million, pays cumulative dividends at a rate of 5% through November 2013 and 9% thereafter, and is held by the U.S. Department of Treasury under the Troubled Asset Relief Program - Capital Purchase Program.
The transaction has been accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded by M&T at their estimated fair values as of the acquisition date. Assets acquired totaled $6.3 billion, including $4.0 billion of loans and leases (including approximately $1.7 billion of commercial real estate loans, $1.4 billion of consumer loans, $700 million of commercial loans and leases and $300 million of residential real estate loans) and $1.0 billion of investment securities. Liabilities assumed were $5.9 billion, including $5.1 billion of deposits. The transaction added $436 million to M&T's stockholders' equity, including $280 million of common equity and $156 million of preferred equity. In connection with the acquisition, the Company recorded $332 million of goodwill and $63 million of core deposit intangible. The core deposit intangible is being amortized over seven years using an accelerated method. The acquisition of Provident expands the Company's presence in the Mid-Atlantic area, gives the Company the second largest deposit share in Maryland, and tripled the Company's presence in Virginia.
Application of the acquisition method requires that acquired loans be recorded at fair value and prohibits the carry over of the acquired entity's allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans. The impact of estimated credit losses on all acquired loans was considered in the estimation of future cash flows used in the determination of estimated fair value as of the acquisition date.
Merger-related expenses associated with the acquisition of Provident incurred during the quarters ended June 30 and March 31, 2009 totaled $66 million ($40 million after tax effect) and $2 million ($1 million after tax effect), respectively. Such expenses were for professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; costs related to branch and office consolidations; costs related to termination of existing Provident contractual arrangements for various services; initial marketing and promotion expenses designed to introduce M&T Bank to Provident's customers; severance and incentive compensation costs; travel costs; and printing, supplies and other costs of commencing operations in new markets and offices. The Company will incur additional merger-related expenses in the second half of 2009, although such costs are expected to be substantially less than the amount incurred in the first six months of 2009. Additional information about the acquisition of Provident is provided in note 2 of Notes to Financial Statements.
The condition of the residential real estate marketplace and the U.S. economy from 2007 through the first half of 2009 has had a significant impact on the financial services industry as a whole, and specifically on the financial results of the Company. A pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values and higher delinquencies and charge-offs of loans, including loans to builders and developers of residential real estate. During 2009, the Company has experienced higher delinquencies and charge-offs related to its commercial loan and commercial real estate loan portfolios as well. Additionally, investment securities backed by residential and commercial real estate have reflected substantial unrealized losses due to a lack of liquidity in the financial markets and anticipated credit losses. Many financial institutions, including the Company, have taken charges for those unrealized losses that were deemed to be other than temporary.
The Company's financial results for the second quarter of 2009 were adversely impacted by certain notable events. During the recent quarter, the Federal Deposit Insurance Corporation ("FDIC") announced that it would levy a special assessment on insured financial institutions to rebuild the Deposit

Insurance Fund. That special assessment amounted to $33 million ($20 million after tax effect, or $.17 of diluted earnings per common share). Also during the recent quarter, other-than-temporary impairment charges of $25 million (pre-tax) were recorded on certain privately issued collateralized mortgage obligations ("CMOs") backed by residential real estate loans and collateralized debt obligations ("CDOs") backed by pooled trust preferred securities of financial institutions. Such securities are held in the Company's available-for-sale investment securities portfolio. Those charges reduced net income and diluted earnings per common share by $15 million and $.13, respectively.
The Company's financial results for the first quarter of 2009 reflected other-than-temporary impairment charges of $32 million ($20 million after taxes, or $.18 of diluted earnings per common share) that were recorded on certain privately issued CMOs. Those securities, which are secured by residential real estate loans, are also held in the Company's available-for-sale investment securities portfolio.
Reflected in the Company's financial results for the first quarter of 2008 was $29 million, or $.26 of diluted earnings per share, resulting from the status of M&T Bank as a member bank of Visa. During the last quarter of 2007, Visa completed a reorganization in contemplation of its initial public offering ("IPO") in 2008. As part of that reorganization M&T Bank and other member banks of Visa received shares of Class B common stock of Visa. Those banks are also obligated under various agreements with Visa to share in losses stemming from certain litigation involving Visa ("Covered Litigation"). As of December 31, 2007, although Visa was expected to set aside a portion of the proceeds from its IPO in an escrow account to fund any judgments or settlements that may arise out of the Covered Litigation, guidance from the Securities and Exchange Commission ("SEC") indicated that Visa member banks should record a liability for the fair value of the contingent obligation to Visa. The estimation of the Company's proportionate share of any potential losses related to the Covered Litigation was extremely difficult and involved a great deal of judgment. Nevertheless, in the fourth quarter of 2007 the Company recorded a pre-tax charge of $23 million ($14 million after tax effect, or $.13 per diluted common share) related to the Covered Litigation. In accordance with generally accepted accounting principles ("GAAP") and consistent with the SEC guidance, the Company did not recognize any value for its common stock ownership interest in Visa as of the 2007 year-end. During the first quarter of 2008, Visa completed its IPO and, as part of the transaction, funded an escrow account with $3 billion from the proceeds of the IPO to cover potential settlements arising out of the Covered Litigation. As a result, during the first three months of 2008, the Company reversed approximately $15 million of the $23 million accrued during the fourth quarter of 2007 for the Covered Litigation. In addition, M&T Bank was allocated 1,967,028 Class B common shares of Visa based on its proportionate ownership of Visa. Of those shares, 760,455 were mandatorily redeemed in March 2008 for an after-tax gain of $20 million ($33 million pre-tax). That pre-tax amount was recorded as gain on bank investment securities in the consolidated statement of income for 2008's initial quarter.
Supplemental Reporting of Non-GAAP Results of Operations As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.7 billion at June 30, 2009, compared with $3.4 billion at each of June 30, 2008 and December 31, 2008. Included in such intangible assets was goodwill of $3.5 billion at June 30, 2009 and $3.2 billion at each of June 30 and December 31, 2008. Amortization of core deposit and other intangible assets, after tax effect, was $9 million during each of the second and first quarters of 2009, ($.08 per diluted common share and $.09 per diluted common share, respectively) and $10 million ($.09 per diluted common share) in the second quarter of 2008. For the six-month periods ended June 30,

2009 and 2008, amortization of core deposit and other intangible assets, after tax effect, totaled $19 million ($.17 per diluted common share) and $21 million ($.19 per diluted common share), respectively.
M&T consistently provides supplemental reporting of its results on a "net operating" or "tangible" basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and expenses associated with merging acquired operations into the Company, since such expenses are considered by management to be "nonoperating" in nature. Although "net operating income" as defined by M&T is not a GAAP measure, M&T's management believes that this information helps investors understand the effect of acquisition activity in reported results.
Net operating income was $101 million in the second quarter of 2009, compared with $170 million in the year-earlier quarter. Diluted net operating earnings per common share for the recent quarter were $.79, compared with $1.53 in the second quarter of 2008. Net operating income and diluted net operating earnings per common share were $75 million and $.59, respectively, in the first quarter of 2009. For the first six months of 2009, net operating income and diluted net operating earnings per common share were $176 million and $1.39, respectively, compared with $386 million and $3.47, respectively, in the similar 2008 period.
Net operating income expressed as an annualized return on average tangible assets was .64% in the second quarter of 2009, compared with 1.10% in the year-earlier quarter and .50% in the initial 2009 quarter. Net operating income expressed as an annualized return on average tangible common equity was 12.08% in the recently completed quarter, compared with 22.20% and 9.36% in the quarters ended June 30, 2008 and March 31, 2009, respectively. For the first half of 2009, net operating income represented an annualized return on average tangible assets and average tangible common stockholders' equity of .57% and 10.76%, respectively, compared with 1.25% and 25.04%, respectively, in the six-month period ended June 30, 2008.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income rose 3% to $507 million in the second quarter of 2009 from $492 million in the corresponding quarter of 2008. That improvement was the result of higher average earning assets, which increased to $59.3 billion in the recent quarter from $58.5 billion in the second quarter of 2008, and a 4 basis point (hundredths of one percent) improvement in the Company's net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets.
Taxable-equivalent net interest income totaled $453 million in the first quarter of 2009. The recent quarter's significant improvement from the immediately preceding quarter resulted from a 24 basis point widening of the net interest margin and a rise in average earning assets of $1.8 billion. The improvement in net interest margin was largely attributable to declines in the rates paid on deposits and long-term borrowings. The higher level of earning assets in the recent quarter was the result of assets obtained in the Provident transaction, which at the acquisition date totaled approximately $5.1 billion.
For the first half of 2009, taxable-equivalent net interest income was $960 million, 2% below $977 million in the corresponding period of 2008. That decline was largely attributable to a 7 basis point narrowing of the Company's net interest margin due to a lower contribution of interest-free funds.

Average loans and leases rose $1.0 billion, or 2%, to $50.6 billion in the second quarter of 2009 from $49.5 billion in the similar 2008 quarter, and were $1.7 billion, or 4%, higher than the $48.8 billion averaged in the first quarter of 2009. Included in average loans and leases in the recent quarter were loans obtained in the Provident acquisition, which added approximately $1.7 billion to the average loan and lease total. Commercial loans and leases averaged $14.1 billion in the second quarter of 2009, up $266 million or 2% from $13.8 billion in the year-earlier quarter. Such loans and leases acquired from Provident added approximately $300 million to the recent quarter's average total. Average commercial real estate loans were $19.7 billion in the recent quarter, $1.2 billion or 7% higher than $18.5 billion in 2008's second quarter, and reflected loans obtained from Provident averaging approximately $700 million in the recent quarter. Average outstanding residential real estate loans declined $764 million, or 13%, to $5.3 billion in the second quarter of 2009, as compared with the $6.0 billion averaged in the year-earlier quarter. Included in that portfolio were loans held for sale, which averaged $720 million in the recent quarter, compared with $728 million in the second quarter of 2008, and loans acquired from Provident, which averaged $100 million in the recent quarter. The decline in average residential real estate loans from 2008's second quarter to the recent quarter was largely attributable to securitization transactions in June and July 2008, which aggregated $875 million and resulted in the transfer of balances from loans to investment securities. A similar securitization in March 2009 was completed aggregating $141 million. In each of those transactions residential real estate loans were securitized into mortgage-backed securities guaranteed by the Federal National Mortgage Association ("Fannie Mae"), which are now held in the Company's available-for-sale investment securities portfolio. The securitizations were completed to improve the Company's liquidity, because investment securities may be more easily pledged as collateral for borrowings, and to enhance regulatory capital ratios, because Fannie Mae guaranteed securities have a lower risk rating than whole loans for regulatory capital purposes. Average consumer loans rose 3% or $301 million from the year-earlier period. That growth was due to loans related to the Provident acquisition, which averaged $600 million (largely home equity loans and lines of credit), partially offset by a decline in average automobile loans and leases.
The predominant factor contributing to the growth in average loans outstanding from $48.8 billion in 2009's initial quarter to $50.6 billion in the second quarter of 2009 was the addition of the Provident loans. Excluding the impact of the acquired loans, total average loans outstanding were little changed from the first quarter to the second quarter of 2009. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions

                                                          Percent increase
                                                           (decrease) from
                                        2nd Qtr.      2nd Qtr.        1st Qtr.
                                          2009          2008            2009
          Commercial, financial, etc.   $  14,067             2 %             - %
          Real estate - commercial         19,719             7               5
          Real estate - consumer            5,262           (13 )             5
          Consumer
          Automobile                        3,194           (12 )            (2 )
          Home equity lines                 5,218            19               9
          Home equity loans                   981           (10 )             4
          Other                             2,113             -               6

          Total consumer                   11,506             3               5

          Total                         $  50,554             2 %             4 %

For the first two quarters of 2009, average loans and leases totaled $49.7 billion, 1% above $49.0 billion in the first six months of 2008. Increases in average balances of commercial loans and leases and commercial real estate loans were partially offset by declines in average residential real estate loans outstanding due largely to the securitization transactions already noted. Acquired Provident loans added approximately $850 million to average loan and lease balances in the first half of 2009.
The investment securities portfolio averaged $8.5 billion in each of the first and second quarters of 2009, compared with $8.8 billion in the second quarter of 2008. The decline in such securities from the second quarter of 2008 to the recent quarter largely reflects paydowns of mortgage-backed securities, partially offset by the Fannie Mae mortgage-backed securities created in the securitization transactions already noted and by investment securities obtained in the Provident transaction. Securities obtained in the Provident transaction increased average investment securities balances in the recent quarter by approximately $450 million. As compared with the initial quarter of 2009, the impact of the already noted March 2009 securitization and the acquired Provident investment securities was offset by paydowns of mortgage-backed securities.
The investment securities portfolio is largely comprised of residential and commercial mortgage-backed securities and CMOs, debt securities issued by municipalities, debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to the risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio following completion of a business combination.
The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as "other than temporary." As previously noted, an other-than-temporary impairment charge of $25 million (pre-tax) was recognized in the second quarter of 2009 related to certain privately issued CMOs and CDOs held in the Company's available-for-sale investment securities portfolio. During 2009's first quarter, the Company recognized other-than-temporary impairment charges of $32 million (pre-tax) related to certain privately issued CMOs. Those securities, which are collateralized by residential real estate loans, are also held in the Company's available-for-sale investment securities portfolio. In the second quarter of 2008, an other-than-temporary impairment charge of $6 million was recognized on one CMO backed by option adjustable rate residential mortgages. Weak economic conditions, rising unemployment and declining real estate values are significant factors contributing to the recognition of the other-than-temporary impairment charges. As of June 30, 2009 and December 31, 2008, the Company concluded that the remaining declines associated with the rest of the investment securities portfolio were temporary in nature. That conclusion was based on management's assessment of future cash flows associated with individual investment securities as of each respective date. A further discussion of fair values of investment securities is included herein under the heading "Capital." Additional information about the investment securities portfolio is included in notes 3 and 10 of Notes to Financial Statements.
Other earning assets include deposits at banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $235 million in the recent quarter, compared with $173 million and $195 million in the second quarter of 2008 and the first quarter of 2009, respectively. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for

loans, which generally yield more than investment securities and other earning assets, ongoing repayments, the level of deposits, and management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets totaled $59.3 billion in the second quarter of 2009, compared with $58.5 billion in the similar quarter of 2008. Average earning assets were $57.5 billion in the initial quarter of 2009, and aggregated $58.4 billion and $58.1 billion during the six-month periods ended June 30, 2009 and 2008, respectively.
The most significant source of funding for the Company is core deposits, which are comprised of noninterest-bearing deposits, nonbrokered interest-bearing transaction accounts, nonbrokered savings deposits and nonbrokered domestic time deposits under $100,000. The Company's branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned bank subsidiary of M&T, are also included in core deposits. Average core deposits aggregated $38.2 billion in the second quarter of 2009, compared with $31.6 billion in the second quarter of 2008 and $34.7 billion in the initial 2009 quarter. The acquisition of Provident added approximately $1.4 billion to average core deposits in the second quarter of 2009. Excluding the impact of deposits obtained in the Provident transaction, the growth in core deposits since the second quarter of 2008 was due, in part, to a lower interest rate environment and to the continuing recessionary environment in the U.S., and its impact on the attractiveness of alternative investments to the Company's customers. During the declining interest rate environment, over the last twelve months the Company has also experienced a shift in customer savings trends, as average time deposits have continued to decline, while average noninterest-bearing deposits and savings deposits have increased. The following table provides an analysis of quarterly changes in the . . .