M&T Bank Corp (MTB) 2013 Q4 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank fourth-quarter 2013 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). Thank you.

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

Thank you, Jackie, and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's fourth-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 at www.mtb.com, and by clicking on the investor relations link.

Also before we start, I would 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 would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don. Good morning, everyone. Thank you for joining us on the call today.

As we noted in the press release, M&T's results for the fourth quarter include an elevated level of professional service expense reflecting our continued focus on building out our regulatory and risk management and technology infrastructure including our BSA/AML compliance program. This represents our second quarter in a row where our costs are above what we would consider the natural level required to operate the bank even in what we might refer to as the new banking environment.

More positive elements in the recent quarter's results included higher fee revenue and continued improvement in our credit, capital, and liquidity measures. I will review a few highlights from both the quarter and the past year, after which Don and I will be happy to take your questions.

Turning to the specific numbers, diluted GAAP earnings per common share were $1.74 during the period compared with $2.11 in last year's third quarter and $2.16 in 2012's fourth quarter. Net income for the recent quarter was $246 million compared with $294 million in the prior quarter. Net income was $296 million in the fourth quarter of 2012.

Recall that M&T's results for the third quarter of 2013 included gains in connection with our securitization of FHA loans to Ginnie Mae securities, which we retained in our investment portfolio and our securitization of indirect auto loans, which were not retained. These transactions contributed $34 million to net income to that quarter or $0.26 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 expenses from the amortization of intangible assets was $6 million or $0.05 per common share in each of the third and fourth quarters of 2013.

M&T's net operating income for the fourth quarter, which excludes intangible amortization, was $252 million compared with $301 million in the linked quarter. Diluted net operating earnings per common share were $1.79 for the recent quarter compared with $2.16 in the linked quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.22% and 14.12% for the recent quarter. The comparable returns were 1.48% and 17.64% in the third quarter of 2013.

In accordance with 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 and the income statement, taxable equivalent net interest income was $673 million for the fourth quarter of 2013, down by $7 million from the linked quarter. The net interest margin was 3.56% during the quarter, down 5 basis points compared with 3.61% in the third quarter. While average earnings assets increased by some 2% annualized as compared with the prior quarter, the mix of those assets changed primarily as a result of the securitization transactions we undertook in the third quarter.

The results included a $1.4 billion increase in average investment securities offset by a $1.3 billion decrease in average loans. We estimate that this shift in the mix of earnings assets accounts for about 3 basis points of the linked-quarter decline in the margin. The core margin pressure, which is primarily the result of new loans coming on at rates lower than those maturing and which is partially offset by the lower cost of funds, amounted to about 2 basis points and was in line with our prior outlook.

On an end-of-period basis, investment securities were about $500 million higher at December 31 as compared with the end of the prior quarter, which reflects further use of the proceeds from the third quarter's auto loan securitization to purchase additional liquid investment securities.

Average total loans declined by 8% annualized from the third quarter also reflecting the impact of the securitizations as well as a reduction in our portfolio of held-for-sale residential mortgages, mortgage loans which reflect a reduced level of mortgage refinancing activity that we are seeing.

Average commercial and industrial loans, which were not impacted by the securitizations, grew by a healthy 7% annualized. That growth came from the typical seasonal recovery in floorplan loans as well as a fairly strong growth in the mid-Atlantic, where C&I loans increased at a 14% annualized rate and in the metropolitan New York City area, which increased by 13%. C&I loans declined slightly in upstate and Western New York and in Pennsylvania.

Average commercial real estate loans grew at an annualized pace of 2%. CRE lending was strongest in Tarrytown, Philadelphia, and New Jersey, while CRE lending in New York City has become more competitive and the portfolio declined slightly. Adjusting for the auto loan securitization, average consumer loans grew at an annualized 3% while on an end-of-period basis, they grew at an annualized 5%. All of that improvement was in the indirect auto portfolio, while other consumer categories remained sluggish.

Overall I would say that while the marketplace remains very competitive, we were able to maintain discipline in the fourth quarter and originated loans at acceptable margins. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, grew at an annualized pace of 8% in the third quarter.

We continue to maintain a high level of excess funds with the Fed averaging $2.8 billion for the quarter reflecting a high level of deposits by institutional trust customers.

Turning to noninterest income, noninterest income totaled $446 million in the quarter, compared to $477 million in the prior quarter. Of course, the third-quarter figure included the securitization gains that I referred to earlier, which totaled $56 million before taxes.

Mortgage banking revenues increased to $82 million in the recent quarter, up $17 million from $65 million in the prior quarter. This includes three components. Residential gain on sale revenues were $15 million for the fourth quarter, a decline of $3 million from the third quarter. Residential origination volumes decline by about 25% from the third quarter to approximately $800 million. While residential gain on sale margins actually expanded about 10 basis points.

Residential mortgage servicing revenues grew by $13 million to $46 million in the fourth quarter. The increase reflects the impact from a full quarter of revenue from the subservicing contract that we entered into during the third quarter.

On the commercial side of mortgage banking, gain on sale revenues grew by $6 million, returning to more normalized levels after a weak third quarter.

Fee income from deposit service charges were $110 million during the fourth quarter compared with $114 million in the linked-quarter, primarily due to lower levels of consumer activity.

Trust and investment revenues were $126 million, up $2 million from $124 million in the prior quarter and up $9 million or 8% from a year ago quarter.

Turning to expenses, as we've noted for some time now, we continue to make investments in our risk management and compliance framework in the areas discussed earlier. We also continue to invest in our technology infrastructure including the new data center here in Buffalo, an enterprise data warehouse project, which will allow us to centralize and improve access to customer information for both regulatory reporting and our own internal use, and a new Web banking platform which goes live this weekend.

As a result, our operating expense have risen meaningfully from what we think -- what we would think of as our normal ongoing expense level.

Operating expenses for the fourth quarter, which excluded expenses from amortization of intangible assets were $693 million, up $45 million from the $648 million in the prior quarter and up $81 million from the $612 million in the fourth quarter of 2012. The primary driver of the linked-quarter increase was professional services, which increased by $42 million compared with the third quarter and by $50 million from the year-ago quarter -- $51 million from the year-ago quarter.

In the fourth quarter, about $25 million or nearly 60% of the increase in those expenses was related to regulatory activities and projects for items such as the customer multifactor rate risk rating model that was developed for our BSA/AML initiative as well as further development and validation of models used in connection with the CCAR stress testing framework. An additional $7 million of the linked-quarter increase was related to the technology infrastructure projects that I mentioned.

In total, in excess of 50% of the $81 million increase in expenses from the fourth quarter of 2012 could be attributable to the ramp up of our spending on BSA/AML and in preparation for CCAR 2014.

Looking again, operating expenses, particularly for professional services tied to our BSA/AML initiative will remain elevated through much of 2014 although likely at a running rate below what we saw in the fourth quarter. While it is difficult to predict the quarterly spending patterns for all professional services, as we meet our expected milestones over the course of 2014, our quarterly rate of professional service spending should ramp down further as we progress into the latter part of the year.

The efficiency ratio, which excludes securities gains and losses as well as the intangible amortization and the merger-related expenses was 61.9% for the fourth quarter compared with 56.0% in the prior quarter and the efficiency ratio for the full year of 2013 was 56.2%, unchanged from 2012.

Next let's turn to credit. Our credit quality remains strong and in line with our expectations. Nonaccrual loans declined by $45 million from the end of the third quarter. The ratio of nonaccrual loans to total loans declined by 8 basis points to 1.36% as at the end of the fourth quarter. And when we file our 10-K in a month or so, I expect we will report another meaningful decline in classified loans as well.

Net charge-offs for the fourth quarter were $42 million compared with $48 million in the third quarter. Annualized net charge-offs as a percentage of loans were 26 basis points for the fourth quarter, improved slightly from 29 basis points in the third quarter. The provision for credit losses was $42 million in the fourth quarter. The allowance for credit losses was $917 million amounting to 1.43% of loans at the end of the year.

The loan loss allowance as of December 31, 2013 was 5.5 times annualized net charge-offs.

Loans 90 days past due on which we continued to accrue interest excluding acquired loans that had been marked to fair value at acquisition were $396 million at the end of the quarter. Of these loans, $298 million or 81% are guaranteed by government-related entities. Accruing loans 90 days past due were $340 million at the end of the third quarter of which 94% were guaranteed by government agencies.

Turning to capital, M&T's Tier 1 common capital ratio was an estimated 9.25% at the end of December, up 17 basis points from 9.08% at the end of the third quarter. Our estimated common equity Tier 1 ratio under the recently adopted Basel III capital rule is approximately 9.01%. M&T's Tier 1 common ratio has increased by some 168 basis points since the end of 2012, while our tangible common equity has grown $1.2 billion or a 20% increase.

Over the same period, tangible book value per share grew by 18% to $52.64.

Before we turn to the outlook, let me take a minute to cover the full-year results for 2013.

Diluted earnings per common share were $8.38, an increase of 11%. Net income was $1.2 billion, which represent a 13% year-over-year increase. GAAP basis net income expressed as a rate of return on average assets and average common equity was 1.39% and 11.18% respectively, improved from 1.29% and 10.96% in 2012.

Net operating income, which excludes the amortization of merger-related expenses was again $1.2 billion, an increase of 12% from the prior year. Diluted net operating income per share was $8.60 per share, an increase of 10% from 2012 and the rate of return on tangible assets and average tangible common shareholders' equity for 2013 was 1.5% and 18.17% respectively.

Let me turn to the outlook. Based on our perceptions on where the economy and interest rates are headed, our outlook has not changed meaningfully from the one that we offered you at the time last year. On a core basis, before the steps we have needed to take -- that we need to take to come into compliance with the LCR rules, we are thinking that loan growth next year will be in the low to mid single-digit range, maybe closer to mid single-digit if you adjust for the securitizations.

On that same basis, and based on where the forward curve is, we are expecting somewhat less NIM compression than in 2013. At present, we would estimate about 2 basis points per quarter. These factors should combine to produce some modest growth and net interest income.

However, beyond our base case outlook, we need to factor in the impact from the additional actions that we will take to reach full compliance with our liquidity coverage ratio by the end of the year and we have made good progress on the LCR compliance, but we have further actions to take. For example, we need to continue to build our liquid asset buffer of MBS and treasury securities and issue unsecured bank notes to fund that buffer. We expect there will be limited if any negative impact on net interest income but the reported net interest margin will likely be diluted and we will keep you updated as we take these actions over the course of 2014.

We are expecting mid single-digit fee revenue growth in 2014 including the benefit from a full year of revenue from the subservicing contract and as noted earlier, expenses will be elevated well into the second half of 2014 but at a rate below what we saw in the fourth quarter and our goal is to be well-positioned on expenses as we enter 2015.

Consistent with the past, we will see our usual seasonal rise in salaries and benefits in the first quarter, which was about $37 million in 2013.

The outlook for credit is stable. There are no signs of a turn in asset quality. With regard to Hudson City, our December announcement represents our expectation that we will be able to meet our milestones for BSA/AML project for the project over the course of the year and give regulators time to assess the progress that we've made before the end of the year. We are very focused on implementing a high-quality BSA/AML compliance program, one that will set the industry standard and position us for the future.

Over the course -- of course as you are 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.

Lastly, on a personal note, we would like to acknowledge the resignation of our friend and mentor, Mike Pinto. As you know, Michael had scaled back to a limited but important role focusing on several key initiatives. Many of you have dealt with Michael also know that it will be impossible to replace somebody with his knowledge of the industry and of M&T.

Over the past 20 years that I've worked with Michael and over the 30 -- nearly 30 years that he has worked with all of us of M&T, he has helped us to understand what is important in running a bank. As a result, he leaves a cohort of proteges that have absorbed that knowledge thoroughly and who I am confident will represent him well.

Now let's open up the call to questions, before which Jackie will briefly review the instructions.

(Operator Instructions). Ken Usdin, Jefferies.

Rene, just on the expense side, understanding your point that it's tough to predict what consulting is going to look like, but if we take your comment that the delta has been about $40 million of excess consulting, would you expect that we would be ending next year expenses kind of more towards this quarter minus that benefit? Do you think you'll get through all of the excess consulting by the end of next year?

That's a good question, Ken. Thanks. So the first thing I would point out is that the $42 million that you mentioned was this quarter. We saw a very similar increase last quarter, so we are very -- we are well above normal run rate on professional services expense. I think as we look at the expense base in the fourth quarter, in some ways it appears to be high and we would expect that as we kind of move into the next year, that they will remain elevated and then taper off kind of to what you are saying but the question is how fast will it come down?

So I think we should see meaningfully lower expenses by the time we get to the fourth quarter, but I also think that expenses will likely be able to come down further from there.

The one thing I would point out is that as we begin to think about the work we have to do over the course of let's say the next three quarters on BSA/AML and some of the initiatives that we have, to the extent that we think we need to go faster, we will just ramp that up and that would sort of mean that expenses would be higher than we thought. But I don't think the total investment is really going to change at all. So that's why I say it's a little bit hard to predict because we are sort of making sure that we stay on track with our progress and if that means the timing of the expenses changes, so be it.

That's fair. Just one other question about the fee guidance. When you are talking about mid single-digit, I'm wondering just against what base you are comparing it to? And then also a little color on what you think will drive stronger fee growth next year?

I think I'll go back with -- I think it will go across the board. We've seen nice growth of 5%, 5% plus over each of the last two years in the trust business. We've seen okay growth in the deposit service charges and then again as we look at what we're doing with the mortgage servicing, we should get some lift from that coming late in the half of the year. So there's no one particular category.

One of the things I'm curious about is that commercial banking fees were somewhat light this year and I think that's a reflection of lower activity but as the economy picks up, that would be another space that I would expect to see maybe recover a bit from what we saw this year.

Okay, last quick one. Can you just give us an update of where the Basel III ratio approximated?

Yes, this quarter fully phased in, we believe it is 9.01%.

Okay. Thanks, Rene, and best of health to Mike.

Brian Klock, Keefe, Bruyette & Woods.

Good morning, Rene. Again I guess another question on the expense side. I guess thinking about the BSA/AML investment and the milestones you talked about that you guys have set for this year, obviously to hit those and then get ready for that resolution and then onto the Hudson City merger. I guess when you're thinking about the total investment, can you give us an idea of maybe expected percentage of completion if you will if by the first quarter, second quarter, third quarter next year that you would be 50% through or 75% through? Is there any way to think about how we should be thinking about maybe how quickly that investment may taper off as we go through next year?

I don't know if I can give a better answer than I just gave on the pace of the expenses, but I think the way to think about it, Brian, is that you can't get a measure of completion because it's a dynamic process. So we work with our team to build out a process. We go through that. We have those processes validated by outside parties. To the extent that there's more work to be done, we go in and we fix that and it's iterative. It's an iterative process, which all leads that some point in the process where we feel that we will be ready and confident that we can have the regulators come in and take a look and have the time to do what they need to do.

So in my mind it doesn't work like that in terms of percentage of completion. But having said that, we think that our expenses will probably remain elevated for the next two or three quarters. And I wouldn't see -- I would see after that that much of the sort of outside expense should be behind us.

The thing to think about is we have also added a lot of folks -- I didn't get the numbers here but we have added a lot of folks over the course of the year and the reason that we have done that is to sort of build our permanent infrastructure. So as we sort of get through the project phase, we will not be dependent upon all those professional services.

So as you look at where that was, I think we spent maybe $134 million on professional services in this quarter and I don't have the number for last quarter, but maybe it was $80 million or something. So you can kind of get a sense if you look back at those numbers over time how much they've ramped up and what likely a normal run rate would be without them with all our other projects.

Got it, that's helpful. I guess thinking -- you said the $25 million of the linked-quarter increase this quarter, there was also not only just BSA/AML but there was some CCAR-related -- I guess in that $25 million I guess the CCAR we would start to see that drop off as we get past the first quarter of 2014, right? So is there a way to kind of parse out how much of that CCAR may go away as we look into the sequential quarters?

I kind of look at it almost on the same timeline as the BSA/AML because don't think about submissions. Think about building -- so Brian, think about banks and their asset liability process, which they can run very routinely every month or as frequently as they want. We are in the process of building the infrastructure to stabilize that, so it's not about the submission as much as it is about building a sustainable, repeatable process that has as much integrity as your ALM, which of course has been around for decades.

So I think that we will continue to spend and invest there probably on the same path as what you are seeing on the BSA/AML. But then again, then again that should taper off particularly on the professional services side.

Okay, great. I guess just one quick one and I will get back in the queue. [With] the accretable yield that was in the NAI this quarter?

Yes, that number I think was $64 million or something, down from $70 million.

$71-ish million?

$71-ish million, That's the number I was going to say.

Got you, okay. Again, Mike Pinto has always been a good friend and a mentor for me and so our prayers are with him and his family. Thank you.

Thanks for that, Brian.

Keith Murray, ISI.

Just to go along with me for a minute here, let's assume for argument's sake that 2014 you hit all your targets on BSA/AML, get the CCAR system where you want it. When you get to 2015, let's put Hudson City aside, what is either an expense dollar run rate level or sort of an efficiency ratio target that you think you can run M&T at for 2015?

That's a good way to ask the question, Keith. I just think in terms of the efficiency ratio, because we are always either expanding businesses or in some cases adding regions, so you saw we were at 56.2% both this year, full year, and last year and that really is a reflection of sort of the new regulatory environment and the building of our infrastructure after the sort of growth spurt that we've had. I think we did something like four or five acquisitions recently.

So we have always felt that operating the efficiencies ratio below that level was something that was very doable. We have actually run 50 to 55, somewhere in that range for a long period of time. I don't see any reason why we shouldn't be back in those levels but it's going to get there not necessarily by just saying that you're going to cut some expenses, because you do have a new infrastructure.

But think of for example if -- as we achieve whatever time period, what we are doing with BSA/AML and building out the system, that's a process that is almost purely 100% leveragable as we bring in new accounts and new volume and so forth. So one of the reasons why we are so confident in making a lot of these investments across the board and the data centers and all the other technology initiatives is we think over time these are very leveragable and they will position us well to sort of get back to the same space in the low 50s that we've always operated the institution at. I feel pretty confident that that's very doable.

Okay, then just on capital allocation, in the past if you went through a patch of slow loan growth or where the risk/reward on loans wasn't so great, you could go and buy back your stock sort of at will. Given where we are in the regulatory world right now, when you are in a situation like that, what's the new default position of what to do with capital? And as you think about the return ROTE potential for M&T, how much has it changed given where we are in the environment?

Yes, over many, many years, that was always the governor, right? You could just sort of simply be very disciplined and say okay, well, I don't have use for it because things are very frothy and I will give back the capital. So I think you're right. In fact, I think that's one of the reasons why you see that the loan pricing and now loan structures are so competitive. It's because there's not really an alternative use. It's also one of the reasons which makes us very comfortable to sort of make these correct investments, right?

But there is no answer to your question. I think if we can utilize that capital well, and put it in the right places over the course of like last year, this year, I think that will be one set. Then past then, our capital ratios are now 9.25. They are kind of getting up there again. So down the road in the future we will have to see how that changes, but the one thing that's for certain, you may see us -- if the loan growth is X, we may be X minus because we are not really interested in sort of chasing some of the stuff that we see out there today particularly in terms of structure.

Okay. Thank you very much, Rene.

Bob Ramsey, FBR.

Good morning, Rene. I just was hoping you could talk maybe a little bit about the loan growth outlook. I know you guys said low to mid single digits and that seems a little slower than some of the other banks are talking about. I think you also mentioned in your introductory comments that you have seen some of the commercial real estate lending in New York become more competitive. I'm curious what you mean by that and how you are thinking about the loan growth outlook?

Yes, I'm pretty optimistic on the commercial side. There's nothing that we have seen at least from an industry trend standpoint that suggests that commercial loan growth is slowing. In fact it's the opposite. So we have had healthy C&I growth. I would expect that to continue and easily could be a little bit higher.

We saw some paydowns in CRE. So the normal trend to me would suggest continued growth and in fact if you kind of look at our numbers by category and in total relative to the industry, I think where we have been higher than the industry in C&I, we've been maybe a little lower in CRE, we have been -- actually had less runoff in home equity. So we are probably positioned well relative to the industry.

The thing that does bug us a little bit is in some places, pockets, you just see behavior that quite frankly the loan pricing didn't make sense. It wouldn't have made sense back in 2005 before we had the higher capital, before we had the higher liquidity, and in many cases in some of our markets you see it in some of the smaller firms who are not necessarily accounting for those types of things. So I think that's one factor that could dampen the growth a bit.

But New York was interesting. If you go back maybe a year ago, maybe a year and a half ago, all during that period it was the one place where pricing was very, very rational. There were actually only a few players and the behavior seemed to be maybe the most rational in all of our footprint. Now you are seeing again the conduits are resurging. You are seeing insurance companies come in and in the past quarter, it was a space where there were a lot of examples of just longer structures, seven years plus and very, very thin pricing.

So we report what we see and we kind of monitor it. I felt pretty good actually about the fact that it was a little slow. We actually because of that we saw some paydowns, where some things were sort of refinancing out during the quarter in New York City. So that's what we know.

Okay, that's helpful color. Thank you.

Erika Najarian, Bank of America.

Good morning, I just had one follow-up question. Rene, if I understood you correctly, your guidance for less new compression this year than last does not include a liquidity build that you have to do to be LCR compliant based on the current proposals?

That's correct and we did it that way because when we think of what we have to do to meet the liquidity coverage ratio and we look at the income impact, there's very little if any income impact. So really what you are doing is sort of putting on a leverage with no impact on interest income sort of take down your printed net interest margin.

Okay, just as we think through it, how -- is it going to be a gradual build in your securities book throughout the year or is it something you might frontload towards the beginning of the year?

I doubt we will frontload. We will be in the market. You will see it every quarter. It will be relatively steady and consistent.

Just as a follow-up question to Keith, you mentioned a 56% efficiency ratio as something that is achievable near term. Is it unreasonable for us to say that M&T could get -- M&T standalone will operate at 56% for full year 2013?

Is it unreasonable? I don't know. We tend to think longer-term, 2015 is a long way away. I don't know, normal efficiency ratios for us would be in the mid levels but as we are done with our work and we start to leverage that structure and the new income structure, I would be surprised if we weren't below 55%, below that -- 50% to 55%, somewhere in that range. It's where we have always been and as you think about it, in particular depending on what type of institution that we have, one of the things you are going to see again because of liquidity coverage ratio, if we were at 56% and if you think of all these things that we've got to do with liquidity, that ratio I'm not so sure that that just doesn't come down because structurally we are a different institution.

So I think we've got a long way to go. We have a good track record and you kind of see it, if I were looking at it, I would go back in history and look at where we've been and that's what I would probably use as my benchmark.

Great, that's clear. Thank you.

Jennifer Thompson, Portales Partners.

Good morning. Just a couple questions on C&I. If you could give us the line utilization rates or the trend you are seeing there? And was there anything discernible in terms of the growth in C&I through the quarter? In other words, was there ramp up at the end of the year or was it pretty consistent throughout the quarter? Thanks.

Great, I will go in reverse again. There definitely was ramp up towards the end of the year. I think most of our loan growth was accounted for in the month of December. From November 30 to December 31, we had about $700 million of growth in C&I. And then when we look at sort of -- that's on the balance sheet. When we look at sort of the pipeline, loan growth -- loan production, so new loans that went through our senior loan committee were lower than a year ago but a year ago was abnormal and they were above average and consistent with any fourth quarter, any of the better fourth quarters we've seen in the past.

So I think that kind of speaks to the idea that -- that kind of speaks to the idea that I wouldn't expect a slowing of commercial loan growth.

In terms of utilization, we are somewhere 57%, 58%. That has been rising fairly consistently over the course of 2013. So in fact if you look at that trend, it's an upward trend. It's a straight line, so again it gives you some sense that the idea that you would expect C&I to start slowing at this point probably doesn't make much sense.

And that 57%, 58% that you are running, has it been -- what is kind of the pace? What was it last quarter? Has it gone up a percentage or so every quarter or what?

It's gone up a very little bit but very slowly. So if you go back a year ago, maybe that number was -- if it's 58% now, maybe that was 55%. If you go back a year before that, it might have been in the low 50%s, 50%. It's on a fairly steady, slow pace, yes.

Thanks very much.

Brian Foran, Autonomous Research.

I guess as I think about BSA/AML, I think as analysts we always talked about it like we knew what we were talking about. But what does a BSA/AML best-in-class system actually entail? Is it mostly about technology or is it adding people?

Like I get the consulting to build it upfront, but when you're done do you end up with a tech system or is it more people? And is there any benefit beyond compliance? Is it really just compliance or is there some other things from a business perspective that it helps you with or lets you do?

Brian, again, a good question, great, great, great question the way you phrase it. Let me do my best. So first of all, it's not just technology. It's people. Heavily people-intensive and training people and training people to know the customer. So if you think about it, what we are doing, one of the first, one of the most fundamental things is we are building a risk rating system that allows us to be very sensitive and knowledgeable about when patterns change that might indicate that someone is engaging in some illicit activity or money laundering and to do that equally across all of our footprints and actually through each of the channels in which we interact with our customers.

So to do that on the systems side, there is a fair amount of just data capture and capturing that information is not necessarily just standard information. You are trying to make sure that you have access to information that allows you to do a great job of being predictive, so it's not a one-time thing. Predicting customer behavior is sort of changing all the time and so these models are relatively complex.

So in order to do that, what you have got to do is you have got to identify the information you need. You've got to train your customer-facing employees on exactly what that information is and how to go about capturing it. Then you've got to interact with all of your customers, both the existing customers and the new ones through the account opening process, to begin to capture that information. But remember you've got to capture that information in a very accurate, consistent way.

So you are not only -- you are not sitting in some back office somewhere building a computer. It's touching every aspect of our business and particularly the aspects that address our customers. And so we have seen this happen before. We've seen places that have done it in a way where there's been a lot of disruption in the markets to their customers. We're trying to balance all that and at the same time, we are trying to sort of aggressively be sort of best in class in terms of having predictive models that allow us to monitor for illicit behavior.

So if you think about it, it's pretty complex. If you are really, really good at systems, that would be one thing and not good at people, I think you'd have a problem. So the quality of your people, the quality of your sales force, as well as the technology and the data are all key elements.

That's very helpful, thank you.

Gerard Cassidy, RBC.

On your LCR ratio that you talked about, and you may have mentioned it and I could have overlooked it, what is the dollar amount do you think you need to buy in terms of liquid securities to get you up to the level you need to get to?

We haven't disclosed that yet, Gerard, and I think over the course of this year you saw some of the moves we made particularly in the second quarter and then in the third and I think those began to get us in a good range to be able to kind of meet the requirements. I think it's fair to say that we still have a fair amount to do. It is a sort of manageable amount that we would do to the course of the year but we really haven't talked about the amount.

In part we are not talking about the amount because remember that the rules, the MPR is sort of not final and one of the things that happened in the fall in my opinion was that maybe it seemed that it came out to be a little bit more stringent than we were thinking. So if it stands as it is, we have more work to do. But I think you'll see it, you will get a feel for it as we get to the -- through the end of the first quarter.

Okay, and stepping back from the BSA/AML, the revamping of your systems that you are doing, how much did your acquisition strategy over the years -- obviously you've done a number of acquisitions very successfully. How much did that kind of complicate the situation versus if you were just a legacy M&T Bank, the legacy bank in Buffalo?

You know, let me put it this way. One of the things that has positioned us extremely well is this philosophy that we've had for many, many years that when we do an acquisition our preference would be to do a simultaneous close and integration. And in doing that, we end up putting everything on M&T Systems and so from a systems and information standpoint, that has helped us very well as you're going to go through the years and think of the transactions that we've done.

Wilmington was a little different in part because we -- the bank part, which was really quite frankly the smaller part, was smooth and easily integrated in a very short time period. I think that same summer that we did the close. Whereas if you think of the trust business, the wealth and institutional services, we were really taking a lot of the quality and attributes that were already existing at Wilmington and bringing the M&T piece into the fold. So that was relatively new.

So I think you've seen that. That's taken us longer on the Wilmington side to sort of get to what we would call a steady-state. Having said that, particularly over the last six months, we feel really good. We feel really good about the work we've done on the control environment and how we've stabilized that so if you think of that as 2013, we announced that deal in 2010. So typically that's longer.

But aside from Wilmington, I think the way we've been able to do things to keep them simple, to have not duplicate systems probably has allowed us to make these investments and have them be much more productive than not. So we are not consolidating processing centers. We are not -- if you remember a bunch of us in 2004 and 2005 when we were complaining about the revenue growth, that's actually what we were doing. We were looking at all the capture centers and we were doing all that kind of work.

This is the third time that we've gone through an experience like this. One was after the 1991-1992 when I joined the bank, we were ramping up all the systems. We called it future solutions and we spent a tremendous amount of money there. We also did the same with the projects I just mentioned to you in 2004 and 2005 and now we are doing it again. So I think this is what you've got to do every period after you go through a period of growth. If you don't do it, things could get out of control.

No doubt, no doubt. Regarding your agreement with the regulators, do you think -- after you finish all your BSA/AML stuff -- do you think that for you to complete the Hudson City acquisition, that that agreement has to be lifted?

I think we have got to make progress on -- on getting to sort of that best practice BSA/AML system. We've got to allow the regulators to have enough time to be able to say that we've got an adequate system. You know, lifting of orders and all that, we have no control over that and there's a history that says those things take much longer. So I think we are just really very -- our thinking is really it's about BSA/AML.

Okay, then finally coming back to capital, excess capital, obviously M&T has demonstrated over the years as being a very good steward on taking care of excess capital and delivering it to shareholders. Assuming that the regional banks like [your own] are required to carry the 7% Tier 1 common ratio and maybe there's a domestic buffer of 25 or 50 basis points, I would assume that you guys want to keep another buffer on top of that. Do you think that after you use your money for growth, what's left over will -- you will maintain that philosophy or the Board will maintain the philosophy that you've had in the past in giving that excess capital back to shareholders?

Yes, I think at some point that's right. Keep in mind our situation -- we got to where we are in an efficient manner, right? We are 9.25. You can see that other institutions are all giving back capital and doing appropriate levels of repurchasing and those things. So it's not as if that has been eliminated from the banking industry. I think as I think about it, if you think of all the things that have been part of our value proposition, acknowledging that we sell commodities and making sure that we have a low-cost controlled environment, keeping everything relatively simple, to me now that everybody has to carry more equity, those things are even more important to be able to carry that through.

And then at some point in time as you get excess capital, the only choice you really have is to give it back in some efficient form.

Thank you.

Todd Hagerman, Sterne, Agee.

Good morning, everybody. Rene, I just wanted to go back to the Hudson City just for a moment. As you mentioned, the Boards again met in December, put out a statement including a comment that it was I believe unlikely the transaction I believe would close by the end of the second quarter. I am just wondering in terms of -- you are very focused on developing or building out kind of a best in class enterprise risk management system. I am just kind of thinking -- I'm trying to think about whether or not are the companies on a dual track system such that they are very much still moving forward in terms of wanting to complete the deal, but by the same token, you are continuing to move forward in terms of your risk management process?

I'm just trying to figure out if -- basically it seems as almost the agreement has becomes an agreement in principle such that when the stars align sometime in the future, the Boards will revisit the transaction and determine whether or not it makes sense.

Well, I had you, Todd, at the beginning but then I think I lost you at the end. I will go with the one from at the beginning. I think, look, put Hudson City aside for a minute. We are among the smallest of the banks that are above $50 billion. We tend to think long-term, so regardless of any specific merger transaction, we think in order to survive and be around you've got to have a pretty strong infrastructure and we also think that as we move further and further along, what's really happening is that there are a lot of barriers to entry being set up. So in our minds these investments that we are making particularly in risk management don't relate to any one particular transaction.

The second part of that would be that once we complete that, it's not sort of running to -- I see what you mean by dual tracks now -- from a risk management perspective, it would plug into Hudson City and there's no incremental whatsoever associated with it.

The dual tracking is sort of -- at the end of the day, the environment is uncertain and it makes sense for them to go down a path to make sure that they have alternatives in the event that we can sort of do the partnership that we want to do. So I think that's all that they were saying and under the sort of regulatory regime and their particular regulators, they've got to continue to make progress to be safe and sound if for some reason that they had to go on their own.

But as we complete the merger, there's no incremental cost to run Hudson City, given what its portfolio and mix are and that's why you get a lot of leverage out of these investments that were made.

I can appreciate that and that's helpful. I am just wondering whether or not again you think about the period of time that has elapsed since the deal was initially announced, the time where the initial due diligence was completed and it just seems like at some point we could get back to a situation where we have to revisit with shareholders and think about the economics of the transaction and whether or not it really makes sense at some point in time.

We reviewed all the economics of it. We are economic animals. We reviewed all the economics of the deal and I'm absolutely positive that Hudson City did the same. It just makes sense. It didn't make sense for one quarter. It made sense. So putting those two institutions together, all that value is there. Nothing has changed at all and both parties kind of weighed that out and are very committed to the transaction.

Great, that's very helpful. I appreciate it.

Sachin Shah, Albert Fried.

My question is about Hudson Bank again. So I know you are trying to set the foundation here on this AML. You've reiterated it in various ways, but from that perspective before you can move on and even have the regulators look at the Hudson Bank situation and actually approve it and allow it to move forward, is there any specific timing on this now relative to the previous statement that you guys put out on extending the termination date, etc.?

The only thing that is out there that is public is our written agreement and it kind of lays out everything that we've got to do and we've sort of talked about the progress we want to make in terms of this year and we've talked about the spending patterns. So with all that together you can get a good sense. Pinning it down to a specific day is not really how we think about it.

But the timing is sometime in the second quarter of this year that you are expecting maybe some progress?

I don't think I can add anything beyond what I've already noted through the course of the call.

Okay. As far as Hudson Bank, just to reiterate that the commitment is there on both Boards to continue as outlined, the merger agreement and the amendment of that to basically merge. Is that -- I just want to solidify those comments.

I think just go back and read the press releases. We are all very enthusiastic about doing the transaction, each of us individually and together. There's sort of no question in our mind and I think that was evident in the actions that both Boards took, so we are very, very enthusiastic about once we get our work done, continuing on with that process.

Okay, just one follow-up question and so aside from this AML situation, is there any -- so if you resolve this -- when you resolve this, it's more of a when you resolve it situation because as you said early on, you are thinking more long-term about the bank, M&T, which makes sense. But when you resolve that, when you resolve that do you believe there is any other -- there are reasons why the regulators, especially the Fed, would say you resolved this but now you still can't do this transaction?

If you spend any time around these processes, really what happens is that you do your best to have both partners have the right intent, which we have here. We think we've got a transaction that creates a lot of value and then you have your application process go through and we don't influence the application process. We don't influence future events. We don't influence the state of the economy as that will happen going forward. All we know is that the two management teams are really committed to producing a strong bank in New Jersey. That's all we know.

Excellent, thank you, guys.

[Adam Rubridge], CIBC Asset Management.

Through the acquisition of Wilmington Trust, you guys have acquired a number of investment managers including a couple equity stakes and some smaller boutique managers such as Roxbury Capital and Cramer Rosenthal McGlynn. Can you comment on M&T's strategic vision for the investment management arm of the bank in general and maybe these two asset specifically?

They are great partners and we are very pleased with every aspect of the Wilmington transaction and the partnership we got. But other than that, there's really nothing to talk about there.

Is growing boutique investment managers underneath the umbrella of Wilmington Trust something that would be in the strategic plan for the future?

I don't think that that's necessarily the way we think about the growth in the Wilmington businesses and platforms. I think that on the ICS and trust business, that's a whole different ballgame in the types of clients and services that we are providing. Then on the Wilmington side really our leverage is all about introducing the strong and talented team that's there to our customers. So we are not sort of focused on the idea that we would need to have more of those types of relationships in order to provide good customer value.

Great, that's very helpful, Rene. Thank you.

[Robert Hirst], Oppenheimer Fund.

Rene, I was wondering if you could talk about the trust preferreds and how you have a $350 million one at 8.5% that I think you were approved to replace with other capital, and then there's like $367 million of other trust preferreds which are currently callable, they just became callable this month?

Yes, so on the $350 million that you mentioned, when we submitted our capital plan last year, we got approval to replace those through -- and that approval will last through the end of the first quarter here. So it is our intention to do that and we will probably use that piece as a replacement with a full preferred.

And then the rest of the stuff it depends. We've talked about this a little bit. Some of it actually floats a very low rates and so it will probably (multiple speakers)

Right, I excluded the low rate stuff. I just gave the things that are all over 8% because they are all those floating rate things.

Right, the remaining amount that probably not in the near term but down the road as our capital structure firms up, we would then obviously look to do something but we are not looking to do anything with that sort of subset that you just talked about in the near term.

Okay, thank you.

A follow-up from Brian Klock, Keith, Bruyette & Woods.

Rene, just a quick follow-up. I guess, one, congratulations on your promotion but I am just wondering if you can let us know what -- with all the additional responsibilities you are taking on now as the Vice Chairman at M&T and now running the wealth management Wilmington Trust lines of business, I guess just talk about expectations and what we can expect -- how that will impact you going forward?

Well, in the near term I don't expect that you will notice any changes. I think that with regard to the whole announcement, I hope you would see with Mark and Kevin and some of the other names that you have heard or will continue to hear that we have got a really, really deep bench.

And with respect to Wilmington, as I said, that team is very, very strong. It has got strong leadership and now we've sort of gotten to a place where we've gotten it to a very stable environment and so I think our forward-looking view of the Wilmington business is that we should be able now to sort of kind of go full steam ahead and integrate that into all the opportunities that we have across our core footprint on the wealth side and then maybe beyond that with respect to the institutional businesses.

So my job is to help out in any capacity that I can and I'm sure you will probably hear more about that as we kind of move forward.

Great, thanks for the additional follow-up. I appreciate it.

That was our final question. I would like to turn the floor back over to Don MacLeod for any additional or closing remarks.

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

Thank you. This concludes today's conference call. You may now disconnect.