M&T Bank Corp (MTB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to M&T Bank's third-quarter 2013 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Maria and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's third-quarter 2013 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.

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today. As I noted in the press release, M&T's profits softened during the recent quarter as compared with the previous quarter. This reflects the impact from -- the impact to M&T from the industry wide slowdown in mortgage banking activity as well as higher operating expense arising from our investment in risk management, capital planning and stress testing, regulatory compliance, and technology and operating infrastructure. I'll cover more details on these investments in a moment.

The recent quarter was also marked by a continued strengthening of our tier 1 common capital ratio which increased by 52 basis points to 9.07%. Let me first review a few of the highlights from the quarter's results, after which Don and I will be happy to take your questions. Turning to specific numbers, diluted GAAP earnings per common share were $2.11 in the third quarter of 2013 compared with $2.55 in this year's second quarter and $2.17 in last year's third quarter. Net income for the recent quarter was $294 million compared with $348 million in the prior quarter. Net income was $293 million in the third quarter of 2012. During the period, we completed the remainder of our actions initiated to strengthen our capital and liquidity position in an efficient -- in the most efficient manner. We converted some $1 billion of FHA loans on our balance sheet into Ginnie Mae securities which were retained in our investment portfolio.

In addition we securitized and sold $1.4 billion of capital-intensive lower return indirect auto loans. These transactions generated $56 million of pretax securitization gains which contributed $34 million to net income for the quarter or $0.26 per common share. You will recall that M&T's results for the second quarter included net pretax gains on the sale of investment securities amounting to $56 million. Also during the second quarter we reversed an accrual amounting to $26 million pretax for a contingent compensation obligation assumed in the limited trust merger which had expired. Taken together those items contributed $50 million after tax to net income for the second quarter or $0.38 per common share.

Since 1998 M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions when they occur. After-tax expense from the amortization of intangible assets was $6 million or $0.05 per common share during the third quarter compared with $8 million or $0.06 per share in the prior quarter. There were no merger-related expenses incurred in the third quarter of 2013. In the second-quarter merger-related expenses amounted to $5 million after-tax effect or $0.04 per common share.

M&T's net operating income for the quarter which excludes intangible amortization and merger-related expenses was $301 million compared with $361 million in the linked quarter. Diluted net operating earnings per common share were $2.16 for the recent quarter compared with $2.65 in the linked quarter. Net operating income yielded annualize rates of return on average tangible assets and average tangible common shareholders equity of 1.48% and 17.64% for the recent quarter. The comparable returns were 1.81% and 22.72% in the second quarter of 2013. In accordance with the SEC guidelines this morning's press release contains a tabular reconciliation of GAAP to non-GAAP results including tangible assets and equity.

Turning to the balance sheet in the income statement taxable equivalent net interest income was $679 million for the third quarter of 2013, down by $5 million from the linked quarter. The net interest margin was 3.61% during the third quarter compared with 3.71% in the second quarter. The narrowing of the net interest margin was largely the result of a $13 million decline in prepayment fees and interest on nonaccrual loans. This accounted for 7 basis points of the decline in margin. The remaining 3 basis points of the decline reflects the core margin pressure that we have been projecting for some time and that we continue to expect to unfold over the course of the year -- over the course of the next year. The higher level of earnings assets would have been sufficient to grow net interest income despite core margin pressure were it not for the return to normal levels of prepayment fees and cash basis interest.

As for the balance sheet, average earnings assets grew by an annualized 4% or about $700 million from the second quarter. This included a $1.7 billion increase in average investment securities and the $1.1 billion decline in average loans, both of which reflect the securitization activity, primarily the FHA securitizations, that I mentioned earlier. In addition to the securities retained through the securitization of FHA loans we purchased an additional $1.6 billion of Ginnie Mae securities in the open market over the course of the third quarter, substantially reinvesting the proceeds from our second quarter sale of private-label securities and the late third-quarter securitization and sale of indirect auto loans.

On an end-of-period basis investment securities were $8.3 billion as of September 30. After annualizing for the securitizations growth in average loans for the quarter was an annualized 1%. Average commercial and industrial loans grew by 2% annualized. That growth was muted by the typical seasonal slowdown in floor plan loans which declined by almost $100 million. Excluding floor plan CNI loan growth was 5% annualized, slightly lower than what we've been seeing over the past several quarters. Average commercial real estate loans grew an annualized 1%. Adjusted for the securitizations average residential real estate loans declined an annualized 5%.

The $1.4 billion auto loan securitization did not have a significant impact on average consumer loans as it was completed in late September. However, adjusting for that securitization, consumer loans grew an annualized 2%. Despite pricing pressures M&T's commercial loan origination has been consistent quarter-over-quarter. However, refinancing activity has driven the apparent slower rate of loan growth.

From a regional perspective, upstate and Western New York continues to be our strongest region for loan growth. The average total loans in that region grew by an annualized 5% compared to the linked quarter while average CNI loans grew by an annualized 8%. Our Metro region, which includes New York City and Albany area and Philadelphia, were just behind that with annualized growth in total loans of about 4% and annualized CNI growth of about 12%. The mid-Atlantic, including Baltimore, Washington and Delaware, continues to experience the softest loan growth with high single-digit annualized declines in CNI and CRE as well as total loans. This region is where we're seeing the most competition, particularly with respect to pricing and structure.

Average core customer deposits, which excluded deposits received at M&T's Cayman Islands office and CDs over $250,000, grew an annualized 3% from the second quarter. On an end-of-period basis core deposits grew an annualized 6%. We continue to maintain a high level of excess funds at the Fed, amounting to $1.8 billion at the end of the quarter. The average balance for the quarter continued to reflect a high level of deposits by institutional trust customers early in the quarter and included a portion of the proceeds from the auto securitization that occurred later in the quarter.

Turning to non-interest income. Non-interest income totaled $477 million in the third quarter compared with $509 million in the prior quarter. This quarter's figures includes the $56 million in securitization gains that I referred to earlier while the second-quarter figure includes $56 million of net gains on the sale of investment securities. Mortgage banking revenues declined to $65 million in the recent quarter compared with $91 million in the prior quarter. This includes three components--residential gain on sale revenues were $17 million for the third quarter, a decline of $23 million from the second quarter. Residential origination volumes declined by 41% from the second quarter to $1.1 billion while residential gain on sale margins declined by 48 basis points.

On the commercial side of mortgage banking, gain on sale revenues declined by $11 million, returning to a more normalized levels after our record second quarter. Residential mortgage servicing revenues grew by $7 million to $30 million in the third quarter. The increase reflects about a one-month of revenue from the sub-servicing contract that we entered into during the quarter. We expect to see in the neighborhood of $15 million of additional servicing fees in the fourth quarter as the revenue from that contract reaches its full running rate. Fee income from deposit services provided were $114 million during the third quarter compared with $112 million and the linked quarter. Trust and investment revenues were $124 million, a little change from $125 million in the prior quarter. The second quarter results benefited from the normal seasonal uptick in tax preparation fees.

Turning to expenses, while we've noted the expected ramp up in expenses for some time now, the full impact of those investments and risk management, capital planning and stress testing, regulatory compliance and technology and operating infrastructure became particularly apparent in this quarter's results. Operating expenses, which exclude merger-related expenses and the amortization of intangible expense, were $648 million for the third quarter compared with $578 million in the second quarter. The linked quarter variance includes the $26 million accrual reversal in the second quarter that I mentioned previously as well as an increase of $44 million in operating expenses.

Contributing to that increase was a $16 million rise in salaries and benefits. That was largely attributable to, first, the $7 million related to approximately 500 FTEs brought on board for the sub-servicing contract at the outset of the third quarter; next $4 million attributed to an extra compensation day in the quarter; and then $2 million reflecting the ramp up in staffing related to our BSA/AML and capital planning and stress testing initiatives including some 200 FTEs. Also contributing to the link quarter increase was an $18 million increase in professional services largely attributable to $7 million spent for specialized consulting services related to BSA/AML, $6 million of additional spending on certain technology-related investments as well as our risk infrastructure, and $1 million related to the sub-servicing contract.

If you were to look at expenses on a year-over-year basis, the $46 million increase as compared to last year's third quarter is characterized as follows. About 37% of the increase in expense is the result of our regulatory compliance initiatives, BSA/AML, capital planning and stress testing including some 250 additional FTEs. Approximately 24% of the year-over-year rise is accounted for by the sub-servicing contract. And finally, you will recall that the staffing hired for our New Jersey initiative during the first four months of this year drove about 20% of the increase including some additional 175 FTEs. We hope you'll find this detail helpful.

The efficiency ratio which excludes securities gains and losses as well as intangible amortization and the merger-related expenses, was 56% for the third-quarter compared with 50.9% in the prior quarter. Excluding the reversal of the Wilmington Trust accrual the efficiency ratio would have been 53.2% in the second quarter.

Next let's turn to credit. Our credit call remains strong and in line with our expectations. Nonaccrual loans declined $49 million from the end of the second quarter and the ratio of nonaccrual loans to total loans declined by 2 basis points to 1.44% as of the end of the third quarter. Net charge-offs for the third quarter were $48 million compared with $57 million in the second quarter. Annualized net charge-offs as a percent of total loans were 29 basis points for the third quarter and the year to date. The comparable figure was 35 basis points for the second quarter.

The provision for credit losses was $48 million for the third quarter which equaled the net charge-offs, were reflected in the aforementioned gain resulting from the securitization and sale of the $1.4 billion of auto loans was an associated reserve release of $11 million. The net effect was a decline in the allowance for credit losses to $916 million as of the end of the third quarter. The ratio of allowance to credit losses for total loans increased to 1.44% at the end of September 30 from 1.41% at the end of the prior quarter. The loan loss allowance as of September 30, 2013, was 4.8 times annualized net charge-offs for both the recent quarter and the year to date.

Loans 90 days past due excluding acquired loans that had been marked to fair value acquisition were $340 million at the end of the recent quarter. Of these $321 million or 94% are guaranteed by government-related entities. Loans 90 days past due were also $340 million at the end of the second quarter of which 93% were guaranteed by government-related entities. M&T's tier 1 common capital ratio was an estimated 9.07% at the end of September, up 52 basis points from 8.55% at the end of the second quarter. Our estimated tier 1 common ratio under the recently adopted Basel III capital rules is approximately 8.75%. The tier 1 common ratio has increased by some 161 basis points since the third quarter of 2012 while our tangible common equity's has grown by $1.1 billion or a 20% increase.

Turning to the outlook, we continue to see the potential for an estimated 3 basis points of quarterly core margin pressure. The reported net interest margin will continue to be impacted by the levels of excess cash held at the Fed. Despite this lower loan growth during the quarter our outlook for loan growth remains relatively unchanged. In addition we may continue to purchase investment securities to round out our liquidity asset buffer. At this point in time, assuming that interest rates stay where they are, some continued modest softness in mortgage origination seems likely.

As noted as revenues from the sub-servicing contract reach their full run rate in the fourth quarter we effectively have a cushion against further declines in total mortgage banking income. And with respect to credit, our year-over-year charge-offs of just 29 basis points are below our long-term average of 37 basis points and we would expect to report a slight increase in criticized assets in our upcoming 10-Q. Stated simply, credit quality remains strong.

Turning to expenses we estimate that our current outside level of spending will likely remain elevated for the next several quarters. As a management team we've concluded that to the extent that we can make the necessary investments and strengthen our infrastructure now it will position us well to sustain our long-term record of relative outperformance. With respect to capital, we have exceeded the 9% for our tier 1 common capital ratio under Basel I rules. And as we said our current estimate is 8.75% under Basel III and we plan to continue to build capital over the near term.

As you know I am not at liberty to discuss the details of our regulatory matters but by way of an update on the BSA/AML matter, we believe the progress to date has been considerable. And while we have a lot of work left to do, we continue to work diligently to create a high-quality BSA compliance program that fully addresses the concerns raised in the written agreement with the Federal Reserve. Of course as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national, regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future. With that, let's open up the call to questions, before which Maria will briefly review the instructions.

(Operator Instructions)

Matt O'Connor of Deutsche Bank

Just to clarify on the NIM outlook of down around 3 basis points per quarter, is that off of the 3.61% that we saw this quarter?

That's an interesting question. The way I look at it, Matt, is I look at a couple ways. If you think about if you were to go back to the first quarter -- I think we were 3.71% in the first quarter. So we are also down 10 over the 6 months and there's probably 2 basis points of day effect. There's actually some effect of cash. So if you look at the underlying trend we are coming down about 3 basis points. It's tough to answer your question because it depends on the level of cash where your starting point is. The other way I look at it is assuming cash and obviously days over time are the same, if you look at it on a year over year basis we were down 16 basis points and 11 of that was the about a $2.4 billion increase in cash. So we only had about 5 basis points of compression. I think that really reflects the 3 basis points we've been talking about offset by the fact that our acquired loan portfolios have been performing better. So you're going to have to pick your number but I don't think of it as off any particular number because it gets reset with the cash balances. Is that helpful?

It is and what I was getting at is do prepayment fees coming down would you consider this quarter a bit more typical in how those fees are?

Yes, very typical. Very, very typical. As I look back over the last, I don't know, I just glanced of the last 6, 7 quarters the numbers between $7 million and $9 million this quarter was $9 million. The aberration was just last quarter was up 13 from that.

And then just separately obviously the mortgage banking business for the industry has gone through a pretty sizable correction both on volumes and on the profitability as we think about the gain on sale. Has your thought process in terms of the mortgage banking business medium and longer term changed at all in terms of obviously your pending deal, you're going to build out the agency mortgage business there. Anything that you're seeing for the environment overall changing how you think about sizing that and the strategic point of all that?

Yes. The one thing that we see that's on our minds and we've made some stake in the ground I guess on it. But if you go way back before the crisis and before the new structure and the higher requirements and then including the put-back fees and those types of things, people were happy getting gain on sale between 80 and 100 basis points. The big issue for us is that the business cannot support those lower levels of gain on sale. So you kind of have to hit a floor and pick that target. And the big question will be is whether the rest of the industry actually adheres to that but as you know we tend to focus on profitability. At least for the last 30 years or so we've been able to avoid chasing all that stuff.

I think that's the big question that's out there for me is are people going to behave rationally. We've had gain on sale margins come down somewhere around to about 200 basis points now and I'm not sure that they can go all that much lower and have it make a lot of sense to be in that -- to do a lot of volume in that business. But that's the big change that we are grappling with and so far it seems to be holding up fine around those levels.

Matt Burnell of Wells Fargo Securities.

A little question on the competition within the loan markets. You mentioned that the mid-Atlantic is the most competitive among your three regions. I guess I'm curious as to within the competition among the other two areas has that competition gotten tougher and are there deals -- more deals now that you're potentially walking away from due to either pricing or structure than there might have been three to six months ago?

Everywhere or outside of the mid-Atlantic?

I was actually speaking specifically outside the mid-Atlantic.

Outside the mid-Atlantic. Yes, there's levels of pricing pressure across the board. And I mentioned the mid-Atlantic because there it is significantly different. You can kind of see that in my comments around the volume which is declining because in the mid-Atlantic just as a background there is a point at which we're not really hitting our risk return levels and we just can't use the balance sheet for that purpose. For some time it was the life companies I think I talked about that for a while but now you see the banks join in -- several banks join in on that. If you look at the other areas, each of them is a little bit different. And if I think of like -- I worked my way up worked my up -- I worked my way north on the map.

You've got in Pennsylvania -- in the Central Pennsylvania, maybe Harrisburg area we talk to our customers, their expectations for the loan growth is relatively soft. They are not -- there hasn't been doing anything on the CapEx front. They also have a lot of low confidence in the economic recovery so they're not doing a lot of hiring. So what that results in is there is just not a lot of activity but there's a lot of folks actually going after the transactions. What we are seeing in that particular market is a willingness for people to take on -- what's probably more important the pricing pressure there is a willingness to take on the whole credit or larger chunks of credit by smaller institutions. And so that affects loan growth as you know -- if you have a granular portfolio you're going to be less [multi]; if it goes the other way you are going to more risk.

If you look at smack in central Pennsylvania there's been actually a little bit of a rebound from the Marcellus shale but again not enough to drive what we are seeing around pricing and structure in that case. But then as you flip your way up to most of upstate New York--and our definition of upstate New York we have five communities; all five communities had loan growth. I would say by the historical measures pricing is got a slight downward trend but volumes have held up fairly well. I can't tell you exactly what that is is a manufacturing base up here and people seem to be a little bit more willing to make investments. I think you're competition is different because of the number of banks who actually choose not to bank up here. That's the landscape. I would say that over the last three quarters the pricing issue in any one quarter wasn't all that noticeably more but now it feels like it's getting pretty heavy. So hopefully that helps.

Yes thank you. Just a couple questions on expenses. You mentioned that those are likely to be elevated for a number of quarters into the future. I guess specifically on the FTEs that were added for the servicing portfolio, is it your expectation that those will remain relatively static to the number of FTEs you onboarded or did those come down over time therefore reducing the potential expense related to that revenue?

On the servicing those are the run -- tightly managed around the level of the servicing portfolio. We had about an $81 billion servicing portfolio and so we are properly staffed for it. If that were to run down over time you wouldn't need new staffing but it depends sort of what comes on the opportunity side there. That's pretty steady.

Okay. Fair enough. And then on the BSA/AML compliance cost, it looks from your comments that you're running at an annualized rate round numbers about $60 million a year for those. Any sense as to how long that might continue and once you get this investment done, presumably your largely over with that is that a one- or two-year time frame or is that longer?

Matt, I can only comment about -- I comment about all the stuff because I think what we've decided is that, and we decided this some time ago, that it doesn't make sense to take a long time to make all these investments. The regulatory environment's changing. The operating environment is changing as well so we figured we would accelerate those changes and try to get a bulk of work done. We saw this before -- we've seen this before. We saw it after each of our areas of expansion in the early 1990s and then again after the all first-period and now we're seeing it again after we've gone through several acquisitions and done a five-year period of growth.

What's different this time is we are just deciding to look at the whole thing together. I think that makes the expense naturally higher. With respect to BSA at some point there is a natural level of staffing that's going to make us, how do I say this, a state-of-the-art program. And that will level out but it will take time for the each of those things to happen. That's why I said over the next several quarters we think it's going to be relatively elevated. So from there each piece was different, so CCAR is different CSA is different, overall risk management structure different animal as well. So as expenses come down it won't all happen at once.

Keith Murray from ISI

Follow-up on the BSA/AML. You were talking of the next several quarters, what percentage of the way do you think you are there on that?

That's a great question. I don't know. You end up with an issue or weakness in your program but then the reality is is that it's not like you just go fix a weakness, you actually have to think about it in the way of building the state-of-the-art, best-in-the-industry practices in part because of all the trillions of dollars of illicit activity that ends up going through the banking system, those folks are ramping up their efforts to try to figure out new ways to get around you. So at the end of the day we're revamping our whole process and that takes a fair amount of time. The real question becomes when do you get enough of it done so that you actually have confidence in it in your own process so that your Board has confidence in it as well as the regulators having confidence in it. There's no answer to that question. You just work hard and you figure out how to keep on course for making sure you have a high-quality product as opposed to trying to get it done too quickly.

Fair enough. Let's assume for argument sake that the deal with Hudson City closes in January. How long do you think it will take to get that franchise sort of set up the way that you guys want it to be? A year or two-year build?

First thing is this--we haven't spent any time thinking about Hudson City lately. We've been really focused on the things that I just talked about. But if you look at any transaction we've got a pretty strong track record of how long it takes to do something like that. Wilmington Trust took a lot longer because it was a different animal. If you're putting together a thrift sort of regardless of size it would be very short order and what you'd have to do is go back and talk to a few folks about what's pretty well documented about what we've done in the past. But today we are not -- this is not what we're focused on. We've got our eyes are all focused on the regulatory matters at hand.

Brian Klock of Keefe, Bruyette & Woods.

Hate to kind of beat on the expense side again but --

You like expenses. I know you.

I know. Sorry about this. The cash expenses in the quarter $648 million and you mentioned with the previous question that obviously a lot of the expenditure is BSA/AML the CCAR regulatory-related stuff that's going to stick around for a while. Is there anything in there though that we could start seeing some small savings coming out or do you think that around this kind of cash basis somewhere around $650 million is where that's going to be in the next couple quarters?

That's a great question. I think it's two things. First of all, because of the earlier question and the fact that we are trying to get a lot of done relatively quickly we are using a lot of outside services. That you can pick your time horizon for how long you're off and running on your own. But quite frankly a lot of requirements under CCAR and those things are that you're actually -- you're not really in a solid position unless you are doing all that stuff on your own. But to us that's a shorter time frame. I don't think we're going to see much of a reduction in the next couple quarters but you can see where you'd see some benefit from not necessarily having all that outside services helping you as you stabilize your processes.

But the flip side is if you think about it and we think about the total expense rate if you look back at times when we had a decline in mortgage volume we tend to focus very heavily on the right sizing and rationalizing the mortgage business but in the way M&T works you actually tend to look at the entire bank. What is logical that will need to happen over some time, and we're still scoping it all out, is that while we are spending a lot more on regulatory compliance in a controlled structure that we are going to have to begin to rationalize the expenses in other areas, right? So in terms of is $648 million our forever run rate? No, not at all. Nor is 56% or 58% efficiency ratio, that doesn't make much sense to us. But we've been at this and attacking it so directly that we haven't spent much time rationalizing. We've just been spending time building. So there will come a time not that far away where we will be able to begin to think about where we can manage the expenses a little bit better. $648 million is not a run rate

I didn't think so but thanks for the extra color on that. Maybe just to go back to another question on the NIM s a follow up here, you talked about prepayment penalties. Can you tell us what happened on the accretable yield because the prepayment income you're talking about is obviously prepayment on loans and you're not talking about the accretable yield on that.

Yes, again accretable yield -- let me just tell you the total interest income on the $4.7 billion of acquired loans that we have was $71 million, I think last quarter it was $77 million. Looked at another way we had 15 basis points of lift in our yield last quarter from the acquired portfolio. We have 14 basis points this quarter so you can kind of see that that's embedded into the 3 basis points of margin for us that we've been talking about. And that 14 basis points of lift that we have will go away as well as the loan is paid down.

Got it. If I could take one other shot at it and I'll get back into queue, you talked about not been really focused on Hudson City today because obviously getting through BSA and CCAR are primarily the biggest things you're focused on. But should I take that to mean that you really can't think about Hudson City until you get the BSA and AML issues behind?

Yes. That's what we are doing. That's exactly what we are doing. We are focused on the core bank first. We are going to get that done and we're going to do it right and then from there we'll see what we do with expansion plans, right? I think that's the most effective way to approach it.

Erika Najarian of Bank of America

I wanted to ask a question on your expense outlook in context of a broader efficiency ratio. The efficiency ratios clearly creeped up on a year over year and as we think about the next few quarters if expenses stay elevated is there enough revenue lift somewhere to take the efficiency ratio down from the 56% that you posted this quarter or until we see some right sizing of the regulatory-related expense it's going to stay at the 56% level?

I think same answer. For several quarters our expenses and therefore our efficiency ratio is going to be elevated. The thing I would say, Erika, is it's not necessarily and probably not likely a right sizing of regulatory expenses. It's a right sizing of everything else. Because the regulatory environment is not like a couple of weeks. It's the total change in the industry. And you've got to have a different infrastructure. So most of our savings were going to come from other areas. And we will probably have increased spending even from where we are on compliance and infrastructure or on risk.

Got it. And my second question has to do with potential growth of your balance sheet. Do you expect to plow the excess deposits into your bond portfolio if loan growth continues to be where your outlook is or rather deposit growth continues to outpace loan growth or do you expect to lever the balance sheet some to increase your securities as a percentage of your earning assets?

The way I would say it is as always we are profitable enough to be patient. We are not done with our liquid asset buffer. As you saw we did a lot of work and the rates puffed up and we were able to get the government-backed securities at rates of about 3.25%. Those yields have backed off but our plan is to keep doing that and particularly if there's any increase in rates we'd probably dive in and do more of that.

But once we are at a steady state in terms of, for example, our liquidity coverage ratio, then I think the answer really is it's we are only going to do loans if they make profitable sense because we don't really want to weaken our balance sheet and our history around securities is the same. So it will be quite interesting because really what you're seeing on the cash balances is that consumers and businesses are just uncomfortable spending. So it's all the same issue. What tends to happen at M&P is we end up with fairly slow revenue growth but a decent return and a healthy balance sheet. That is becoming more and more of a concern to me when I look at what the stories on getting out of the field in the different regions around pricing and structure.

Ken Usdin, Jeffrey

First question regarding net interest income hearing your point about a little bit [coordinating] pressure it seemed like the period ended -- there's a lot of moving parts this quarter so with the loans and securities, securitizations whatnot. So I want to understand I think period-end balances for earning assets looked a decent amount higher than earning assets, so are we at the point where we can expect NII to resume growth from here?

Yes, I think that's what I was trying to say in my comments. If you take away the swing in the prepayment fees we would've had probably close of $7 million, $8 million one quarter and that is because of all the additional investment securities mostly. So I think that's right. That's what you see. You've got some momentum going into the quarter and then from a margin perspective those are costing us a bit, right, in terms of a net interest margin percentage. It's coming down a bit other than the fact we are using cash. So it depends what happens with those cash balances again. The way we look at it is that actually puts some slight margin pressure on you but I still think as I look at it we probably have growth.

Okay. Right. Driven by earning asset growth. On the mortgage banking side I just wanted to clarify something. You talked about $15 million incremental fees from the servicing deal and you talked about expected weakness on what I think was the resi side. Are you saying that you expect those to pretty much offset each other?

I would love to say on the residential side that things have stabilized. But because I've only seen two months of it, I'm a little nervous. But I would expect the decline in resi mortgage probably being smaller than the lift from -- it's been early. It was such a quick ramp down. But I'm thinking that the servicing increase probably should readily offset the other side but hard to say, right?

Yes. On the cost side of just mortgage again related to the servicing deal, were those costs already run rated in the third quarter so we will see the fee benefit in the fourth but do we get a incremental cost side increase related to the servicing acquisition?

No, not material. So, yes, you're right that those expenses were there at the outset of the quarter. They were there on July 1.

Okay. The last question for me just regarding -- you did a lot of these securitizations and capital kind of benefit type of transactions this quarter. Do you anticipate doing much more of that or did you take care of a lot of the shifting those several transactions in the third. How are you thinking best about balance sheet efficiency and mix going forward?

The way I would characterize it, Ken, is we did most of what the repositioning of things that were on our balance sheet. What we have left to do is maybe some issuance of unsecured debt and maybe some more purchases of liquid securities to invest that in. Maybe in the near term -- in the near term we are on a program to do that.

Bob Ramsey of FBR.

Following along that line of thinking should we think about the securitizations this quarter as sort of steps being taken right now to reposition the balance sheet or will auto securitization be an ongoing piece of your revenue stream?

That's exactly what we are talking about. One of the things we found when we kicked this off was that the appetite for yield was so high that it made the transaction work. But having said that at least in my history, it's an indirect auto loan. You can't get a return on your book. It's hard to get a return by selling [to somebody else]. So we're thinking about that and we'll probably be in much more of a flow-oriented program because a lot of times the appetite for that product is a little bit different than our own appetite just because we have different cost of capital and different return requirements. So more but we haven't got there yet but we are thinking about that.

Okay and then as you think about that with the thought process be to securitized every quarter or a couple times a year? How do you think about the ebb and flow of originate and sale?

We're just building an infrastructure so I don't know how we would do enough volume to be doing it anywhere near it. Once in a great while at this point I think is probably the answer.

Okay. And then --

Another thing is if you're going to do that, Bob, you would see it right away because we would have to originate those for sale, right? So unless you see us actually reclassifying those loans as we've book them on we are not there yet to be able to do something like that.

Got it. One last question on expenses. I know you've talked a lot about how they're going to be elevated. Is the build out done though? Do they remain elevated at these levels or are there further increases related to hiring or other from where we are today?

It depends on the topic. We've made a lot of progress on I believe our capital planning. I don't want to suggest that we are done but we've made a lot of progress there. We have more hiring to do on the BSA/AML and as we talked of the flow through the plan is to continue to hire there. But I think we also are beginning our efforts on the other areas, do you know what I mean? So my sense is that if -- I don't have it in front of me if but if I could give you -- Bob will probably put it in his annual report -- but if I could give you a regulatory number, that number is probably going to go up. But I don't think our overall expenses will be going up.

Gerard Cassidy, RBC Capital Markets.

Very exciting events up in your neck of the woods these days

Absolutely. I agree.

Can we come back to the expenses that you were talking about that you've incurred in handling the regulatory issues and they are going to remain elevated of course for a number of quarters. Can you give us an estimate of what you think down the road what's kind of one-time the outside consultants that you are using and I know you've hired a bunch of people and that's embedded and that's going to remain around for quite some time. Is it 30% of the total number is the outside people and the rest is ongoing?

Oh, wow. It's a tough question. Let me tell you why. Once I say it, it will sound obvious, but the day one when you decide to make your investment it's heavily loaded with outside people. And then at the end when you're at your [sten] state is none. So if you're at BSA probably got a high percentage of people and you're seeing us replaced -- as those outside people go away you're seeing use replaced with core infrastructure. On the CCAR we're probably further along. That's a tough one. And then actually most of the [rich] management stuff is actually -- we hired Don Trustwell, he's hiring permanent staff, so that's all permanent. If you want to look at what could be more variable look at the professional service line and look at the ramp up of professional services. Don't just look over the last year; look at it over eight or nine quarters and you'll see in that professional services line where you have expenses that could move.

Okay. Good. And second, you've been able as you pointed out in this quarter to do a little restructuring of the balance sheet, strengthens your capital ratios with a very nice game to boot. Last quarter you had some securities gains. Do you still have those types of opportunities in the next two or three quarters to help defray some of the elevated costs that you are running into with the regulatory issues here?

No. I think the way I look at those -- each of those transactions maybe with the exception of the Visa were a net cost to me. The indirect auto loans were lower returns but they were above our cost of capital. So that was just the least cost way to get the liquidity profile. But there all a net cost. So to the extent that I don't have to do any more of those I'd be very, very happy. And I think as we look at our projection of where will be, as I said, the only thing we really have left on the balance sheet is maybe holding more liquid. And fortunately we have a fair amount of cash to be able to do that today. So I wouldn't expect to see a lot of those types of gains and sale-type activities.

Speaking of those auto loans, aside from the lower yields that you just mentioned -- did credit come into your thinking as well in securitizing them about the potential for increased delinquencies or anything?

Well, high-quality credit book. The normal answer is we look at everything including the expenses but, no, that was very high quality. That's a book originally under at the time before we thought about the liquidity efforts we were going to keep those loans.

Marty Mosby from Guggenheim

I'll wrap it up with technical question and I have two broader scope questions. If you look at the technical side the Other Cost and Operations was up almost $50 million. You mentioned several things but didn't really all add up to the $50 million. I didn't know if there was something else besides the topics you've been talking about that's loaded into that Other expense line.

Did you adjust for the Wilmington accrual issue?

I thought that I had tried to do that but maybe that's the difference.

That would be a big number and then there was just a lot of little individual things -- nothing that really -- no one big item that I can really tell you about.

Okay so nothing else transitory that would come out of that number

No

Okay. And then the two bigger scope is as you look back and think of all the increased expenses and investment and process that you've had to put in place, really two things with this is (1) what do you think was the primary catalyst? Was it because of your size growing or you're just active in M&A or is it just rolling down to smaller and smaller banks getting to be required to be like you said at the best in the industry even though your operations may be much simpler. But what was the catalyst and then (2) do you think after you're all done do you see improvement in risk management where you've already been one of the best in the industry, but do see any back-end benefit from doing all this exercise that will make you manage the bank differently or better?

Give me one second. The first part [I would guard to I think] as I said before particularly on technology front and other areas like that, we were at a stage where we needed to make a fair bit of investment. We hired Mahesh from one of our counterparts, it's almost two years ago now, right? And we've hired a number of other people because we realized that we needed to build the infrastructure from a larger bank -- we had done four or five acquisitions, right, recently. So that was on our mind. The speed of it is clearly the fact that we are about $50 billion and growing. The expectation is not only that you've got a be top notch in terms of risk management and controls--we've always been top-notch in terms of controls--but you've got to do it right now. If you take those two things combined I think were probably headed there anyway but it's been accelerated a bit.

The second part of your question as to whether that we can do anything better, the way I would characterize it is that M&T we've had a great track record around control and part of that is because we are so detail oriented. We focus a lot on people. We like to look under the covers of everything. When we can close the books on a monthly basis, if moving expense we went up, the question we ask is who moved? So we are very, very detailed. What we are trying to do as we get larger is to overlay an addition, processes that let us see across the bank as the bank gets bigger. I think it is probably a very positive thing. I think that to justify all the cost we are spending I don't know how you could possibly do that, but will there be some benefit, yes, sure there will be some benefit especially when it comes to the risk management environment that [Trust Low] is creating. I'm really looking forward to that. I think that's very, very necessary given the larger size of the banks.

So is this a stepwise -- one of those points were you're growing assets on a linear line but all of a sudden your resources have to ratchet up but then they will level out and you'll get the benefit of capacity going forward?

Yes, and then the other thing you realize is that in that size, whatever size we are as a regional bank, it's not like -- take BSA/AML, it's not like we're going to have a state-of-the-art system and nobody else is going to have. This is probably the new requirement across the industry just to be in the game. So we figure we better get that done quickly. I'd hate to be behind in that respect.

And then lastly the other broad scope was earlier you mentioned the increase in your capital ratios with the delay that you are seeing in acquisitions do you think that that changes your posturing as you go into the 2014 CCAR and how you think about deployment of capital?

No we haven't had any change whatsoever in our thinking and we think is just prudent to at this stage of the game to have more capital. And we've talked about whether to narrow it down the road as other opportunities come up we think it's just a prudent position to have today. We're really pleased that we've gotten ourselves back to the pack and have a much, much stronger capital level. But we don't see any reason to change the course that we are on now of adding capital

And that's where you're patient to looking how to deploy it comes into play. You know that eventually you'll have that opportunity?

That's exactly right. That's exactly right. So you're thinking about how to do that and a lot of people early in the process assume that, well, M&T is going to have to have a lot more capital so the return is going to go down. Our job is to manage both sides of that equation and we are trying to rationalize as we have more capital certain things that made sense before don't make any sense anymore. And so far we've done a pretty good job of it. We're going to keep working on it that trade off.

There are no further questions in the queue. At this time I'll turn the call back over to Mr. McLeod for any closing remarks.

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

Thank you this concludes today's M&T banks third-quarter 2013 earnings conference call.