations for one, I’m just trying to think – actually, one potentially, the larger one potentially could be with some small institutions, but the second one I don't recall where it is. If that changes, I'll get something to you in a few minutes.
Steve Alexopoulos
René given, maybe we'll shift gears, given the improvement you're seeing in commercial loan growth, does this change in your outlook Bayview at all for 2011, and do you expect that to be less of a financial drag for the year?
René Jones
We don't have any change – again, I think from valuation standpoint, the engine behind lots of the valuation that we have in Bayview has to do with Bayview asset management. We were relying very, very little on the idea or if any, on the idea that the securitization market will come back.
So we haven't changed our view there at all, and I wouldn't expect in the near term much change and the income statement impact.
Steve Alexopoulos
Just final. Do you have an estimated date at this point where you'll close the Wilmington deal?
René Jones
No, we do not.
Steve Alexopoulos
No. Still second or third quarter?
René Jones
Yeah, we got to go through the application process. There was never any discussion in the third quarter, but we had targeted somewhere of in the mid year, which we were thinking probably somewhere in the second quarter.
You got to go through your process, so you don't really know, and the two loans are our loss.
Operator
Your next question comes from Ken Usdin of Jefferies.
Kenneth Usdin
A question, big picture about just loans versus deposit growth and I'm just wondering if you can characterize what part of the business or the deposit growth coming in and generally how would you expect as commercial loan growth does start to come back, are you starting to see any behavioral changes as far as the commercial deposits, and how you expect one side of the balance sheet to act versus the other, as we do start to see some loan growth come back?
René Jones
I haven't heard or seen anything that suggests on a big change, particularly in this quarter. It's a growth that we have been seeing; say first, second, and third quarter seem to be slowing a bit on the deposit side, well, obviously, that wasn't the case this quarter.
But I haven't seen anything that suggested that. I don't have really more there.
I would expect that deposit balances are elevated, first, because of the low interest rates, which this is pretty typical that happens, and because of the severity of the low interest rates, you say a lot of money that would otherwise be parked in money fund. One of the things I think is interesting is that, as that will happen we'll see some maybe runoff, natural runoff on the deposit side, but it is interesting that the business that will benefit from that would be our Trust and Investment Group and Wilmington Trust business, right, so, but no evidence.
Kenneth Usdin
Well, I guess the question is so then where is incremental deposit growth coming from today, given that rates have been low for such a long time and as you start to think about rates eventually going higher, how do you expect your deposit pricing to act versus rate increases? Understanding your point the Company is inheriting asset sensitive, do you expect any different change as far as this cycle versus previous cycles?
René Jones
No, I don't. I mean, again this is evidence, but I haven't seen much.
So, I think things probably will move text book. I look out next year if we have modest loan growth which is a change organically from past several quarters than I would guess that we do not have a lot of deposit growth.
But I don't see, if it is classic.
Kenneth Usdin
Then my second question is just couple of specific line items. Just can you talk through the strength in trading revenues and the even ex the K Bank gain, other income was above our run rate, was anything going in either of those two areas from either just business activity or one-time stuff?
René Jones
No, all business activity, I mean let me answer the other income first. The other income in one way shape or form cannot be classified as those commercial fees.
So, we had an increase in loan syndication fees syndicating the credit out. We had an increase in the advisory fees, where we're helping someone with a liquidity event during the quarter.
We had an increase in general loan fees. We have ended term leases.
Then if you go up to trading, the increase in trading was people doing swaps, swapping their fixed rate loans to floating I believe. So, all of that activity was really commercial activity this quarter.
Kenneth Usdin
Is it fair to say as we would see a general improvement in commercial activity those two areas should continue to do fairly well or grow along the lines with the commercial book?
René Jones
The trading is very rate sensitive and turning what's moving with rates. So you see that coming in and out as the rates change, but the other business I think that's pretty fair to say.
Our syndication fees have been relatively low just because the pipeline was low in the first half of the year, and now you've seen a change there, so I wouldn't agree with that.
Operator
Your next question comes from John Fox of Fenimore Asset Management.
John Fox
My main question was on the residential mortgages, which you answered. Second question is, René when you have the expense for the mortgage put backs, which I think you said increased about $10 million, where is that accounted for, does that run through the mortgage line or is it in other expense or where we see that in the income statement?
René Jones
It runs through revenue, so that's the other part of the decline from the $61 million to the $35 million.
John Fox
So it's netted in revenue? In mortgage.
René Jones
Mortgage banking revenues.
Operator
Your next question comes from Andrew Jave [ph] with Cowen.
Andrew Jave
Couple of quick questions. First is, if your portfolio in mortgages are you also open to buying loans from other financial institutions.
If so, explain what are you looking for?
René Jones
Well, actually that's the point, we just think that it makes more sense to retain the mortgages that we have rather than buy mortgages and securities from somebody else, because you give up a transaction fee. So we just think it's sufficient to keep our own, so we haven't been buying mortgages and we typically don't, sometimes we'll buy servicing.
Andrew Jave
Second question is about unrealized losses and securities versus the market interest rates that everyone can easily observe. Are there some details or call it you can give us so that we can better relate it too?
René Jones
No. I think the unrealized loss would have been greater probably towards the end of November, but then we had a swing back in the rates, all right.
So I don't know Don, is there anything you could think of that would have caused it to be.
Don MacLeod
No. There is nothing there.
Operator
Your next question comes from Collyn Gilbert with Stifel Nicolaus.
Collyn Gilbert
René, I just got a big picture for you as you look at your potential growth opportunities within the business. What do you think given where we are in the economic cycle and rates and everything?
Where do you think your best opportunities are for putting on growth with the best risk adjusted returns?
René Jones
We think it's kind of an easy answer for me and its right in our warehouses the business banking and middle market clients and when I say that obviously some of them are doing some real estate lending with us but that type of clients we think has got great prospects. We've never seen a big fall-off as you can see in our rankings in a small business side.
Having said that all those customers have been relatively cautious, so I don't view us as having really lost any share or not being well positioned when they start to actually make investments. I think that's a real positive.
I do think and I can't say enough I am very encouraged by the idea of having a new product set in the Wilmington Trust side to help with that process. I think as was the case for our small investment banking and our advisory business and a few other businesses that we got from offers, I would think that if we do that well that's going to provide additional opportunity, but the customer will be the same customer.
Collyn Gilbert
That doesn't change at all. Can you just give us an update on what some of the larger credits might be right now on your watch list?
René Jones
I just told you that.
Collyn Gilbert
…that are not yet in nonperformers.
René Jones
Let me see. I don't want to give you a short of an answer.
So let me give you – give me a second here. I mean I will say generally if you look at credit, there is not a lot of large loans that we haven't talked about some way shape or form.
The two largest are the two that we just talked about. So we don't have anything larger than that in our non-performing book and as you go to the third largest loan…
Collyn Gilbert
I don't mean to interrupt you, but I don't mean that it's currently in the nonperforming book but that’s not that you keep that's currently performing that you're keeping an eye on. Because neither of these – I mean they may be…
René Jones
Yeah. I mean, I – specific credits and so – I mean, there is just not a lot that if you look from a year ago where you have credits of large size, you just don't see a lot of that.
There is still probably stuff in the resi space or the construction space which would be anything tied to housing which would be lingering in there. But they are not large credits and these credits you saw here would be the exception.
Collyn Gilbert
I guess I'm just a little surprised that given where we are in this housing cycle but we're still seeing large-sized credits move to nonperforming. I think given that you said you had an eye on them for a while but I guess I'm just trying to dig into that.
How much longer into this cycle do we need to go that we're going to still see large credits migrate into there and you're saying that not many?
René Jones
I would say not many. Those were not typical.
Hand on one second. We’re just looking at, for example, in the fourth quarter the catalogue addition; I mean, there is nothing above $25 million if they’re just trying to be smaller, whereas that would not have been the case a year or more ago.
Operator
Your next question comes from Gary Paul, a private investor.
Gary Paul
I have two topics; one relates to allowance and the other relates to capital. As people have asked questions and others have done on the repayment of TARP and whether you need to raise capital and since you have not shown a concern of over-involvement of government, the way the big banks did for your having TARP.
Since the dividend on that is 5% now and doesn’t go to 9% until 2013, if the economy doesn’t become robust and absent acquisitions which probably won’t materially alter your capital needs because almost any active, any untroubled one will be all stock at present. I'm not asking you if this is your strategy.
But it looks to me like you could hold the TARP which Dodd-Frank allows as capital until the rate goes up to 9% in 2013, and with your capital generation need to issue little or no new capital as some people are concerned about. Is that a viable potential?
I'm not asking if it's the strategy.
René Jones
I would say Gary that I don't like the idea because the TARP does not absorb any losses, all it does is, saying your financial comment. So, the idea that you think you're getting something that you're having some peep laid out there, it doesn't make much sense because you're not really using it for actual loss of building capacity, right.
Gary Paul
Your cost of common capitals has got to be above 5%, not cash flow?
René Jones
I’m with you, but it's all about risk management and that doesn't absorb any losses, it just takes (inaudible) go generation away. So, that's how I think about it.
Gary Paul
The second question, the government in its usual – let's forget the consequences, has caused any bank doing meaningful acquisitions to have allowance ratios that don't really give you enough on adequacy because you no longer have an allowance related to the acquiree. Can you with respect to deals already completed give any type of ballpark as to how much mark for allowance is in your acquired bank's marks.
You give them for example $0.5 billion when you start Wilmington Trust, but two years down the road, you don't know how much of the loans are there and you don't know how much of the mark is there?
René Jones
I feel like we didn't some of it [ph], I don't have it in front of me, but, I would say that if you look at the mark that we did for Provident. First of all, just in terms of – I think you understand it, but you'll have to take a look at your disclose rate, you really would have to change and instead of allowance for loans, just make allowance to marks of loan and we do that for M&T, although I don't have in front of me, they are very, very high, because you have to add in the equivalent of the $320 million that we had of credit estimates in our marks for Provident.
We've probably had charge-offs of maybe $120 million out of the Provident portfolio. The last time I look, which is not this recent quarter, but we were more than $100 million ahead on that.
So that probably gives you some sort of sense. We did assess it in last June and what we said is, we didn't think that a 100% of that $100 million was necessary, something that we could reverse, because we said, there maybe some of it actually is going to be pushed out, and maybe the cycle of this like to go longer.
If you take those numbers, you can get yourselves to what we have as a rough remaining mark that's out there.
Gary Paul
So, am I interpreting your statement accurately to say that in a sense, there is $100 million to $200 million of unrecorded reserves that are sort of reserves for losses.
René Jones
I hate to think – we haven't disclosed that particular number and if we were to, we just put it in the K, but there is a substantial amount of the mark remaining and as you get to Wilmington, we will work the same way with the number that we put out there. So if you think about it, just go to Wilmington, the bank is one-fifth our size and the market is bigger than our allowance.
So the old ratios just don’t work.
Gary Paul
No, no, I agree with that and I’m just trying to bust through and see what order of magnitude is really there and it does sound like there is $100 million or $200 million that I should view as additional allowance unofficially?
René Jones
Our controller is sitting here and saying no. I appreciate the question; we'll consider how much more we should be disclosing about that in a moment but he is stopping us from that.
Operator
Your next question comes from Brian Foran of Nomura.
Brian Foran
The statement, limited returns on indirect auto in the current environment. Can you just talk about, is that a price statement or is that a future projected losses statement or something else that's driving that.
Then are the returns out right bad or they just not as good as what you can get on other opportunities?
René Jones
I think that we want a little bit a pro forma on every single month of all the volumes that we do which a full P&L and we have an appetite for that business, because we like it. But at times the competition gets a little frothy and as we – if we can generate a return above our cost of capital then our appetite for the volume actually slows down and I would say that in some ways I kind of guess it has to do with the fact that we just came through the cycle where there was not a lot of credit demand.
So, a number of banks were probably going to that space and it just makes it very competitive in terms of pricing and that takes the returns down to a breakeven economics. So we tend to have a little bit of risk on there and we’d just rather take the slower growth than not generate economic profits.
Brian Foran
Then a follow-up on the mortgage retention. Given how high gain on sale is right now across the industry, is portfolio and mortgages even more profitable than the gain on sell route or is it more about the benefits you get from an AUM perspective make it worthwhile to portfolio things even if the standalone return is a little lower?
René Jones
Generally, it's the latter. But if it’s an AUM issue, we don't see much of an impact on our long run income statement from that move and the economics for selling, retaining should be generally the same as long as you are funding it properly, right, because you are not doing a carry trade or something like that.
Operator
Your next question comes from Gerard Cassidy of RBS.
Gerard Cassidy
My other question was just asked, but to follow up on that question, do you think the – is the competition in the indirect auto space coming more from banks expanding more aggressively or is it the cap that is coming back into the business?
René Jones
I don't know about the cap. But I can tell in the bank space that the way I look at it is there is probably two camps.
There is a camp that just has a lower cost of borrowing than us and I think you've heard some stories about the securitization market being back and appetite for that and so that actually pulls demand away from us because we just don't have as lower cost of borrowing as some of the bigger players and so that gives them a little advantage. Then I think there is another half which is just smaller institutions chasing the assets that they can get, right?
I don't know about the captives?
Gerard Cassidy
Regarding loan demand in general when we talk to you, when your guys on the front line talk to their commercial customers are they seeing any signs or feeling better that your customers are going to maybe drawing down lines on commercial to build up for inventories or capital expenditures. Are you seeing any evidence of that yet?
René Jones
The last survey we did was in the third quarter of some kind of dry on new information but we've seen generally positive signs from our customer base. A quarter ago they were just going to sidelines a bit but very healthy you seek a little bit of utilization pick up, but we've most of the stories I have heard are generally positive ones.
Gerard Cassidy
Finally, when you guys do your asset liability modeling what type of assumptions are you using should the Fed start raising Fed fund rate let’s say in the second half of this year for your interest bearing deposits on retail side what type of assumption are you using on the amount of those deposits that will reprice after the first Fed funds an increase of let’s say 50 basis points?
René Jones
Very specific I haven’t got that question a long time, I have to get a little (inaudible).
Gerard Cassidy
Now we really have been giving you just all easy questions?
René Jones
Yeah, I not saying that our reactivity is probably pretty consistent with the past and we move up to it, but I just don’t have it right in front of me.
Gerard Cassidy
I could hear from Don later.
René Jones
Yeah. We will be happy to provide it.
I think we do provide that kind of information in our disclosures, so…
Operator
Your next question comes from Mac Hodgson with SunTrust Robinson Humphrey.
Mac Hodgson
On a two large new nonaccrual loans in the quarter, where are those located from a market perspective or geographic standpoint?
René Jones
We didn’t say that, well I think one is in the PA area, the other would be customer – customer in our Maryland market, it’s not acquired loan.
Mac Hodgson
Then on capital, when you did the Wilmington Trust acquisition you estimated that the TCE range at the second quarter of 596 to 640, is that still accurate and does that assume any sort of capital issued to support the acquisition?
René Jones
We haven't changed anything we said on Wilmington Trust and I think the nice part of that is, we have some time to get in there and see how everything works out both for M&T and Wilmington and then if it changes we’ll say something, but haven’t said anything there.
Mac Hodgson
Just to clarify that, so it does not assume a capital raise for the acquisition?
René Jones
What we had said is that we bought about the accretion in the economics of the deal within the idea that if there was potential TARP repayment we’ve included all the costs and economics in there. So we haven’t talked about capital raise, we’ve just talked about the economics of the deal.
Mac Hodgson
Then just one last on M&A, should we assume you guys are out of the market for any sort similar buys transaction until Wilmington is closed and fully integrated, say maybe 2012 would be a time when you’d be ready?
René Jones
For other activity or other M&A activity, is that your question?
Mac Hodgson
Yeah, of kind of seller size?
René Jones
I would say generally that we get through our work pretty quickly, but in terms of our mindset today, we're very focused on Wilmington, and we think that it would be silly to focus on something else, because if we can execute it well, it means a lot to both organizations. So, we really haven't talked much about that, but I guess as we get towards the end of next year ask us the question again and we'll tell you, if we're on to other things.
But I think Wilmington is our focus. If I could just get back to Gerard's question, we had initially first rate hike, if you saw a rate hike I think we had initially about 30% reactivity, but you got to take a look at that.
I think what it basically says is, we got a fair amount of cushion I think it's pretty consistent with what we have seen in the past. We'll take a look at it over a longer period than just sort it from the initial hike.
Operator
Your next question comes from Sachin Shah of Capstone Global.
Sachin Shah
I just wanted to follow-up on this regulatory approval process of Wilmington Trust, any kind of clarity or transparency on where some of these regulatory approvals stand besides the OTS or where approval is never required.
René Jones
As the approvals happen and they become public, we'll talk about it. But there is no update.
Sachin Shah
Any comment on when you expect a shareholder vote, if you have on Wilmington side?
René Jones
No, no news there.
Sachin Shah
When you see second quarter possibility of a deal close, are we talking Easter second quarter or are we talking Memorial Day second quarter?
René Jones
We don't have a date, so basically that information is what we said on November 1st when we announced the deal and if we have an update to it we'll say it publicly.
Sachin Shah
Just one last question. Now you mentioned the loan losses when you announced the deal about $1 billion or so.
Is there any concern about consummating the deal, any issues as far as the loan losses, anything that would deter you from this consummated deal as you're kind of working through integration and completing the deal?
René Jones
If we had a material issue we would've said it.
Operator
[Operator Instructions] Matthew Kelley of Sterne Agee Leach.
Matthew Kelley
I was wondering on the residential construction book of business, are you seeing any pockets of strength throughout the footprint on C&D loans or is it weak across the entire franchise?
René Jones
No, I don't think it's – I don't see any differentiation really across the regions. I think it's more differentiated by the strength of the underlying borrower and their individual wherewithal.
So, I think it's a case-by-case basis. Some projects are moving and even within the two, one of them is showing and moving property and the other is doing lesser than some.
Matthew Kelley
The one other question, just on the mortgage banking business, the gain on sale margins in the fourth quarter versus what you're seeing today and what you were seeing in the first half of the year, what kind of changes have you seen?
René Jones
Gain was somewhat a little less in the fourth quarter than the third but actually probably – fourth quarter probably looked more like the first and second. Third looks relatively high but there is still high gain on sale margins relative to history.
Matthew Kelley
What are those today you're seeing?
René Jones
I would probably still – probably what they were in the past and maybe in the past we were somewhere between any given time maybe between 80 and 100 basis points, and starting with your 100 basis points when you said that.
Operator
At this time, I'm showing no further questions. So I'll turn the conference back to Mr.
MacLeod for any closing remarks.
Don MacLeod
Again, thank you all for participating today. As always, if clarification of any items on the call or news release is necessary, please contact our Investor Relations department at 716-842-5138.
Operator
Ladies and gentlemen, that concludes the M&T Bank fourth quarter fiscal year 2010 earnings conference call. We appreciate your time.
You may now disconnect.