M&T Bank Corp (MTB) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the M&T Bank first quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. I'll now turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead, Sir.

Thank you, Laurie, and good morning, everyone. This is Don MacLeod. I'd like to thank everyone for participating in M&T's first quarter 2014 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 comments made during this call might contain forward-looking statements relating to the banks industry and 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. Good morning, everyone. Thank you for joining us today. As I noted in the press release, we got off to a bit of a slow start in 2014 with lower than normal levels of client activity in January and February followed by a rebound in March. This was the case for both the balance sheet as well as some of the fee income categories. Nonetheless, the quarter was a productive one.

We received a non-objection to our capital plan from the Federal Reserve, accessed the debt markets and financed one of our TruPS issues with perpetual preferred stock, thus eliminating the need for additional amounts of preferred for the foreseeable future, and we continued to make progress on our BSA/AML compliance, risk management, and capital planning and stress testing capabilities. I'll have further thoughts on some of these topics later in the call, but first let me review a few of the highlights from our first quarter results after which Don and I will be happy to take your questions.

Turning to the specific numbers. Diluted GAAP earnings per common share were $1.61 for the first quarter compared with $1.56 in last year's forth quarter and $1.98 in the first quarter of 2013. Net income for the recent period was $229 million compared with $221 million in the prior quarter. Net income was $274 million in the year-ago quarter.

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 in both the first quarter of 2014 and the fourth quarter of 2013. M&T's net operating income for the first quarter, which excludes intangible amortization, was $235 million, up from $228 million in the linked quarter.

Diluted net operating earnings per common share were $1.66 for the recent quarter, up from $1.61 in the linked quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.15% and 12.76% for the recent quarter. The comparable returns were 1.11% and 12.67% in the fourth quarter of 2013. In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Turning to the balance sheet and the income statement, taxable equivalent net interest income was $662 million for the first quarter of 2014, down by $10 million from the linked quarter. The decline was attributable to 90 days in the quarter compared with 92 days in the prior quarter. The net interest margin was 3.52% during the quarter, down by 4 basis points compared with 3.56% in the fourth quarter.

Although the reduced day count in the quarter had the effect of reducing net interest income, it added 2 basis points to the reported margins. We estimate that the actions taken during the quarter to further build our liquidity asset buffer in connection with the liquidity coverage ratio reduced the reported net interest margin by about 4 basis points.

During the quarter, we issued $1.5 billion of senior bank notes and began to deploy the proceeds of that issuance into LCR qualifying investments. Finally, the remaining 2 basis points of margin compression represents our estimated core margin pressure which includes the impact of new loans coming on at rates lower than those maturing and which is partially offset by a lower cost of funds.

The average interest earning assets increased by $1.2 billion or 7% annualized as compared with the prior quarter. The increase included a $911 million increase in average investment securities as well as a $213 million or 1% annualized increase in average loans. Average commercial and industrial loans, or those loans to support business operations, grew at a healthy 9% annualized rate. We saw strong double digit growth in both Pennsylvania and in our New York City metropolitan region as well as continued growth in auto floor plan loans.

Average commercial real estate loans declined slightly at an annualized rate of 1%. While the origination activity remained steady, we experienced a higher level of pay downs, a high proportion of which were refinanced by CMBS conduits or life insurance companies at lower rates or longer terms. The industry-wide slowdown in residential mortgage loan volumes has resulted in a smaller portfolio of loans being held in the pipeline for eventual sale and that was the primary factor driving an annualized 7% decline in residential real estate loans.

Average consumer loans grew at an annualized rate of 3% with strong growth in indirect auto loans being partially offset by continued declines in home equity lines of credit as well as seasonal softness in recreation finance lending. Average core customer deposits, which exclude deposits received at M&T's Cayman Island's office and CDs over $250,000 grew at an annualized rate of 2% from the fourth quarter. On an end of period basis, core deposits grew at a much stronger annualized rate of 11%.

Turning to non-interest income. Non-interest income totaled $420 million in the first quarter compared with $446 million in the prior quarter. There were no securities gains or losses in either period. Mortgage banking revenues were $80 million in the recent quarter, down $2 million from the prior quarter. Commercial gain on sale revenues declined by $6 million compared with the fourth quarter reflecting lower volumes of commercial mortgage loans originated for sale. The impact from those was partially offset by higher residential mortgage servicing revenues.

Fee income from deposit services provided were $104 million during the first quarter compared with $110 million in the linked quarter primarily due to the lower levels of NSF volumes as well as lower customer debit card activity. Trust and investment revenues were $121 million compared with $126 million in the prior quarter. Some portion of this decline is seasonal and we would expect to see a rebound in the coming quarters in addition to the seasonally strong tax preparation fees we typically realize in the second quarter.

Turning to expenses, we continue to make investments in our risk management and compliance framework. As a result, our operating expenses are still elevated from what we think of as our normal ongoing expense level. Operating expenses for the first quarter, which exclude expense from the amortization of intangible assets, were $692 million, down by $41 million from $733 million in the prior quarter. Recall that the fourth quarter's results included a $40 million addition to our litigation reserve.

In the first quarter, salaries and benefits increased by $35 million reflecting in part the normal seasonal increase that comes from the accelerated recognition of equity compensation expense for certain retirement eligible employees, higher FICA expense, higher unemployment insurance expense, and expenses related to the 401(k) match. As in prior years, as these items return to more normal levels, we would expect a comparable decline in this year's second quarter.

The other noteworthy change from the linked quarter was a $34 million decline in professional services expense. As we noted on the January call, those expenses likely peaked in the fourth quarter, reflecting front-end spending tied to our BSA/AML, capital planning and stress testing, and other initiatives. Bob Wilmers offered additional details on our risk management and other investment priorities in his message to shareholders published with the 2013 annual report. That said, we would expect our spending in these categories to remain elevated, possibly through the third quarter, before beginning to show improvement. The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and merger-related expenses, was 63.9% for the first quarter compared with 65.5% in the prior quarter.

Next, let's spend some time on credit. Our credit quality remains strong and in line with our expectations. Non-accrual loans increased slightly from the end of the fourth quarter. The ratio of non-accrual loans to total loans increased by 3 basis points to 1.39% as of the end of the first quarter. Notwithstanding that slight increase when we file our 10-Q in the coming weeks, I would expect that we will report another decline in classified loans.

Net charge-offs for the first quarter were $32 million, down from $42 million in the fourth quarter and annualized net charge-offs as a percentage of total loans were 20 basis points for the first quarter, improved slightly from 26 basis points in the fourth quarter. The provision for credit losses was $32 million in the first quarter. The allowance for credit losses was $917 million, amounting to 1.43% of total loans at the end of March. The allowance for -- the loan loss allowance as of March 31, 2014 was 7.1 times annualized net charge-offs.

Loans 90 days past due on which we accrue -- continue to accrue interest excluding acquired loans that have been marked to fair value at acquisition were $307 million at the end of the recent quarter. Of these loans, $291 million or 95% are guaranteed by government-related entities. Accruing loans 90 days past due were $369 million at the end of the fourth quarter, of which 81% were guaranteed by government-related entities.

Turning to capital. M&T's Tier 1 common capital ratio was an estimated 9.45% at the end of March, up 23 basis points from 9.22% at the end of 2013. Our estimated common equity Tier 1 ratio under the recently adopted Basel III capital rules is approximately 9.22% and tangible book value per share increased by 3% from the prior quarter to $53.92 per share.

We were very pleased to have received the non-objection from the Federal Reserve's CCAR stress test on both quantitative and qualitative basis. As we noted last month, our capital plan for the coming 12 months includes maintaining our common dividend at its $2.80 a share annual rate as well as continued payments of dividends and interest on other regulatory capital instruments.

Turning to our outlook. As I mentioned at the outset, client activity was very slow across the board for both the balance sheet and some of the fee categories in January and February and then picked up significantly in March. Our sense is that the slowdown was likely a temporary issue. Regarding loan growth, we were pleased with the momentum we had in C&I lending. We expect continued pressure on pricing and structures in the CRE space. At this point in time, we're maintaining our outlook for mid single digit loan growth in 2014.

We continue to expect modest ongoing core compression in the net interest margin of about 2 basis points per quarter. As we've discussed, we will see a continued decline in the printed margin as we take further steps towards reaching full compliance with the liquidity coverage ratio by the end of this year; however, those actions will have little to no impact, no negative impact on net interest income.

We expect some improvement in fee-based revenue going into the second quarter despite the slow start. Our outlook for fee revenue growth in 2014 remains in the mid single digit area and, as noted earlier, expenses will be elevated as our pace of investment will remain high for the next couple of quarters before we begin to see some improvement. Our goal is to be well positioned for 2015.

The outlook for credit is stable. There are no signs of any turn in asset quality metrics. With respect to our work on BSA/AML compliance, we continue to make considerable progress, achieving several important milestones by the end of this first quarter; however, we have much more work to do and we're working closely with the Federal Reserve to implement a strong and sustainable BSA program. I would also note that despite passing the CCAR stress test this year, we are also focused on continued improvement in our capital planning and stress testing capabilities in anticipation of CCAR 2015.

Of course, as you're aware our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future. Now, let's open up the call to questions before which Laurie will briefly review the instructions.

(Operator Instructions)

Your first question comes from the line of Brian Klock of Keefe, Bruyette & Woods.

Good morning, Brian.

Good morning, Rene. So, I'm not sure. Maybe you can kind of let us know on the expense side things came in better than I was expecting, I think better than the Street was expecting, and you talked about achieving many significant BSA-related milestones. So is there any way you can kind of gauge for us or say are you through the fourth inning or fifth inning or maybe kind of let us know I guess how much progress or how far along the way you guys are with the BSA/AML process?

Yes, as I said a few minutes ago, I think we made very significant progress. We do have a lot of steps left to do and so to give you sort of some sense, what we're really attempting do, and we've been doing since last year, is we're trying to do a complete overhaul of our program. What we've done most recently is we've implemented, we've launched a new enterprise wide know your customer program. And if you think of that, what that involves is putting in place your process to identify all the customers' accounts and to collect a more comprehensive view of all the information at account opening and then to begin to use that to go through a new enhanced risk scoring process.

And so one of the steps we made progress on to date is as of March 31, all new customers are going through that process and it's a much, much enhanced process. And obviously if you just take that one step, we'll need time to see that work and to make sure it's working properly and for all of the regulatory bodies to get comfortable with that, but that's an example of one of the things we've done. We've still got a lot more work to do.

We've got work to do on transaction monitoring, we've got work to do to take a look at our overall policies and procedures, but we're making really significant progress. By way of example, in all of our new procedures we've trained over 7800 employees on the new program and those procedures. We've increased our staffing.

We are now at the end of the quarter up to 425 individuals, FTEs, working in the BSA/AML compliance area. And then one of the biggest things that we've got to do is that once we get comfortable with our new process and how it's working, including the restoring, we've got to go take a look back at our customer base, our existing customer base, and sort of understand whether our new process would have come out with any different answer and whether there's anything in that book that we would uncover now that we have a new enhanced process. So, it's a lot of work.

We're really pleased that we made the progress we've had to date, but we still have a fair bit of work to do and so we ask you to kind of stick with us. We'll keep updating you.

Okay. Thanks. I appreciate the color. And I guess maybe thinking just one other question on expenses and I'll get back in the queue. You did talk about the highly compensated seasonal spike that you have, the professional services were down $34 million linked quarter,

But remind me, isn't there usually in the second quarter the other miscellaneous expenses usually have sort of catch up after the sort of lower first quarter? Should we expect that same sort of ramp that we've seen in last second to first quarter changes in that other expense line?

I'm not sure. Well, one, if you look back, pick a period five or six years, yes, you do see the decline in salaries and benefits and you usually see a slight uptick in those categories. I'm not so sure whether that will be the case or not, Brian, I don't -- I haven't thought about it that much, but that would be typical, if that helps.

Okay. And I guess just with that, can you actually give us the actual amount of the stock-based compensation expense here in the first quarter and the FICA [food] and insurance expense items?

How do I say this? The best I can do is, because what you have is we've also got other things that are in there as well as sort of health savings account, things that are funded up front. My sense is somewhere between $35 million to $40 million for all of the items because somewhere in there -- it doesn't all reverse itself right away because it gets smoothed out over the course of the rest of the year, but you should see somewhere in there it would be the drop I would expect.

All right. Thank you.

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

Hi, guys. I have [Dan Delmar] on the call. Matt's not able to hop on. Couple questions. I just want to clarify on the NIM. NIM should have benefited this quarter from the TruPS redemption, so as we look forward in the printed NIM, are you still expecting about the same decline outside of the [tube of] core NIM compression?

Yes, nothing has changed if I get that right. To your specific item, we did that halfway through the quarter, so I guess there's still some benefit there, but I think all of that's really included in our thought that if we weren't adding unsecured debt and liquid securities, we would be seeing about two basis points every quarter in compression.

Okay, great. And just moving on to the fee income, you mentioned most of your businesses bounced back in March after a slow January and February which I'd assume is partly due to some of the extreme weather. Was there anything else to note that attributed to the weaker activity and also what drove the rebound in March as we try to look forward?

It's a good question. It was very unusual in that almost everywhere you looked things were slow, so whether it be in our residential mortgage business things were slow until we got to March and we saw a pick-up. If you go to loan volume in terms of pipelines the same was true. If you look at our lockbox volume which is centered in upstate New York and the Mid Atlantic, they would lockbox in the first quarter, volumes were significantly down which is customer behavior, right?

If you look at wires handled out of our western New York wire office, those were down significantly in January and February, picked up in March. If you look at debit card transactions, those were down I think 17% quarter-over-quarter but had an uptick in March. So, almost every topic you looked at was affected. So, my sense is that although I've not seen that before that it was something about the economy as a whole as opposed to something specific to M&T.

All right. Appreciate it. Thank you.

Your next question comes from the line of Ryan Nash of Goldman Sachs.

Good morning, Rene. Just first another followup on the expenses. You talked about a $34 million decline in the professional fees.

Can you just give us a sense of what really drove the decline this quarter? Was it the completion of CCAR, a milestone in the systems? And then when you think out you're saying that we're going to see a decline post Q3. What is the milestones we're going to reach that are going to allow them to come down once we reach that point?

Okay. Yes, sure, Ryan. I guess the best example or logic I can give for the fourth quarter was that, think about this, in order to be able to get to where we were at March 31 with the new program and on-boarding all of our customers, most of the significant technology work on aggregating customers and focusing on gathering new information and putting those processes in, a lot of technology work is going to happen up front because you can't begin those people intensive processes until you have your structure built.

On top of that, all of the design of the program, using the outside consultants and ramping -- the ramp up of the process, what I would suggest, one, it costs a lot but then you become more efficient at the process as well. As you look through and remediate accounts you become more efficient at that over time.

So, that's really what was behind -- a big part of what was behind the fourth quarter expenses being so high. It also, to your point, a lot of what we've been doing over the course of last year on CCAR I think was probably higher than it will be this year even though we'll continue to spend this year, that upfront engagement of what we are trying to do to meet the first test was pretty high.

So, I don't know if that helps, but that's kind of what we saw. Then I guess as we kind of move forward, as we get the bulk of all of our processes in place and we're able to go back and look at how that new process affects our existing customer base, you begin at some point to start to move much more towards a normal process of re-screening your accounts and screening new accounts that are coming on, which is a much less costly process than kind of starting from where we are and looking at your existing book of I think we've got 3.5 million customers and 5 million accounts right? So, we had to get through that whole process.

Got it. Just to follow-up on the LCR. When you think about the additions that you've done over the past couple quarters, securities book is up almost 100% and I know you're saying that you'll likely be where you need to be by the end of the year, but can you give us a sense of the magnitude of how far you think you are in terms of the securities additions? Will we have another step-up from here or would you expect to continue at a pace similar to what we've seen the past couple of quarters?

I'd say we've got more work to do. I would say I was very pleased that we got a significant portion of what we need to do done in the first quarter, so more to do and then I guess beyond there it's hard to comment because we've got to see the rule, right? So -- and I think it's hard to suggest, but I think we're ahead of plan and I think you'll see a noticeable amount of new volume, but I think we're ahead of what we thought we would be.

Great. Thanks for taking my questions.

Your next question comes from the line of Brian Foran of Autonomous.

Hi. Good morning. Just following up on the January and February comments. Does it feel like all that activity was just lost and March is returning to kind of the run rate you had budgeted on these various metrics, or are there some line items that could have a doubling up effect in 2Q for lack of a better term, so stuff that would have normally happened in 1Q getting pushed into 2Q plus the normal volume that you would have expected in 2Q?

I'd say I don't know, Brian. I don't know. All I know is that March looked more normal. Had February and January looked like March, we would have been happy, but it's hard to predict customer behavior from here.

Fair enough. And then going back to the annual letter there were a couple stats on the New Jersey build out with 171 employees, $878 million in loans. I was wondering if you could just give us a general update. How's that going? How are those lenders progressing? And how's the business volume in New Jersey coming in this kind of interim period before Hudson City comes on board?

Yes, thanks for that question. It's going very, very well. About a month or so ago Kevin Pearson and I went down and we had the grand opening of our new New Jersey office which means the majority of those folks that Bob listed, the 171 people, are all located in one particular office and they've been generating business and working really well together. What's nice about it is that but for the fact that we don't have the branches, you've got every single M&T business division in that same office working together around leads, both loans and deposits have been growing.

I think Bob covered that in his stats in the message, so we've got a wealth management team set up there. So, things look like it's going pretty well and at some point in time if we can get ourselves with a nice branch network behind us it will be a bonus on top of that. It kind of reminds me of if you've known M&T for a while, over the years we've done -- we've been able to do a great deal of work at building a franchise or a community bank in places like Albany or the Hudson Valley before we were ever able to have the benefit of a branch network, and I think there's something special about that. It builds a lot of character.

Thank you.

Your next question comes from the line of Erika Najarian of Banc of America.

Good morning.

Hi, Erika.

Just the umpteenth follow-up question on expenses, Rene, if I could. You mentioned that the expense base will remain elevated through 3Q 2014, so I guess two follow-up questions from there. First, is it too optimistic to assume or project that the fourth quarter expense base could go down to the mid $600 million level and, two, because of the staffing additions that you mentioned when you answered Brian's question, does the definition of a normal expense base for M&T, has it shifted from here and how much has it shifted?

Okay, so a couple of things. So, I guess we were at 692 in the first quarter and we've got some elevated salaries expense, but if you start there you're already in the mid 600s, right? And then from there you've got to think to the reasons why the expenses are elevated, so beyond BSA/AML we are making improvements to our overall risk management structure because we're a larger institution.

So, while that spending is not as great, it will probably last a little longer, but we talked about the build out of our web banking platform and then investments we're making in that space and in the mobile space, so I think those will continue for a while. And then I think we've got one more -- another year of making sure that our capital planning process is really stable.

So my sense is that it's not like a cliff. There's sort of a process we're going through, some of which will slow down at the end of this summer, but other things which will continue and we'll reap the benefits over time.

I think I said on the call last quarter that something that the idea that we would be in the mid 55s and 50s in an efficiency ratio was not unreasonable and it was in the long term that a bank with this added infrastructure, because its all leveragable, could operate in the 50 to 55 space and so that's how I would think about it in terms of long-term -- maybe long-term efficiency ratio in those ranges.

Okay. That's very helpful. And just a quick followup question on the LCR. As we think about the full year, should earning asset growth continue to out pace the mid single digit loan growth that you mentioned?

Well, with the liquidity coverage ratio that's just going to be the case until we get to where we need to be so, yes. Which is the sort of issue of what will drive the non-core margin compression, but the cost of that is, there's no negative impact on the dollar amount of NII.

Got it. Thank you.

Your next question comes from the line of Todd Hagerman of Sterne, Agee.

Good morning, everybody. Rene, just a couple questions going back to the CCAR program. Number one, as you referred to in your remarks I think you're pretty much done on the preferred side, but I'd like to get a little bit more insight if you could just in terms of the net new capital issuance, if you will, with the Hudson City deal.

Theoretically, the equity component moved up to 70% from 60%, so I'm just wondering how we should think about that net new capital issue and with the fed's calculation on capital actions your number went from 6.2 to 6.7. I was just wondering if you could just provide a little more perspective behind that?

Yes. The last one is easy, I don't know. 6.2 - 6.7, not my test, so I don't know. I was happy about it. The way to think about it, Todd, I guess is that we were going into the test for the first time and so that's one degree of uncertainty where all of the data that we've been submitted was going to be run through the Federal Reserves model. And then the other uncertainty is that we were doing just I think the only large bank transaction included in the stress test, so there was an amount of uncertainty there.

And how do I think of uncertainty? I think we are very buttoned down in terms of understanding the risks associated with Hudson City. We've looked at it a lot and we looked at it for a long time now, but when you're taking something that -- an institution that's below $50 billion and you're running information on their mortgages and their data through a centralized stress test again there's uncertainty. So, we just thought it was prudent going into that situation to assume that of the purchase price, we would assume that we would finance 70% of it.

There's been no change in the agreement with Hudson City and the Hudson City shareholders. That sort of brings me to sort of looking back at the economics. I think the way that we think about transactions whenever we talk to you about we announced that we're going to do a transaction and it makes economic sense, we are always starting with an internal rate of return that assumes 100% equity financing and then we may choose to do 60% in the end or 70% or some other number, but what that means is that the returns that we told you upon announcement haven't changed.

There's still 18 plus in terms of returns and IRR and then to the extent that we use less equity fine, that's a financing benefit. When we look at -- if we were to go through and use 70 in the transaction, as we look at the numbers we still see a high single digit accretion -- EPS accretion from the deal, high single digit below double digit accretion, so not much has changed there.

I think the one thing that we've noticed is that credit quality has improved at Hudson and -- which affects marks in a positive way, and the other thing is that prepayment speeds have slowed, so it means that there's more net interest income than when we had originally announced the transaction in our initial projections. So, everything is held up well. I think our thought process was to try to be conservative and sort of help eliminate some of the uncertainty associated with putting that kind of a pro forma together in the test for the first time.

Okay. So just to be clear, as you mentioned, this is not unusual that you would go into the deal with 100% equity assumption if you will, but then with that incremental 10% you're talking more about or you still haven't figured out necessarily that incremental 10% financing in terms of the structure that might take, if you will?

No. I think the way that I think about it is at the time we get down to -- if and when we get down to that point, what we're committed to doing is making sure that our capital ratios are consistent with what we say in our stress test and actually for many, many years we've been very proud to do that with you folks. We're also doing that with our various regulatory bodies and that's how we're going to manage it to try to make sure we hit what we put in.

I'll note even today if you look at the pace with which we are generating capital in just the first three months, it's already higher than what we had in our base forecast, ending up at 945. So, we're generating capital quickly. As we get closer to a potential transaction there, we'll kind of make some decisions and decide what we need to do.

Okay, great. And then just if I could on the mortgage side. You mentioned a couple of the items related to the mortgage this quarter. I was just wondering again and just with the volumes coming down in the quarter you guys have actually been able to keep your numbers high relative to the industry in terms of both year-over-year as well as sequentially.

Was there any change in the MSR this quarter or is there any other color that you could add in terms of just for example the margin on the gain on sale, I think you said that it was -- the gain I think on the commercial side was relatively stable. But I'm just interested kind of how the MSR was treated this quarter and the margin on the gain on sale or anything else that kind of contributed to a more stable mortgage line relative to the industry?

Yes. So, in terms of -- stick to the residential side for a minute. On the residential side the gain on sale was relatively flat. We saw about a 10% decline in locked volume. We saw a 7% decline in application volume. It matters that it's lower, it was a lower decline, but then if you go to the applications, the applications were up.

So, kind of gives you some sense that the activity was weighted towards the end of the quarter, but no change really in the gain on sale margins and I don't really expect one. I think the residential business has been relatively stable. It's taken a couple quarters to come down to a normalized level. We seem to be there. What else did I miss in your question?

MSR.

Oh, no change in the MSR. We didn't have any material change in MSR this quarter.

So, with the applications up, the pipeline has actually improved from year-end going into April it sounds like?

Yes, slightly. It's up as opposed to what you saw in all of the lagging indicators, yes.

Great. Terrific. Thanks so much.

Sure.

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

Great, thanks. Rene, can you just -- seems like you were pretty negative on the CRE competition this quarter from the I think you said the conduits and life insurers. What caused that to change and do you expect it to change? And also do you need it to change to get to your I think it was mid single digit loan growth or is most of that being pulled by C&I?

No, I don't think we need it to change. I think this quarter, I'm doing this off the top of my head, but the last couple quarters our CRE growth has been about 2%. It was negative 1% annualized this quarter, so I don't know maybe that will bounce up and down. I don't expect us to see significant growth in CRE because of what you're saying in terms of the competition, and I think there are really three things, three broad things that are happening.

One is what I mentioned and that's people looking for yield, so that's why you get the conduits where things are going into securities, you get the insurance companies who are also looking for yield, and so the low rate environment is driving that portion. Unless any of us expect that to change soon, you know my sense is that will be around for awhile. I think the second thing is that there's a whole other subset of folks, for example, who seem to be more aggressive in the multi-family space and I would assume it's because of the risk weighting on the assets, but relative to a year ago or so we see more and more people interested that multi-family space, and so I wouldn't expect that to change as well.

I do anecdotally think that it has a lot to do with the favorable risk weighting which in our minds tends to create risk in some ways. So, in those cases we would tend to back away from those things if the pricing and structure starts to fall outside of what we're normally comfortable with.

And then, finally, the third space is that we get a lot of competition from the smaller institutions, institutions that are smaller than us around the community banking space and I'm not sure. Anecdotally, I know that for example, as the FDIC rules change and as capital changes we're building those into our models as RMs are making decisions every day and it often wonders to me whether the smaller institutions are doing that as quickly and/or whether or not they've got a reprieve from some of the rules that's having an effect.

So, how you look at all of those things, I can't imagine that we're going to see any change in the pace there, and so when I think about mid single digits, I'm really thinking about the commercial bank as a whole.

I'm throwing out the resi real estate because that's really just held for sale stuff, and I think we were probably pretty close, probably like 3% growth even with the down quarter in CRE this quarter when you combine C&I and CRE.

Okay, great, thank you.

Sure.

Your next question comes from the line of Keith Murray of ISI.

Just on the C side, you mentioned the mid single digit fee income growth outlook. What's the base that you're starting that from, the dollar amount?

Last year.

So, full year 2013?

Yes. You got to throw out the security gains and the nonsense there, but just those regular categories without the securities gains that's what we're looking at.

The core fees, okay. And then within the trust fees, just curious given the market back drop what's holding it back there? Is it fee waivers on the money market fund side? What's the right way to think about that line item going forward?

Well, definitely fee waivers are there but that's in the base. Its been for a very long time so you've got upside there as rates turn around, but I think for us we've had year-over-year I think the trust number first quarter was flat. I think from time to time we have what we refer to as non-recurring fees but I don't think it's the right term, sort of estate fees and lumpiness and so forth, and we were on the downside this quarter. And so that was sort of lead to our comments we wouldn't be surprised to see it be a little stronger as we move into the rest of the year.

Okay, and then back on loan pricing, you were just talking about it. Given Basel III LCR, et cetera, do you guys feel like you're pricing loans today for the current regulatory environment? Meaning do you feel like you're ahead of the industry and how much catch up do you feel the industry has to play and how long will that take?

Well, I think if I look at our statistics over many, many quarters, our pricing has been relatively consistent and we're reflecting the changes in the cost structure in a way that says the returns are a little lower than they used to be but the pricing is relatively consistent. And the way I would characterize it is we're in there with the competition so we don't set the price per se but we compete, so that's driven mostly by the market. I think the way to look at it is there are certain triggers we just don't like to go through in terms of what we're generating in terms of pricing and ROEs.

Having said that, the other part of it is structure and when I mention the commercial real estate process, there's been some structural issues, people willing to go 10 years on things that we might go 5, so I think what's going to slow us down is probably if that continues to change and hit sort of a lower level trigger, it's not broad based but we've seen here and there we could get beat out on a price and a CRE deal by 100 basis points.

So, if that continues and the number of times that that continues goes up, I think you're going to see us be relatively slow, but if you go back to 2004 that's what was going on with us as well where we had almost no growth, particularly in New York City, and we couldn't quite understand it, we just felt the pricing was irrational and lo and behold you could kind of see in the aftermath that it was.

Thanks. And then just last one. I don't know if you've had much back and forth with the Fed post the CCAR results, but just curious if you've gotten any color on the RWA difference between your forecast and what the Fed had in their numbers?

No, I don't know but I would sort of just -- I don't know that I would work too much into it, especially given that we were in the middle of our CCAR submission, we were combining two banks. There's a lot of moving parts, but I don't have insight into what drove the change.

Thanks a lot, Rene.

Sure.

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

Good morning, Rene. Really almost everything has been asked but I'm just curious on the trading account and FX gains line that seemed particularly light this quarter. Was there anything unusual on a go-forward basis. When you talk about your full year fee income guidance, does that kind of bump back into an $8 million to $10 million a quarter range?

Yes, it was down. I think there's two things that are in there. One in particular is just movements with the market because it's the other side of some of our post retirement benefits that are there, but the other thing that's in there is our customer swap business and so there was a lot of activity in the fourth quarter. That activity was just quiet just like everything else, so my sense is that's very dependent upon rates and if you were to see the rates come back down, then you'd get more activity going on there of people trying to lock into fixed.

So, if you look at what's happened recently, that would, you're kind of right, I don't know about the exact dollar amount but that's what the movement is.

Okay. And on the deposit service fees, they were obviously down year-over-year. I know you mentioned NSF. Is it as you sort of build to the mid single digit growth in all fee income year-over-year is the expectation deposit service fees are lighter this year than last as this quarter was lighter than last or do you get some sort of bounce back on that line?

Yes, I do think so. I think that is definitely the case and I mean if you get away from M&T and you look at national trends, there's a change in behavior that people are seeing which is there are fewer and fewer NSF eligible-type transactions which I guess at the end of the day is a good thing as customers say they are really understanding how the process works and they are adjusting their behavior which is probably what you'll want to have happen.

Great, thank you, Rene.

Sure.

Your next question comes from the line of Gerard Cassidy of RBC.

Bob mentioned in his letter to shareholders the regulatory costs now represent just over 10% of your total operating expenses. Is that a number that we should kind of keep in mind going forward that it will remain that elevated into the indefinite future?

I know we'll spend -- my gut is that we'll spend more this year than we did last year and then the question will become how do we -- look, what's happened is that the regulation has come very fast and so we and other institutions have had to react to that change very rapidly. So, you have existing processes in the bank and so really what you're doing is you're adding on to them and not necessarily with the time it takes to rethink everything.

So, my sense is just pure numbers it will be higher this year in 2014 but then we'll begin to start looking at how we are able to achieve those things in a more efficient manner and maybe it means as stuff starts to level off or come down a little bit, but there's still a lot of regulation that needs to get put in place, right? So, I don't know if that helps but that's why we actually put it out there. We track it, it tells us a lot about what's going on in the industry, we'll continue to do it.

Sure, yes and as he also pointed out I think there's still hundreds of regulations part of Dodd-Frank that still need to be implemented. Can you share with us you mentioned how the securities book increased obviously for LCR. What's the duration of your total investment portfolio today?

Yes, if you were to ask me that a couple years ago I'd think it was about 2.5 and now it's something like 4.7 - 4.8, so if you look at that in one sense you could get alarmed by it but I think the thing to think about is as we moved from that 2.5 to 4 whatever, what we've been doing is we've been to the best of our ability as we add those securities we're trying to match it, so you saw the $1.5 billion which was 5s and 3s, right? So, that's sort of right in that space. So, I think from a risk management perspective we're probably about the same risk profile but cosmetically that number looks a little worse a little longer.

Do you guys do stress testing of that portfolio should long-term rates rise by 100 basis point, what the duration extension would be and what it does to the value of the portfolio?

I don't know if I have that exact number because we tend to look at the whole balance sheet as a whole, right? So, we're looking at -- I don't think you're asking so I won't give it to you, but you're 100 up and 100 down on NII.

Right.

So, yes, again, I don't know, Gerard. We can look at that but I don't know that we would probably publish that because at the end of the day it's sort of about managing the whole balance sheet, right?

Oh, yes, I agree. Unfortunately, all of the banks are going to have to mark that securities portfolio through capital should rates ever rise. That was really the question, but I understand looking at the whole balance sheet, absolutely.

Well, we do do that and our stress test regardless of the fact that because we're under $250 million and $1 billion in assets, we have the ability to -- we don't have to do that method. We still actually run through that whole process of understanding what it would be in that situation, but I don't think -- I think the way the rules are written, you aren't going to end up being longer than anybody. Everybody is going to be right in about the same place and it's pretty short actually in total I think.

Okay. M&T over the years has been a very strong manager of their capital, now we of course have Dodd-Frank and you've got to carry a lot more capital similar to your peers, and with the Tier 1 common ratio today well over 9% even when you went through your stress test I think you came out with about a 6.7% stress ratio. What's the ideal Tier 1 common ratio that you think once all this is behind us, you've got your BSA/AML all taken care of, Hudson City is on board, so if we look out a couple years where's the comfortable level on capital?

So, the way I think about it, Gerard, is that you described it well. We spent a lot of time understanding the risk in our balance sheet, the capital, how much it could fluctuate over the years and we've done a pretty good job of managing it, but now the standard's a little different. So, the standard is that not only do we have to do that but on a national level we have to go through the same exact test as everybody else and I think the first part of my answer is that we're still going to a place where we want to make sure that those levels are predictable, not our own internal models but also the external models.

And so we were very pleased about where we came out, going into the test with a 9.1% capital and coming out sort of in the middle of the pack we think begins to show -- fit the risk profile of the institution and as we get more comfortable with that, I think what you'll see is that we'll start getting right back into the process of making sure that if we have excess capital because it doesn't make sense to make the loans, we'll have to try to figure out ways to give that back. It's just sort of where we are in the maturity of the process that sort of puts us, makes us reluctant to sort of talk about a particular number.

I think you'll learn more about that as we go through this year and then I think once we go through one more test it will be very clear and we can talk about it. But you've got it -- unless you have transparency there and you're talking about the target ratio, when you'll give back capital when you don't have a use for it, it's hard to sort of be really efficient.

The other thing I would mention is that because we've held off on a number of things, we're not exactly very efficient today in the rest of the capital structure that we have. We still have a lot of sub debt sitting around that is probably not necessary now. We have a fair amount of hybrids that are sitting around that are no longer necessary.

In the past we would probably start to begin to fine tune that but, as you know, the way in which we are able to do that is to go through the next test and then ask for it then, so it takes a little longer to get there. I would hope that as we saw in the test it's starting to tell us we're getting right about to where we need to be and as long as we can continue to perform that way then I think you'll start to shape out, that answer will start to round out for you.

And then finally, I know you guys touched upon it in your, or Bob did, in the shareholder letter about the amount of money you're spending on technology and for customer service, the ATM machines, et cetera, the upgrades there. Can you share with us on the mobile channel that you're using, a metric or two on how many people are using it? Some of your competitors, for example, will give us the amount of deposits they are taking through the mobile channel. Do you have a similar number available?

No, I actually don't, Gerard, and today will be fair to say that's not a large number for us. I think the way we're thinking about the use of those types of products and other things, you saw for example that this quarter you didn't see but this quarter we completed the rollout of our image ATMs in Delaware which is the last place that we need to have them across our network. So, if you look at all of those things we're trying to figure out how to use those devices to have a lower cost delivery system on the one hand and then in places where we do not have a branch network, we're trying to figure out if those types of things can actually help us in the absence of a branch network.

So, that's the way I would think about it, but we're in the early stages and I don't think sort of just the raw numbers would be maybe significant relative to some of the large national players.

Great, appreciate all your time, thank you.

Sure. Thanks, Gerard.

The next question comes from the line of Matt Burnell of Wells Fargo Securities.

Good morning, gentlemen. Hi, how are you?

Good.

Just wanted to follow-up on your commentary on commercial lending. First of all, you mentioned you'd seen some strength both in New York metro and in Pennsylvania. Just curious if you would provide some color relative to some of the other markets both upstate New York and maybe closer to the DC area? And any update on your commercial lending utilization rate would be appreciated.

Yes, sure. Let me start at the back of that. I think last call I mentioned something about 57% - 58% utilization. If I go and just focus just on the commercial bank, that number is a little different. That number last quarter would be about 51.7% and then this quarter would be about 52.1%, so just a slight uptick and that's probably, if you look back over the quarters, you don't see much change quarter to quarter but you've seen a positive trend overall, so that's across the commercial bank network.

And then the performance sort of varies by product by region, so we saw for example in western New York while we didn't have double digit growth in C&I, we had 4% annualized growth as well as in commercial real estate. And then if you kind of flip down to Baltimore, Baltimore was soft on the C&I side it was down 3% annualized, but it was pretty strong in the real estate side, it was 7% annualized growth there.

So, it's relatively mixed which I think is good. I think particularly if pricing and competition continues to get frothy, what's nice about our model is we can sort of bounce around and focus on the opportunities that make sense for us and so you'll see a shift there. So, it's pretty varied across the region.

Okay. And then we constantly hear at least media reports suggesting that mid size business and smaller businesses are being a little bit left behind in terms of C&I growth. Are you seeing greater demand from those types of borrowers across your markets than you saw perhaps 6 to 12 months ago?

No, we're not seeing change in business banking. No, I don't think so. I mean, if you look at the numbers I guess we've been creeping up in the larger space in the middle market companies, but what I would suggest is that if you take our whole book, we tend to bank smaller companies as a whole, right? And so we're probably a proxy for business banking across the US and you haven't seen much of a change.

Okay. That's helpful. Thanks for taking my questions.

Sure.

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

Hi, Ken.

Hi, Rene. A couple of quick ones. Can you quantify for us what the preferred dividend will look like going forward after this issuance run rates?

I don't know if I can off the top of my head. I'm willing to.

I can follow up offline on that.

No, what I'll tell you is that it was light. It was light in the first quarter because we didn't declare the dividend on the new preferred, so I'll give you that and then we will -- maybe we'll put something in our 10-Q so that you guys can see that.

So, importantly if it steps up with this one now starting to pay in the second?

Yes, yes.

And the second question is, Rene, you've got $3 billion of cash on both an average and period end and I'm wondering just how do we think about that cash and then also your securities to earning assets ratio? Where do you think it should level out as you continue the LCR, when you think about securities to earning assets and whether or not you're just living with an extra amount of cash that may or may not get invested over time?

On the cash side, a lot of this is driven by our Wilmington business and when we first came together that number was about $2 billion of excess cash that Wilmington sort of brought to the table and now that's as high as maybe 3.9, and I guess we're still learning about as we go through the cycles on how sticky that is and what's a normal run rate tranche there? Today we assume it's about $2 billion and we're running higher than that, so we don't do much associated with those funds.

We don't really count them in our liquidity profile beyond that and the secure -- I mean you'll see it tick up a little bit and it's just going to stay there. I don't know how to answer it any different. We're just about getting to where we should be in terms of securities to total assets, but then it won't come down because that's how the coverage ratio works, right?

Yes, I was just wondering more if -- I know you're saying you're still building, but you used to have the lowest amount of loans to earning assets, highest amount of loans to earning assets, now we're growing. The follow-up question I just want to ask is you mentioned a couple basis points of core -- of the pricing compression. In this quarter with had the 4 basis points from the LCR, and so again if we're presuming we're still kind of growing into the LCR does that presume all things equal we're kind of still seeing this 6 basis points of margin compression until that investment is complete?

Yes, I'm not sure about the exact number, but you're thinking about it the right way.

Okay, got it. Thanks, Rene.

Yes, sure.

Your next question comes from the line of Sameer Gokhale of Janney Capital.

Thanks for taking my question. Actually, most of them have been answered but just a couple of ones. In terms of commentary, Rene, about loan growth and competition. And it sounded like you said some competitors were extending loan terms and the like, and it just seemed a little surprising to me in light of the regulatory environment that competitors are able to do that.

It seems like regulators should have most banks in the box dictating how much they can grow, so I'd like to get your perspective on that and also I know you run your bank pretty conservatively in the past, so I'm assuming haven't changed LTVs much particularly in the C&I side, so if you could just talk about that also that would be helpful.

Yes, I mean again I'll go in reverse. We haven't changed anything in terms of loan to values. We tend to be relatively conservative. In part we can do that because we're banking for the most part our customers -- our clients who we've known for a very, very long time and who know us and sort of know what our standards are, so that's not changing at all.

Your question is a fantastic one. I've been thinking about it a lot. I don't really know the answer. I don't know if everybody is under the same pressure or scrutiny but it is surprising what you see and, quite frankly, I think in general with the larger players seem to be much more rational, which is consistent with the fact that everybody is going through the same new regulations and oversight and capital testing.

I don't know what to think about the smaller folks and maybe some folks that are outside of the banking industry. I think that's a good topic to follow going forward because you've got to wonder whether the risk is controlled or the risk is moving, right, but I don't know enough to have an answer to that.

Okay, and then you'd also talked about how conduits and insurance companies seeking yield were essentially driving some of the price competition in the CRE market and clearly the conduits are real estate investment conduits of some sort, but is there anything that precludes structurally these insurance companies from being a greater competitive force on the C&I side or is that something that could happen going forward? Just trying to get a sense for if it's just a matter of a yield differential, any color on that?

Well, the way I think about it is those two are proxies for investments and people seeking returns, so that's going to be driven heavily by the level of interest rates. I wouldn't expect to see competition on the C&I side because of the loan part of that is just one of the things that we do. All of the ability to do cash management and help them, as I mentioned lockbox and all of those types of services, right, are really the core offer what we do for those clients, lending is just one component. So, it would be very hard for an institution without those capabilities to compete with a large commercial bank.

Okay, that's helpful. And then just my last question. I know you've been asked this question about BSA/AML probably 10 different ways, so I'll ask it the 11th time in a different way. In thinking about your expenses there in light of the fact you went through the stress test and passed, and I know you were saying there's more work to be done there. But the fact you've passed a stress test, doesn't that sort of imply that, not to put a number out there but I will, but doesn't it imply that [you seem] 90% of the way done simply because if you weren't that far along in the process that could have been one of the issues regulators could have balked at on the qualitative front.

So, why would that be the wrong way of thinking about it and doesn't it suggest that you're being conservative when you thinking about expenses related to BSA/AML, expecting somewhat of a benefit in Q4. Could we see a benefit before that?

Okay, so thank you for the question. First, sort of regulatory environment is not going to change in the next couple years. There's still a lot of regulation that's coming out and there's been fast change, so it's going to take time to really embed those processes into what we do on a day-to-day basis. The other thing is just step back and think about maybe use like asset liability processes in banks, so those things are extremely mature.

As you see with the liquidity coverage ratio we're going to be running liquidity on a daily basis. We've been there on asset liability for a very long time. The capital planning processes have to mature as well and that systems, people, repeatable process, right? So, you've got to imagine that where we're going to get to is not a place where we're running an annual test or biannual test, but that any point in time that as we're putting on business in our portfolios that change the risk profile that we're going to be able to see those things realtime.

So that is not a short-term test and as some of my colleagues are telling me here I guess the phrase is the bar is getting higher and I think that will continue to happen. I think relative to maybe the 18 that have been through this a couple years before us, we're probably a year behind them in terms of what we need to do. So a lot of work to be done there and so I wouldn't expect to see any slowdown on that front.

Okay, great. Thanks, Rene.

Your next question comes from the line of Jennifer Thompson of Portales Partners.

Hi good morning. Thanks, but all of my questions have already been answered.

Thank you.

At this time there are no further questions. I'll now turn the call 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 the news release is necessary, please contact our investor relations department at 716-842-5138. Goodbye.

Thank you. That does conclude the M&T Bank first quarter 2014 earnings conference call. You may now disconnect.