M&T Bank Corp (MTB) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to M&T Bank's third-quarter 2014 earnings conference call. At this time all lines have been placed in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

It is now my pleasure to turn the call over to Don MacLeod to begin. Please go ahead, sir.

Thank you, Maria, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's third-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 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, and good morning everyone. Thank you for joining us on the call today. As I noted in this morning's press release, our third-quarter performance was marked by relatively subdued revenue trends with modest growth and average loans and a slight decline in fee income coming off a strong second quarter. That said, credit continued to trend positively.

We are also pleased with our continued progress on our BSA/AML compliance, risk management and capital planning initiatives, the progress we've made during the quarter. And while maintaining that progress has meant a continuation of an elevated level of operating expenses we firmly believe that those investments will position us well for the future.

As we usually do, I will start by reviewing a few of the highlights from M&T's third-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 $1.91 for the third quarter of 2014 compared to $1.98 in the second quarter and $2.11 in the third quarter of 2013. Net income for the recent period was $275 million compared with $284 million in the prior quarter. Net income was $294 million in the year-ago quarter. There were no noteworthy items impacting M&T's third-quarter result.

Results for last year's third quarter were benefited by $34 million of after-tax securities gains which amounted to $0.26 per share. Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions when they occur. After-tax expense from the amortization of intangible assets was $5 million or $0.03 per common share in the recent quarter compared with $6 million and $0.04 per share in the prior quarter.

M&T's net operating income for the third quarter which excludes intangible amortization was $280 million compared with $290 million in the linked quarter. Diluted net operating earnings per common share were $1.94 for the recent quarter compared with $2.02 in the linked quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.24% and 13.8% for the recent quarter. The comparable returns were 1.35% and 14.92% in the second quarter of 2014. In accordance with 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 income statement, taxable equivalent net interest income was $675 million for the third quarter of 2014 unchanged from the linked quarter. The net interest margin was 3.23% during the quarter, down 17 basis points compared with 3.40% in the second quarter. The margin compression was driven by the following components.

We continued to build out our liquid asset buffer earlier in the quarter prior to the adoption of the final LCR rule and the delay of its implementation for banks like M&T until 2016. We purchased $1.7 billion of securities during the quarter funded by $1.7 billion of bank notes issued in late July. We estimate the impact from those actions combined with the full quarter affect from our actions in the second quarter reduced the margin by about 6 basis points.

During the quarter, we had a further increase in deposits from our institutional trust business and which we held at the Federal Reserve. On an average basis, interest-bearing deposits with banks including the Fed were some $1 billion higher in the third quarter than in the second quarter. We estimate this further elevation of excess funds diluted the margin by 3 basis points as compared to the last quarter.

The end of period balance for interest-bearing deposits with banks was higher than the average for the quarter indicating further negative impact on the margin in the fourth quarter but a slight positive impact on net interest income. The additional accrual day in the quarter contributed to 1 basis point of the compression. The remainder of the margin compression is attributable to the impact of new loans coming on at rates lower than those maturing as well as the lower impact from ancillary items such as interest from the repayment of nonaccrual loans and the recapture of deferred loan fees which in aggregate were somewhat lower than we would typically expect.

Our outlook for future core margin pressure is about 4 basis points per quarter.

Average loans increased by $420 million or 3% annualized compared with the prior quarter. On that same basis, average commercial and industrial loans were down an annualized 2% reflecting the usual seasonal contraction of loans to auto dealers to finance inventories.

Average commercial real estate loans increased by about 5% annualized reflecting an improvement from the sluggish growth in the first half of the year. The improvement was driven by both a higher level of originations as well as lower pay downs on existing loans. Our residential mortgage loan volumes declined an annualized 5% reflecting the natural pace of principal amortization in the portfolio. The held for sale pipeline was flat.

And average consumer loans grew an annualized 10% reflecting growth in indirect auto and recreation finance loans. Overall end of period loans grew 5% annualized as softness in July and August was overcome by stronger results in September. We would expect the seasonal recovery in floorplan activity to be a tailwind in the fourth quarter.

Average customer deposits which exclude deposits received at M&T's Cayman Island office and CDs over $250,000, increased an annualized 7% in the second quarter reflecting the elevated level of trust deposits I referred to -- I referenced earlier.

Turning to noninterest income, noninterest income totaled $451 million in the third quarter compared with $456 million in the prior quarter. There were no securities gains or losses in either period. Mortgage Banking revenues were $94 million in the third quarter compared with $96 million in the prior quarter. Lower revenues associated with loan sales activities were partially offset by a $4 million increase in servicing income.

Commitments to originate residential mortgage loans for sale declined by about 3% while the gain on sale margin was effectively unchanged. The pipeline for mortgage loan applications was down at the end of the quarter.

Fee income from deposit service charges provided were $110 million during the third quarter compared with $107 million in the linked quarter reflecting higher levels of customer activity. The trust and investment revenues, which include fees from wealth management and institutional trust services, were $129 million compared with $130 million in the prior quarter. A $4 million decline in seasonal tax preparation fees from the second quarter was mostly offset by new business.

Credit related fees, which are included in other revenues from operations, were impacted by the soft lending environment early in the quarter and were down by $5 million from what was a comparatively strong second quarter.

Turning to expenses, operating expenses for the third quarter which exclude expenses from the amortization of intangible assets were $672 million, unchanged from the prior quarter. Salary and benefits were $349 million, up $9 million from $340 million in the second quarter. About $5 million of the increase came from one additional compensation day in the quarter. The remainder of the increase related to higher BSA/AML staffing as well as higher incentive compensation.

Other costs of operations declined by $7 million from the previous quarter. Legal expenses declined from the second quarter which included a $12 million addition to the litigation reserve. Professional services, including outside consultants, were flat quarter over quarter.

The efficiency ratio which excludes intangible amortization was 59.7% for the third quarter compared with 59.4% in the prior quarter.

Next let's turn to credit. Credit quality remains strong and in line with our expectations. Nonaccrual loans declined further from the end of the second quarter; that ratio of nonaccrual loans to loans declined by 7 basis points to 1.29% as of the end of the third quarter.

Net charge-offs for the third quarter were $28 million, $1 million lower than in the second quarter. And annualized net charge-offs as a percentage of total loans were 17 basis points for the third quarter, improved slightly from 18 basis points in the previous quarter.

The provision for credit losses was $29 million for the recent quarter and the allowance for credit losses was $919 million amounting to 1.40% of total loans as of the end of September. The loan loss allowance as of September 30 was 7.7 times year to date annualized net charge-offs. Loans 90 days past due on which we continue to accrue interest excluding acquired loans that have been marked to fair value at the acquisition, were $313 million at the end of the recent quarter. Of these, $265 million or 85% are guaranteed by government related entities.

Turning to capital, M&T's Tier 1 common capital ratio was an estimated 9.77% at the end of September, up 14 basis points from 9.64% at the end of June. Our estimated common equity Tier 1 ratio under the recently adopted Basel III capital rules is approximately 9.52%.

Turning to the outlook, as is our usual practice we will update you on our outlook for 2015 on the January call. However, we have a limited number of observations regarding the remainder of 2014.

While our view of loan growth is largely unchanged, the lending environment remains very difficult particularly on the commercial side. Where we have primarily been seeing pressure on rates and spreads, we're also now beginning to see further relaxation of structures including longer loan tenures, lower cap rates and limited or no recourse in personal guarantees, all of which tends to keep us on the sideline.

We were pleased with our progress toward the LCR compliance during the quarter and with the rules for implementation of liquidity coverage ratio now finalized we will be opportunistic in completing any remaining buildout of our liquid asset buffer before the end of 2015.

We expect continued core margin pressure of about 4 basis points as we enter the fourth quarter. In addition, the full quarter impact of the actions we took in the third quarter towards the LCR compliance combined with the higher end of period trust deposits held at the Fed will further reduce the margin but not net interest income.

We remain focused closely on investing in our infrastructure with an eye toward improving our efficiency ratio in the longer-term once the pace of those investments begins to trend downward. Since early in 2013, M&T has been working diligently to address the concerns identified by the Federal Reserve with regard to M&T's BSA/AML and other compliance initiatives. And we are very much on track with those -- with the expense trajectory that we outlined for you back in January of this year and that elevated spending has produced good results. We've made significant progress in line with the plans and milestones that we set for ourselves.

Of course, as you are aware, our projections are subject to a number of uncertainties, 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.

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

(Operator Instructions). Brian Klock, Keefe, Bruyette, Woods.

Rene, I guess can you let us know I guess what are the milestones that you have hit so far with BSA and AML and what are sort of the next big milestones that you have on the checklist?

Yes, I mean, I think the way I think about it in terms of the BSA/AML, I mean there is a number of things that we've been able to achieve. And as I said, I think we are sort of on track with the commitments we have made. But to run through them, first on the list was improving M&T's risk governance, our infrastructure and then all of the training associated with our front-line employees.

Second was that we built a comprehensive risk rating model to better identify potential money laundering risk and that has been up and running since this spring. And so there has been several months to kind of work the kinks out of there and show how that is working for all the new customers that we have onboarded since those dates.

Third, we've sort of begun a bank-wide effort to update our customer information to better understand our customers and how they plan to use the products and services and we've made substantial progress there. Of course, that has been going on for almost a year now, maybe just over a year and we have made substantial progress there.

Fourth was we improved our process for monitoring and reporting suspicious activity reporting.

And then finally, we have sort of implemented a review by our -- by a third party to sort of determine whether certain transactions undertaken in the past our customers were properly identified and reported. And of course that is ongoing. So the way I would characterize it is that we really have made a lot of progress, we feel that we are on track with all the requirements that were outlined in the written agreement that -- and the plans that we conveyed to our regulators. But having said that of course as is typical for these types of things, they take a long time and there's a fair amount of work that obviously would go on beyond the end of 2014 and 2015 to meet the full requirements. But at the same time we believe our progress to date has been substantial.

Great, thanks for that. And I guess thinking about with what you need to do going forward and what has been done, I think I mean is the -- in order to sort of talk with the Fed and say here we have made substantial compliance, and for the Fed to say we can approve this Hudson City merger or not even though the written agreement may be something that requires some more test work, is a third-party review something that they would need to see in order to do that or what are the other things that would -- the Fed would need to see and I guess in your opinion to move things along with the Hudson City merger?

So Hudson City. So let me start out, Brian, I know it is not your question but I have to start out by saying that how saddened we were by Ron's passing. He was very, very close to us; he was a good friend with a lot of roots in Western New York and a lot in common with us as is true of the existing management team at Hudson City. So I think that we are going to miss him greatly as will others I think.

But I mention that because as we think about what we did back last January, M&T and Hudson City mutually agreed to extend that period in which either party could sort of walk away from the transaction without a penalty. And we did that extension all the way out to December 31 of this year. And in doing that what we were attempting to do by providing that sort of 12-month window in the discussions that we had between M&T and Hudson City was to ensure that we could provide enough time to show that we could make the substantial progress that we are talking about that we talked about today. And we also wanted to in addition to be able to show our commitment and we also though included in that thought process was that we needed to provide enough time for the various regulators to come in and take a look at what was being done and to also at that point in time consider whether M&T was in the right condition to be able to proceed with any sort of transaction.

So all we can really say is that there is nothing sort of in that timeline that we kind of -- that has surprised us. We think we have met all of our milestones in that process. And at the point where we are sitting here today, I guess we sort of always envisioned that we were going to be -- we still wouldn't be able on the October call to be able to provide any clarity other than the fact that whether or not we've done what we expected to do. And we have done that. And so I think what has to happen is you just have to let that process take its course and give the regulators time to make their assessments and do what they feel is the appropriate thing to do.

But we feel good about the work we have done. That is sort of the best I can share with you.

Great, that is very helpful. Thanks for taking my questions.

Sameer Gokhale, Janney Capital Markets.

Rene, you talked about mortgage banking revenues and some of the items that flowed through there again this quarter. If you would just help clarify -- when we look at the sequential comparison certainly I think you talked about the $4 million in servicing income and I think that was incremental compared to last quarter. But I thought last quarter's mortgage banking revenues were elevated because you had gains on the sale of three portfolios of performing loans. And so when we look at Q2 to Q3 level of mortgage banking revenues as relatively flat and it looks like the servicing only contributed incremental $4 million.

So were there any other items that also kept the level of mortgage banking revenues elevated? You only mentioned a few of them. If you could just help clarify that would be great.

I think -- I was just looking for the numbers at my fingertips. But I mean off the top of my head -- one other thing I would say is that commercial held up very nicely in the quarter. Let me see if I can just grab a number on the commercial gain on sales.

So the commercial business, which Fannie and Freddie business was up $2 million. But other than that, no, I think what was interesting is that the volume was probably a little stronger than I thought it would be and that sort of offset the decline that I was also probably expecting on a linked quarter basis.

And having said that, that is sort of why I mentioned the applications. You know our applications were down a bit, about 9% and our pipeline which is really consisting of applications that haven't made it all the way through the processes was down about 18%. So I do think that there is still a little bit of downward pressure that we would be logical to see as we move into the fourth quarter. But, no, it held up pretty well and it was real core business.

Okay, that is helpful insight. And the other question was I know you talked about this again in your prepared comments but if you could just help me understand the flow of funds in terms of the interest-bearing deposits? It sounds like you have some institutional trust money that came through and so your deposits grew sequentially and then that money was deposited with the Federal Reserve. And can you just help me understand how that tends to work? Again, is that drawn short notice and then you again have to withdraw those funds out from where you deposited them? I mean just the flow of funds would be helpful and how that particularly works.

Yes. So the larger size deposits that we have been taking as I mentioned relate to our institutional trust business. And then in many cases we are serving as escrow agents and in the case of this quarter, a number of folks who were doing M&A transactions have deposited money with us that we hold until those transactions go through approval -- in some cases the various regulators, the Justice Department and so forth. At times we have those types of transactions due to our trust duties which tend to be relatively short-term. In this case, they were a little longer as much as six months because of the nature of those transactions.

And so given where we are now where we have got more deposits because of quite frankly us but also the industry is just flush with the excess liquidity that exists nationally, there is no real use for that. We put it aside and it goes into the Fed and we earn interest income but it tends to dampen a bit of our tangible ratio and it of course dampens the printed net interest margin. So just service that we provide for our good, strong trust customers.

Okay, that is very helpful. And just my last question was going to touch on the floorplan commentary and lending dealer floorplan lending. And I think you had suggested that seasonally balances tend to be lower in Q3 and you see a seasonal increase again in Q4. And what I was wondering is when you look at this business, what do you see when you hear about a lot of optimism that dealers tend to have and it certainly seems like floorplan lenders aren't concerned. And I was curious because you tend to underwrite conservatively if you had any changes to your underwriting standards or lending criteria as far as floorplan lending goes especially in light of some the concerns about auto lending really across the board. So if you could address that, that would be helpful. Thank you.

Yes, sure, sure, I will start with a little bit of history. So we entered the auto floorplan business in 1950. And if I can remember, Don, you might have to help me out, but the first time we lost a dollar through charge-offs was in maybe 2005.

I was going to say either 2006 or 2007. It might have been 2006 --.

It was before the downturn in the economy. And at that point in time what I think was changing was the structural thing in the industry where for the previous 50 years what would happen is in a floorplan there was a lot of support by the manufacturer. So if somebody got into trouble they would take them out. And they stopped taking them out as of course the manufactures got into their own problems of course and quite frankly before the crisis started.

But we went through a pretty exhaustive process at that time. And the thing that we sort of concluded throughout our footprint was that there was a lot of difficulty with anybody who had a single flag. And so if you weren't able to have multiple brands, it was going to be much more difficult to you. So we went through a pretty exhaustive process in 2005 and 2006 which positioned us relatively well.

Then during the crisis what you saw was a massive amount of consolidation, right, in that process. So you're actually dealing, I believe, with a significantly lower volume of dealerships who are much, much stronger than they ever were in the past. And that is how you are entering the process. So then today they are benefiting because car sales are going up nationally, right. And my sense although I haven't looked at it recently, but I would suggest that those guys are probably stronger than they ever have been in the past because they are not really dependent upon sort of this big brother backing that existed for the sort of -- for the earlier years -- earlier go.

So as I have talked to customers that focus in that space and the RMs that deal with them, things look pretty good, the underwriting standards have not diminished significantly there. It is competitive like any other place. But quite frankly in that space for us, our relationships are really long, it is not like we are picking up a lot of new dealerships. I don't know that there are a lot of new dealerships. These are people we have done business with for quite some time. That is what I could tell you.

Okay, that is very helpful color. Thank you.

Bob Ramsey, FBR.

I wanted to touch just a little bit more on Hudson City and sort of how we think about the milestones from here. I mean I know you said you have sort of done what you expected to do in terms of hitting milestones and targets. Does that mean that you all still hope to be able to close the deal by year-end? And will you all announce when the Fed sort of restarts the application review process?

Well, I think I guess the way I would think about it is I will start from a high level. I mean I talk to Denis every week and other parties talk to each other quite frequently. So we are both very, very committed to the transaction. All the economics are still there and it is an interesting thing that when you have this long of a period to watch a portfolio that you are about to merge with it gives you a significant amount of comfort above and beyond what typically -- typically these take place in a lot faster pace.

But having said that, I mean all we are doing is we are working really, really hard. We are providing external folks like the regulators everything they need to assess our position. And we are just letting it play out. I don't think, quite frankly, enough time has passed for us to be able to answer your question on that.

Having said that, I mean as soon as we were to hear something in any direction it would be our response to talk to you guys about it and to mention it.

Okay. No, that is helpful. And I mean it sounds like maybe the deadline is more formality than anything else and that all parties seem committed and you guys continue to move forward and do everything. I mean it doesn't sound like it is a hard stop. Is that fair?

Define hard stop?

As if December 31 comes and the deal has not been approved as if it would unwind somehow.

Well, it is been a long dance and we all still like each other. And quite frankly, I have to say I mean while I feel bad about it, is not typical of M&T to put somebody through a process like that. So I think our relationships are strong and we will just have to see what happens.

Fair enough, fair enough. Shifting topics a little bit. I know you pointed to 4 basis points of margin compression sort of expectation heading into the fourth quarter. Given where rates are today as you all look forward, is that a good pace on sort of a go-forward basis through the foreseeable future until rates move higher or do you think that the pace of compression diminishes as we head through 2015?

You know, it is funny because this is the first quarter -- we look basis point by basis point at what is going on in the margin. This is the first quarter where we seem to be above our 2% to 3% and you know about 4% compression. So my sense is that is not going to go away. There is too much competitive pressure and too much pricing pressure out there for that to happen.

When I looked back, I mean I am pretty excited about the fact that our net interest margin this quarter versus -- I'm sorry net interest income this quarter versus last year declined by $4 million. So it is almost -- it is basically flat. And so I think that has been our trade-off of trying to figure out how to get the right volumes, serve our customer base but do so in a way that doesn't result in too much margin compression.

So I feel like I did almost a decade ago where we were saying, look, if you are going to see large growth in volume, you are going to see margin compression. And so my sense is that we didn't change our outlook because that sort of mid single-digit 5% growth is probably what is reasonable. And if we stay there I think margin compression probably stays where it is. I don't see it getting less.

Fair. And would the thought process be there that you could continue to sort of hold the net interest income? I mean margin goes down, earning assets go up and you are flattish on the net interest income line?

I don't know. I mean it is not like when I look at my volumes --.

It is tougher?

-- that we are not getting decent spreads and we are -- we're getting decent spreads, we're getting decent returns, we measure economic profit. So all the volume that we did was just about $2.2 billion of new commitments that went through our senior loan committee was done at very strong economic profits, right. So that is kind of the way I think about it.

I guess the other thing I would say, Bob, is that I don't think you see a change in the competitive environment until some of the liquidity is taken out of the system. It is just too much money. Everybody is available, everybody is healthy. In some cases in probably some of the regions where we've seen the most competition, one of the most interesting observations that was made in preparing for the call by some of our relationship managers in Baltimore was that we had a number of credits actually that were in our catalogs that were taken out. And that always kind of gives you some interesting sense of how competitive it is. But it is not as if the revenue growth trends are devoid from what is happening on the credit side, right.

Yes.

And so my sense is that this will be one of those times where things will be slow on the revenue growth side as they always are and our job is to sort of maintain our discipline so that we do well in the next cycle.

Great. And then last question around the margin, and I will hop out. But did I understand you correctly that it is sort of 4 basis points of core compression and then the liquidity, which doesn't have the same impact on net interest income but the liquidity could actually drive a little bit more compression on top of that or was the 4 all in including the liquidity expectation?

No, the 4 was on its own and then the liquidity impact would be further compression. And the reason I have been talking about it that way is because at least to date in this year that liquidity has added a little bit to net interest income. As we look to 2015, I've got to reassess whether the remainder of what we do on the liquidity coverage ratio is neutral or negative, right? Where is it? And I think I might change the way we talk about it. Right now that is the best way for you to understand sort of what is going to happen with the dollars of revenue.

Got it. Very helpful. Thank you, Rene.

Ken Usdin, Jefferies.

Rene, if I can ask you a couple of questions on the expense side. You know you mention all the progress you have been making with the compliance side pieces. We are still obviously seeing an increase on the salary side and but yet we started to see a little bit of a decrease on the other expense side. Can you walk us through where you are in that hiring and consulting spend? Are we still escalating from here? Have we peaked or are we actually turning the corner?

I kind of feel like we are at the top end as it relates to hiring for BSA/AML as I look at the projections. I mean we were I think last fall I said we had done -- we had like 571 or 572 individuals. That number this quarter is 613. But as I look at projections, I think we are fully staffed in my mind.

And on the professional services as you saw, that just didn't change. I mean that was -- it was exactly the same number as it was last quarter. And I think that is going to -- I know that that is going to stay around for a little while longer because we have got work and volume to get through particularly on the fact that we have got to get through the customer information and we use the term remediation but really getting customer information on all of our customers, right. So not just the high risk ones. We then have got to get them on the medium risk and the low risk customers have all got to go through sort of a refresh of information. So I think that will be around for a little bit before we began to see it taper off.

So wait, so, Rene, on that point about the professional services I'm not sure where exactly we see that but the other one was down about $10 million from 240 -- down $7 million, $240 million to $233 million. But within that, are you saying that those kind of consulting costs have been stable within that?

Yes, it is in there. I'm going to -- Don tell me if I am wrong. I think we spent about $102 million on professional services?

Yes.

And it is in that same line. But then what you are seeing is you are seeing that the litigation reserve -- you know we didn't need another one.

Right.

So -- and really the expenses that we're placing that were on the salary side with the extra day and then some hires.

Okay, so you are kind of staying on net. And then do have an understanding of just when that would start to roll like as we -- I hear your point about we can see it hang around for a while. But as you get into some point next year, do you have a line of sight in terms of when we can finally actually see that trend down or do you anticipate this type of level carrying throughout all of 2015?

Well, as we hit each of the milestones, which we have done a lot of, you are not going to need the level of external services and labor that we are doing today. And I kind of talked about the idea that we were going to see this happen sort of through this year and that would sort of position us well as we get into 2015.

So my sense is that as we are now fully staffed with full-time internal people and as the work starts to get to various completion stages, you will need less and less of external labor, right.

Right.

It is just that the time to ramp up the internal people and get fully qualified internal people was going to take too long for us to have made the significant progress that we wanted to make in the past 12 months. So we used a lot of external people to supplement in the interim.

Okay, got it. Thanks, Rene.

Gerard Cassidy, RBC Capital Markets.

Technical question regarding the Hudson City deal. Do you officially have to reapply to the Federal Reserve to get that deal done?

Do we have to officially -- I mean we have had our same application that has been outstanding for the period. And obviously there is things that you would need to do as balance sheets change and circumstances change. You have got to make sure that constantly you always have the right up to date current information available to the Fed. But that is -- I mean it is pretty straightforward.

How about again just on a technical basis here. What takes that application that is sitting at the Fed to the meeting that they will have at some day in the future to vote to approve or disapprove? What is the catalyst that puts it in front of them on the agenda to vote?

All I can tell you is from my years of experience on mergers, you basically -- when you have an application and there are a number of steps, but some of the most important steps are making sure that each institution from a supervisory perspective, there is a very strong understanding of where those institutions are from a supervisory perspective. And that is sort of the standard protocol that goes on and I think almost written in is the BSA/AML and that is why we are sort of in this situation.

So the supervisory teams have to do a full assessment and make sure they understand where you are and then everything else is relatively standard in an application process. So we are really focused on particularly making sure that we were able to give a clear picture of where both firms are from a supervisory perspective.

Okay. I know this is probably putting the cart before the horse. But from the sounds of what you have done for BSA/AML the amount of money you have invested, the people and so on, you are probably going to be defined as best in class by the regulators after this process is completed. If you agree with that, does that give you an advantage in a year or two should acquisition activity pick up again of sizable banks that you may be able to convince the potential seller that you know you can get the deal done because you spent -- you have invested all of this money into BSA/AML?

No.

Okay.

Look, I think actually a couple of things I will restate a couple of things. Regardless of what happens this fall, we are not done with the work that we need to do. We are under a written agreement, it will take a long time to get out from that written agreement. And what we are dealing with today in terms of the topic you're talking about is really a unique and special circumstance. Our focus is really on continuing to build up that infrastructure. And I can't -- I mean I think you can get this from other institutions as well but I can't express to you the amount of change that has gone on in the regulatory environment in particular as I look forward around information, information management, structure of the data and that is stuff that we will continue to make investments on to make sure that we sort of have this sort of renewed focus on our risk structure and our capabilities to manage risk. My sense is that when we are done, we will look a lot different than we looked five years ago and we looked three years ago.

So I don't think that anywhere in our discussion is M&A and all that kind of stuff. We are very focused on the topic at hand and I think what we are dealing with right now is unique. Got a lot of work to do to demonstrate that we can sort of maintain our risk structure.

Coming back to more on a day-to-day business side, you talked about some of the underwriting standards now are being stretched. Two-part question. Could you compare this period of underwriting to a prior period when you look back over the last 10 years? What would be a similar time period would you say?

And second, is there any geographies that you are finding it more intense, is Metro New York versus Baltimore versus upstate New York tougher?

Yes. So okay, so what is similar now to say 2004 would be the amount of liquidity in the system enhanced by the fact that there is more capital in the system as well. And that is similar. If you remember what we were talking about then, we were talking about the fact that it was really easy to raise money for a hedge fund because everybody had all this excess cash that they couldn't find anywhere to invest because rates were low. That feels identical.

I think what is a little different though is sort of when I look at the underlying economies that we serve, I don't think it is as clear that those economies are as strong. So when I flip through the largest credits in our nonperforming book, I do not see one area. I see it cuts across, whether it be people that are in the refining business, manufacturing business, baked goods, I mean you can run down -- I just did this yesterday -- you run down it. It cuts across the economy.

So I don't think that there is as much underlying economic strength as we probably felt when we were back at that time. The good news is that what we are hearing is that sort of several of our reasons are suggesting that the actual -- there is a slowly improving underlying economic conditions, and we are hearing that almost across each of the footprints.

The downside is, for us, is that people are stretching on terms, they are stretching on, in particular, deal structures. And the one that strikes me the most is that when we are stretching out going past 10 years, or going out to 10 years in terms of term structure. And particularly if you think about the idea that there is huge amounts of liquidity in the system, indirectly that means that asset prices are very, very high.

And if that liquidity were to not be around, you start to wonder about looking at deals with a 10-year structure and really whether they can sustain those higher rates and so forth.

Upstate New York has been a wonderful place to be. Back then, everybody used to ask me, well, all of your growth must be coming out of Baltimore because there is nothing going on in Buffalo. That is not true. That is some of our stronger growth. We saw like 6% growth linked quarter, annualized linked quarter there.

And in the New York City metropolitan area we saw 9% growth. But as you get down to Baltimore, that was very competitive, and so was Pennsylvania. Pennsylvania is talking about the economy improving in a lot of different places, but that the lending available is putting terms at a place that's sort of outside of our capabilities.

To give you a sense, we had one transaction which we lost which was an existing customer. It was priced at LIBOR plus 70 basis points, and it was a 15-year commitment, which would be so far underwater even before you considered expenses and the efforts of the RM, right, it just doesn't make sense. So some things are similar, you know, I think. But that is the best I think I can tell you. We are watching it very closely though.

Just final question regarding your comment about reviewing your nonperforming credits yesterday across the broad swath of the economy. Would you say that those credits have been on the list for a fair amount of time or is it you are seeing this broad swath of new non-performers that may be changing from what you just said from the guys in the field saying things seem to be getting better or are these credits that have just been sitting there and you have been working on them for 12 or 18 months to try to get them into a performing status?

Last year I would have said we have seen a lot of churn, new stuff going in, old stuff going out. This year I think we are seeing improvement. So the credits are -- and quite frankly the majority of them are actually paying, right, so we are receiving interest payments under the terms. It is just that they weren't in the original terms. And it is a small subset but it is always sort of helpful to look at where they sit. And again a couple of years back, right, obviously they would've been in for us in residential development and that stuff from -- in those portfolios. But now it is more evenly spread across the various economies.

Thank you, I appreciate all the color.

Geoffrey Elliott, Autonomous Research.

On the liquidity coverage ratio, where do you stand on that now?

Well, we have made a lot of progress. Essentially what is difficult about -- talking about the ratio is that if you were just a look at our balance sheet, follow the rules and get through all that, I mean we are pretty much there. But we tend to take maybe a little bit more of a conservative view, we throw out the cash, large cash balances and those things. And I think we are sort of -- what I would characterize is as we do that more conservative view, we are in striking distance. And I think we are doing that with basically five more quarters to go.

I think the only reason we haven't really closed that out is because we have some time to be opportunistic about the types of paper we are buying and to do that maybe over a little longer period. But that is the best way I can characterize it.

When you say you are pretty much there, you are pretty much there on the phase-in 90% rather than the (multiple speakers)

Yes, that is the way to think about it. The phase-in 90%; the estimate and the proposal was 80%, right, that has now been moved out a year and moved to 90%, right. So we are all in striking distance of all that and where we intend it to be. And again that -- we are taking a very conservative view. We are not counting lots -- large amounts, large amounts of the cash that we have sitting on for institutional type things and so forth.

Thank you.

David Darst, Guggenheim Securities.

So you have announced and discussed the organic plans you've got around business banking and commercial lending in New Jersey. Would you say that you are kind of on track with what you would have been doing had the Hudson City acquisition closed say six or 12 months ago? Or do you think you are kind of ahead of pace or at a different pace from what you would have liked to have been doing on the commercial side in New Jersey?

I would say we are definitely on track. We are probably ahead and there is always strength in adversity, right. One of the things that I think we learned, we were really impressed at how much progress the team could make and how the circumstances sort of forced the team to work more closely together to provide a full service to their relationship. So we did all of this stuff without branches. And so we think we've learned something there and all of that has been very positive. We are very, very pleased with what the team has done in New Jersey and I would say it is ahead of pace from the original schedule that we had planned.

Okay and then I guess could you talk about -- maybe it is premature, but I guess there is some anticipation through the remixing of the Hudson City residential mortgages into those commercial loans. From this perspective, is there a timeline change or your ability to scale up the New Jersey market to do that?

No, no. It is ahead of the original plan despite the fact that there has been a delay. So that has gone really well. And quite frankly if I were to think about how you do this, I think I remember talking back then about how that works when you go into a market. A lot of times as you try to build relationships you get a little bit more business from the CRE side. But I don't think that is really the case. I think we have done a nice job on both CRE, middle market, business banking as well and the business banking in particular is impressive when you don't have a branch network.

Okay, great. Thank you.

And that was our final question. I would now like to turn the floor back over to management for any 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 area code 716-842-5138.

Thank you. This concludes today's M&T Bank's third-quarter 2014 earnings conference call. You may disconnect your lines at this time. And have a wonderful day.