M&T Bank Corp (MTB) 2015 Q1 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time I would like to welcome everyone to the M&T Bank Q1 2015 earnings call. (Operator Instructions)

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

Thank you, Christy. This is Don MacLeod. I'd like to thank everyone for participating in M&T's first-quarter 2015 earnings conference call both by telephone and through the webcast.

If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.MTB.com, and by clicking on the Investor Relations link.

Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found in Forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements.

Now I'd like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning, everyone. As I noted in this morning's press release, M&T reported a 6% increase in net income, and diluted earnings per share growth of 2% from the first quarter of last year. We were able to eke out modest growth in revenue in a difficult environment which, combined with continued favorable credit performance and disciplined expense management, produced positive operating leverage even while we made investments to improve the franchise and to more efficiently serve our stakeholders. A higher share count accounted for the lower pace of growth and earnings per share as our capital levels continued to grow.

We have a lot to talk about today: our results, progress on our initiatives, and some recent announcements. As we usually do, I'll start by reviewing some of the highlights from the first-quarter results, after which Don and I will be happy to take your questions. Remember that you can reenter the queue if you have additional questions that haven't been answered.

Turning to the results, diluted GAAP earnings per common share were $1.65 for the first quarter of 2015, up from $1.61 in the first quarter of 2014. That figure was $1.92 in the fourth quarter of last year.

Net income for the quarter was $242 million, up 6% from $229 million in the year-ago quarter and $278 million in the linked quarter. As you are all aware, 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 $4 [million] or $0.03 per common share in the recent quarter, relatively unchanged from the prior quarter.

M&T's net operating income for the first quarter, which excludes intangible amortization, was $246 million, up from $235 million in last year's first quarter, but down from $282 million in the linked quarter. Net operating earnings per common share were $1.68 for the recent quarter, compared with $1.66 in the year-ago quarter and $1.95 in the previous quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders equity of 1.08% and 11.90% for the recent quarter. The comparable returns were 1.18% and 13.55% in the fourth quarter of 2014. In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP to non-GAAP results, including tangible assets and equity.

Before we get to the specifics, note that effective January 1, 2015, M&T adopted amended guidance from the Financial Accounting Standards Board for investments in qualified affordable housing projects. The adoption of this accounting guidance did not have a significant effect on M&T's financial position or results of operation, but did result in the restatement of the consolidated financial statements for 2014 and earlier years, to remove the net cost associated with qualified affordable housing projects from the noninterest expense and include the amortization of the investment in income tax expense.

Turning to the balance sheet and the income statement, taxable equivalent net interest income was $665 million for the first quarter of 2015, a decline of $22 million from the linked quarter. Contributing to that decline was the normal impact from two fewer accrual days in the quarter, which reduced interest income by an estimated $10 million.

An additional $5 million reduction in interest income was driven primarily by the accelerated amortization of the premium on certain mortgage-backed securities. This follows the reduction in guarantee fees on newly originated FHA mortgage loans and the resultant uptick in the refinancing of loans backed by some of our Ginnie Mae securities. If our expectations for prepayment speeds don't change we wouldn't expect this to reoccur next quarter.

We took further steps towards reaching LCR compliance during the quarter by issuing $1.5 billion of unsecured bank notes and using the proceeds to purchase additional high-quality liquid assets with lower yields than we previously obtained. The combination of those transactions reduced net interest income by an estimated $4 million. We will discuss our LCR program further when we get into the outlook.

Finally, there was a $4 billion decline in average deposits from our institutional trust business. Recall that excess deposit balances reside at the Federal Reserve. That decline occurred prior to the end of the fourth quarter and was reflected on the balance sheet at December 31.

Although those transactions generated a very narrow spread, the large decline in those balances reduced interest income by an estimated $3 million but improved the net interest margin. These average balances are now at what we would consider to be more normal levels.

The net interest margin was 317 basis points during the quarter, up 7 basis points from 310 basis points in the fourth quarter. The components of that change were as follows.

The large decline in trust deposits held at the Fed increased the reported net interest margin by an estimated 14 basis points, while LCR-related investments and associated funding reduced the net interest margin by an estimated 5 basis points. The impact from the accelerated MBS premium amortization reduced the margin by an estimated 2 basis points. We saw the usual impact from the day count in the shorter quarter, which added an estimated 2 basis points to the reported margin.

Our estimate of the compression in the core margin excluding the items I just mentioned was somewhat less than what we've usually been -- what we've recently seen over the past several quarters, about 1 to 2 basis points.

Average loans increased by $820 million or about 5% annualized compared with the fourth quarter. Looking at each of the portfolio categories on an average basis compared with the linked quarter: commercial and industrial loans increased an annualized 7%, including continued strong growth in the auto floorplan portfolio; commercial real estate loans increased by about 8% annualized; residential mortgage loans declined an annualized 4%; consumer loans grew an annualized 1%. This category included growth in indirect auto loans, offset by a decline in home equity lines of credit.

Average core consumer deposits, which exclude deposits received at M&T's Cayman Island office and CDs over [$250,000], declined an annualized 21% from the fourth quarter, reflecting the decrease in the trust deposits I referenced earlier.

Turning to noninterest income, noninterest income totaled $440 million in the first quarter, compared with $452 million in the prior quarter. Mortgage banking revenues were $102 million in the first quarter, up $8 million from the prior quarter.

Commitments to originate residential mortgage loans for sale increased about 27%. We saw a surge in refinancing activity early in the quarter when rates declined, and the momentum continued even after rates rallied. This led to a $6 million increase in residential gain on sale.

Several fee categories were impacted by typical seasonal factors. For example, fee income from deposit service charges provided was $102 million during the first quarter, compared with $106 million in the linked quarter. Trust fees were $124 million in the recent quarter, compared with $128 million in the previous quarter, which included strong results for the institutional client service business.

Similarly, credit-related fees were lower by $7 million coming off what was a strong fourth quarter. That decline largely related to fees that are typically transaction driven and can vary somewhat from quarter to quarter.

Turning to expenses, operating expenses for the first quarter, which exclude expenses from the amortization of intangible assets, were $680 million, unchanged from a year-ago quarter. The $21 million increase in operating expenses from $659 million in the linked quarter reflected increased salaries and benefits, partially offset by a decline in other costs of operation.

Salary and benefits increased by $45 million from the fourth quarter, 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, and certain other benefit costs, as well as an $8 million rise in pension expense that was previously disclosed in the footnote to the 2014 10-K. The seasonal factors will decline as we enter the second quarter, but the higher pension costs should remain throughout the end of the year.

Other costs of operations were $203 million, down $28 million from the linked quarter and down $8 million from a year ago. Elevated professional service expenses in the fourth quarter of 2014, including higher legal expenses that we noted on the January call, declined to a more normal level this past quarter, and other professional services costs were reduced as certain projects were either completed or reached significant milestones.

Overall, we were pleased that we could keep expenses flat year-over-year while funding our initiatives and meeting our compliance-related milestones. As a result the efficiency ratio, which excludes intangible amortization, was 61.5% for the first quarter, improved from 62.8% in the year-ago quarter.

Next, let's turn to credit. Our credit quality remains strong. Nonaccrual loans declined further from the end of the fourth quarter. The ratio of nonaccrual loans to total loans declined by 2 basis points to 1.18% as of the end of the first quarter.

Net charge-offs for the first quarter were $36 million compared with $32 million in the fourth quarter. Annualized net charge-offs is a percentage of loans were 22 basis points for the first quarter, up slightly from 19 basis points for the previous quarter, but still well below our long-term average of 37 basis points.

The provision for credit losses was $38 million in the recent quarter, slightly exceeding net charge-offs. The allowance for credit losses was $921 million, amounting to 1.37% of total loans as of the end of March.

The loan loss allowance as of March 31 was 6.3 times 2015's annualized net charge-offs. Loans 90 days past due on which we continue to accrue interest, excluding acquired loans that had been marked to fair value at acquisition, were $237 million at the end of the recent quarter. Of these loans, $194 million or 82% are guaranteed by government-related entities.

Turning to capital, the Tier 1 common capital ratio is being deemphasized as the industry moves from Basel I to the Basel III capital framework this year, although it will continue to be a variable on the stress testing process. But to give you a basis for comparison, M&T's Tier 1 common ratio was an estimated 9.98% at the end of March, up 15 basis points from 9.83% at the end of last year. Our common equity Tier 1 ratio under the current transitional Basel III capital rules was slightly less, an estimated 9.78% at the end of the recent quarter.

Before we turn to our outlook, there were two noteworthy items announced after the end of the recent quarter. Earlier this month, we completed the divestiture of a trade processing business within the retirement services business that we acquired with Wilmington Trust. This business generated annual revenues of $34 million, with some minimal impact to net income and earnings per share in 2014. From that you should be able to estimate the quarterly impact on revenues and expenses going forward.

Last week on April 15 we completed the redemption of $310 million of high-cost fixed-rate TruPS as contemplated in our capital plan. The three issues had a weighted average coupon of 8.445%.

Now turning to the outlook, as is our usual practice, without giving specific earnings guidance we would like to revisit our thoughts from the January call regarding the full year of 2015. Although our loan growth this past quarter was slightly stronger than the 4% that we gave in our outlook in the January earnings call, we are not going to increase our outlook at this point in time, given some of the mixed signals that we see in the economy. So we feel that we were relatively on track with the trend that you saw this quarter.

Our guidance on the net interest margin is little changed from our previous outlook. Although the compression in the core margin was somewhat less than it has been in the first quarter, we still believe it's reasonable to expect about 3 basis points of core margin pressure per quarter. As short-term rates start to rise the impact will tend to offset those pressures.

We expect modest progression in the net interest income over the coming quarters and still expect to grow net interest income on a year-over-year basis. We still need to acquire additional high-quality liquid assets to reach full compliance with the liquidity coverage ratio over the remainder of the year. Timing will be opportunistic; but we expect to be done well before the end of the year and perhaps by the end of the third quarter.

We are still looking for low-single-digit growth in fees revenues. As is normally the case we expect the seasonal increases in salaries and benefits during the first quarter to reverse itself; however, as I noted, the increase in pension expense will persist for the full year. We would expect the decline in the second quarter to be in the neighborhood of $30 million.

As a result -- as many of you know, in his message to the shareholders in the Annual Report, Bob Wilmers discussed in detail the investments that we've made in 2014 and our continuing investments in BSA/AML, compliance, capital planning, stress testing, risk management infrastructure, and client technology platforms to optimize the franchise. While we still have more work to do, professional service expenses incurred in connection with our BSA/AML work are starting to trend downward as some of the workstreams reached completion.

Over the remainder of 2015 infrastructure, data, and other initiatives that we are working on will absorb some of those savings. We do expect to see some net benefit beginning next quarter, with most of the improvements in the second half of the year.

All that said, our basic outlook for expenses is unchanged. We continue to expect lower overall spending in 2015 compared to last year, and we remain focused on producing positive operating leverage on a year-over-year basis. The first quarter got us off to a good start.

Overall, our areas of focus for 2015 are fairly straightforward: to continue to improve the efficiency of our balance sheet; manage the revenue-expense dynamics to produce operating leverage; to optimize our capital structure while conforming with both the regulatory capital threshold as well as the annual stress test.

I'll conclude my prepared remarks with a topic that I'm sure you're all closely focused on, the merger with Hudson City Bancorp. In connection with the merger we announced last Friday that M&T and Hudson City have agreed to an extension of the merger agreement to October 31, 2015. We think this will provide our regulator sufficient time to review our merger applications, which the Federal Reserve has indicated it will be in a position to act on by September 30.

No assurance can be given as to whether or when the necessary approvals for the merger will be received. We see no material change in the deal economics from what we have conveyed previously, and we remain strongly committed to the merger and to our respected partners at Hudson City.

Of course, as you are 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 the operator will briefly review the instructions.

(Operator Instructions) Matt Burnell, Wells Fargo Securities.

Good morning, Rene; thanks for taking my call. Just a couple of questions, just on the HCBK transaction. You mentioned that there is no material -- you are not -- you don't believe there is a material change to the deal economics at this point. Is there any change in the pace of the accretion relative to the pace that you originally announced in 2012?

If you go back to what -- we announced this in 2012, I'll start by saying we're still in line with that guidance. Just straightforward, what the accretion would be, we are still in line with that guidance.

Okay.

Having said that, remember what's happening with the shrinking balance sheet over time. Had we done the deal earlier the accretion probably would've been a little bit larger.

But all of that is now captured in the equity of the Firm, right? So that is how the economics are held intact and don't change the deal.

Right. Okay; and does the delay relative to what you thought the timing was going to be when you submitted your CCAR at the beginning of this year, does that have any effect on the potential timing of the buybacks that you are scheduled to do in early 2016?

In our governance process, when we looked at those levels of buyback, we didn't assume anything about whether or not we would have the deal. We just looked at what M&T on its own could handle as a first step of returning to buybacks.

Okay. Just finally from me, any change in the tax rate, given the new accounting treatment going forward?

No, there is no change to the tax rate. But what I would urge you to do is take a look at the quarterly trend, because all those are restated. So the number might be higher that what's in your models.

But the tax rate is going to be consistent with what you are seeing across the quarters there and the press release.

Okay. Thanks for taking my questions.

Brian Klock, Keefe, Bruyette & Woods.

Hey, good morning, Rene; good morning, Don. Just wanted to follow up on the question around the guidance related to the margin and the NII. Rene, you talked about typical 3 basis points of quarterly compression in the NIM.

It looks like the HQLA was added late in the quarter and it had a 5 basis point impact. So is that 3 basis points not including the impact of those HQLA purchases into the second quarter? Maybe give us a little extra color on what the HQLA impact could have on Q2's NIM.

Yes, that's a good -- so that 2, 3 basis points is without the HQLA. If you think about what happened in the first quarter, we went out and did a $1.5 billion issuance of debt; and in fact, we did 5s and 10s, which is the first time we did that too, because we thought that the spread between Treasuries and that debt were at historic lows. I think 47 basis points between -- for the 10.

So we took the opportunity to go out and grab some of that efficiency to lengthen out the maturity structure of the debt. So there was a bit of an extra cost this quarter than you would normally see.

My thinking is that our thought is that we might be quite a bit lighter in the second quarter and then finish up in the second half of the year. So second quarter, I don't expect a similar impact; and third quarter will depend a little bit about -- on what we do with the term structure and what's available at that time.

So I think going forward for the remainder of the three quarters I don't think there is a big material effect from finishing up what we have to do on the dollar amount of NII.

Okay. I guess just on the NIM, the percentage NIM now, the 5 basis point impact in the first quarter, if that was about a third of an impact it seems on average balances, should we think that there is another 10 basis points that come out of the NIM in the second quarter for the full impact of what you did in the first?

There might be some impact, but I don't see much of an impact.

Okay. Again the 3 basis points doesn't include the benefit from the TruP redemption either then?

No, it does not.

Right, okay. All right. Thanks for taking my questions. Appreciate it.

Ken Usdin, Jefferies.

Hi, good morning. Rene, I was wondering if you could talk a little bit more about that trajectory of other expenses and your comments about having lower expenses in 2015 versus 2014. Can you help us understand how this mix shift happens from the professional and consulting fees into the core, and how much netting down you think that could have, especially on that other expense line?

Yes, just to be clear -- I think I know what you mean, but just to be clear, in terms of where we were at the end of last year, we had built up our infrastructure to have all of our permanent resources in place, a lot of which were in salaries and benefits. But we still had running the full content of the professional services and temporary staffing that helped us accelerate the pace of the work.

So as we reach our milestones, that will come down and it will produce lower expenses from where we are now, and also on a year-over-year basis point as you look at each quarter. But we don't think that you'll see the full benefit of that, because we need to continue to make some investments, particularly on the technology side that we'd like to do.

So I think the way to think about it is we're going to try to shoot for positive operating leverage every quarter this year and --

On a year --?

-- and that -- go ahead.

I was just going to say on a year-over-year basis positive operating leverage?

Yes. I'm thinking about it -- I'm looking at every quarter. And that's why I said I feel good about the fact that we started off positively in the first quarter; and if we can continue to do that by utilizing some of the lower professional services, I think we'll feel pretty good about it.

Okay. My second question is just about the trust business. It's been moving along at a low-single-digit rate of growth. I'm just wondering. What is that growth rate being burdened by? And at what point do you think we can start to see an acceleration in the trust income growth line -- line item?

You know, I mean -- I think this year-over-year we are looking at 2%. In the past year since we did the merger we've been running at about 5%.

If you look at the two most important businesses that underlie that, the institutional client services and the wealth businesses, those are still growing at about that pace. We still have investments in some of the affiliated managers; and as you know, with the market performance on active managers that you are seeing across the industry, those balances and fees are down.

But the two core businesses are still doing very, very well. So I would expect if we could get 3% to 5% growth every year in that business, I think that's a real plus, because we are cross-selling that into the existing customer base.

And then we have to do that -- we have to work on our efficiency and our ability to deliver that, those services, in a more streamlined fashion. If we can do that, that will be a home run for the economics around those businesses.

Just a quick one on the end there. Do you know the amount of quarterly fee waivers that you're waiving in that business?

No. Fee waivers in --?

The money funds. Ken, we'd --

Oh, I'm sorry, the money funds?

Yes. Ken, we had previously disclosed 15 to 20 a quarter; but I need to get that updated and we'll have to get back to you.

Okay. Thank you, guys.

Bob Ramsey, FBR Capital Markets.

Hey, good morning, guys. Just maybe touch on loan growth. I know you pointed out the first quarter was a bit ahead of what you all had guided for, but you didn't feel comfortable enough to take up the full-year outlook.

What drove the strength this quarter relative to expectations? And what gives you caution on a look-forward basis?

Yes, I mean I think you saw from the comments, Bob, that we had pretty decent growth in C&I and real estate; and consumer was slower. Then geographically, we still continue to see very nice growth.

We had 5% growth annualized in upstate and Western New York. Then New York, Philadelphia, New Jersey, that was 8% annualized. Baltimore, which has been running negative for several quarters, was up 2%. So it's sort of across-the-board with strength in New York, I guess is what I would say.

Why we're so conservative, though, in terms of thinking that we would be higher is because we really have seen a lot of competitive pressure mostly, we believe, because of the substantial market liquidity and the number of participants that are actually out there lending or competing for the same strong credit. So we've got banks, we've got insurance companies, CMBS originations that have hit peak, and we also now have PE firms.

What we are seeing is that we are starting to routinely see sub-200 over cost of funds over LIBOR deals. A number of them are now situated around 150 basis points, in the 150 basis point range.

And we are also seeing loosening deal structures. So the way we think about that is when you start seeing terms get extended so that deal terms are that low in pricing and your -- I'm sorry. The pricing is low and the deal terms are 7 to 10 years, the economics are in the low -- or mid single digits on tangible capital.

So the idea that you can ramp up growth and actually produce any economic results, it doesn't seem to make much sense in this competitive environment. So that would keep us somewhat subdued.

I think to the extent that you see somebody have significant loan growth, I think you would have to question the structure and the pricing of the deals.

Okay, that's helpful. Then one other question, shifting gears: the mortgage line, obviously very strong. What is the split there of servicing versus origination income this quarter?

I can give you that; I may shuffle around a little bit to do it, but -- so $68 million in servicing would be outstanding; and then the residential gain on sale was around $21 million.

I think you can maybe figure out the rest from there. The rest would be commercial.

Okay. What are the pipelines in that business looking like heading into the second quarter?

Pipelines were pretty strong. I think if I look at the mortgage pipeline, which is applications that were received during the quarter, minus those that were denied or withdrawn or loans closed, that was up high. That was up 50%.

To give you some sense, that pipeline at the end of the quarter was $869 million. The last time it was about that high was second quarter of 2014.

Okay, great. Thank you very much.

David Eads, UBS.

Hello. Thanks for taking the question. I guess just following up real quickly on the mortgage question there, you guys had previously talked about expecting mortgage revenues to be down for the year. Yet after the strong 1Q and the strong pipeline, should we think about maybe that having a potential to the upside there?

I feel good about the first quarter; it's in the bag. The momentum in the second is great.

But mortgage is all about rates. So it really depends what happens with the rate environment.

Sure. Okay, that makes sense. I guess maybe on -- when it comes to mortgage loans on the balance sheet, that dipped after a couple quarters of being stable. Would you say that's more due to seasonal factors, or anything else?

You mean the residential mortgage book that we have?

Yes, on the balance sheet.

Yes. No, the balance sheet, I think that's -- I would characterize that as normal runoff in the held-to-maturity portfolio. And it wouldn't make much sense for us to be adding mortgages pending the Hudson City thing, where you would be bringing on $20-billion plus of mortgages. So that's just sort of natural runoff I think that you see there.

Okay. I had just seen that number stabilize a little bit over the last couple quarters, but that makes sense. Then just a last one for me, you talked about cash balances stabilized here. Should we think about this level of cash balances as a good run rate for the near term, rather than investing any of that in securities or elsewhere?

We think that's right. I think for now, we are thinking about that as separate businesses. Because those cash balances are high, but they tend not to be individual -- the individual transactions aren't around for long periods of time, right? So I think the level that we see today is what we expect; and I don't think we have any plans to really use a lot of that for the LCR.

All right, great. Thanks.

Sameer Gokhale, Janney Montgomery Scott.

Hi, thank you. Just a couple of questions. The first one was in terms of C&I growth. Rene, you talked a little bit about your growth relative to others and some of the competition in the industry. But I was curious if you could just help us delve a little deeper into where exactly your growth is coming from now within C&I, relative to maybe where you had seen growth say 12 months or so ago.

So basically I'm asking if the mix of where you're generating C&I loan growth has changed any relative to what you had seen, say, a year ago.

I don't think so. I mean I'm just -- I'll do a bit of a scan. For a long period of time the C&I growth was strongest in upstate New York and in New York City and Philadelphia; fairly strong in PA; and weaker in Baltimore and Washington. That still holds true.

Still holds true. I think it's pretty consistent with what we've seen over time.

Okay, and are there any --

(multiple speakers) what's going on in those economies, yes.

But is there anything, any underlying loan category specifically within C&I that is growing more? Any -- I see your comments in terms of geography, but as far as specific loan categories that you can think of where there might be a more pronounced mix shift.

No. Remember, each of the markets are different. So there has been -- now you've got me out of the C&I category in a sense. But if I just think of the markets overall, in Buffalo there is a lot of construction going on, and a number of hotels that have been put up that could be transitioned into permanent financing.

Versus in Washington, DC, one of the reasons why we think things are so slow is because the economy there around the government services seems to be relatively weak in terms of job growth. So in Washington we are seeing a slowdown in job growth; we are seeing tepid office space demand, especially in the General Services Administration and Defense contractor sector.

We've got a fair bit of diversity, so it depends on which market you're in. So there may be themes in markets, but there is no big theme overall.

Okay. Then there was one other bank that reported on Friday. They, I think, have a significantly higher amount of exposure to the energy sector; and yet they were talking about how they had reduced commitments, but it seemed like at the same time those same borrowers were able to get funding elsewhere in the capital markets. So while they were de-risking it seems like somebody else in the capital markets was willing to take on that risk.

Now in terms of your customer base and your tight underwriting through cycles, it seems like your customer base would be even more receptive and able to get funding in the capital markets. So when I listen to your commentary about C&I loan growth and loan growth overall, shouldn't we expect in this sort of environment that you see a more pronounced slowdown relative to maybe what your peers are seeing from that perspective? Just more competition, more loans going away, funded by the capital markets relative to your peers.

You should. You should. First, let me start off by saying -- I think we talked about this last time. We don't have very much exposure to the energy sector at all. So we don't -- we have some, but it's secondary.

As you think about shale and things like that and people, for example, trucking companies supplying water to those facilities. So it's very limited.

But having said that, one of the things you are seeing, whether it be on healthy deals or on things coming out of the classified portfolio, there's plenty of people to take those deals out. I'll give you an example.

One of the things, as I go through all the deals and I look, one of them in New York State where we lost a particular deal, it was a $30 million credit. It was a 10-year fixed rate pricing of 2.14%.

We just did the $750 million of 10-year fixed at 2.90%. It's not possible for us to make that loan.

So you start to wonder, where is that going? Is that going to the capital markets, and are people stretching in those venues?

So this is one of the things that makes us very increasingly cautious as we move forward. Most of our credits, for example, a lot, the majority of the lending is being done with the existing customers that are out there. (multiple speakers)

Okay, thanks. Thank you. And just my last question was, I'm just trying to get a sense for, in this current environment, what levers you can pull from a revenue growth standpoint, right? I mean clearly looking at new products, etc., would be one place where you might try to drive additional revenue growth incrementally.

But if you look at the penetration of your commercial lending customer base, and if you look at cash management or other types of services you could offer those customers, do you feel that there is more room there where you can improve penetration? Or at this point do you feel like you are at a level where there are limited opportunities for you to sell additional products to that specific customer base?

I think that as you focus on -- particularly you focus on the commercial space, I think we are very fortunate. So while, yes, I think there is probably more that we could do in certain parts of the commercial segment around cash management and different types of cash management services, I also think that we are light in a number of other areas that we do.

So relative to our peers, we are probably light on the insurance side. There is a number of areas.

And then don't forget that we've got -- a big part of what the wealth business in Wilmington is, is serving businesses. And that has actually provided tremendous -- I hate to use the word -- you used the word cross-sell. It's provided tremendous capabilities for us to supplement the natural lifecycle of those business owners, right? So that's going pretty well.

So I feel fortunate. We've got areas where we know we could improve, and we have some that we actually are improving; and so I think that will be our focus.

I'll just say it. I know we were off of some folks' expectations for the quarter in terms of revenue. But at the end of the day, I was pretty impressed that we had growth in revenue year-over-year at 2%, and we're not seeing much of that.

I think I talked in my comments about efficiency, and one of the places where you have to look at efficiency is you have to look at efficiency of your balance sheet. And if we do that and we continue to look for opportunities there, then that will have a positive impact on revenue, like the TruP redemptions we just did. So those types of things are going to be really important to us.

Okay, terrific. Thank you.

Erika Najarian, Bank of America.

Yes, good morning. My first question is just a follow-up to Brian's question on HQLA. Rene, could you give us a sense of what you think the end-of-period balances would be on your investment securities portfolio, and also what you're going to be funding that growth with for the duration of the year?

What they are now, the end-of-period balance??

What you expect the securities balances to be by the end of the year, taking into account the HQLA purchases that you are going to embark upon, and what you are going to fund that incremental purchases with.

We are somewhere around $14 billion now. I think we've got to do a little more than we did recently.

In the last quarter we did $1.8 billion. So we have a little bit more than that to do to get ourselves closed [out].

And remember, I think we're being relatively conservative there. As someone mentioned, are you using the $5 billion in cash, that counts in the liquidity coverage ratio, but we are not using it. Right? So we are probably technically further along and have some leeway from there. But we tend not to count those assets as we manage it internally.

Is that more than $1.8 billion for the rest of the year, or is that more than $1.8 billion quarter (technical difficulty) quarter?

More than $1.8 billion for the rest of the year.

Got it.

The peer median, right, we're at 16% of our securities or 16% of our balance sheet; and the peers are at about 19%.

Okay. Just one last question, if you could. If the deal with Hudson City does close or gets voted on, on October 31, is fourth quarter, end of fourth quarter too soon of a close to assume, just for our modeling purposes?

We've been trying to get the deal done for a very long time; and should we get approval, we will work very swiftly.

Got it. Thank you.

Marty Mosby, Vining Sparks.

Hey, I was wanting to ask about the cross-sell efforts down in New Jersey, and twofold. One is how much in run rate expenses are already there? Because that was netted out against your synergies in the original deal, and it's already in the expenses.

And then, two, what kind of revenue have you been able to see with your efforts so far as you've got that fully operational now?

Marty, I think things are on track, maybe a little better than we would have expected when we first laid out our plan. We've got over $1 billion -- I think we may have put these notes in our -- best place to look is in Bob's letter. I think we did a paragraph on it. But one of the keys is that we have over $1 billion of loans to date.

We seem to be engaged in all fronts, except those where we really can't because we don't -- so retail we don't have any engagement. So we feel pretty good. That seems to be on track with what we thought.

I think for the level of activity that we have going on today in those non-branch business lines, I'd say we probably are pretty fully staffed from the level of activity that we have today. And to see more hires we would have to see more growth and a bigger portfolio.

Just curious how much you were netting out of the original expense synergies that you've already incurred.

I don't know if I've ever disclosed it; but quite frankly, I can't remember. It's -- well, you know the number we've hired, right? I think we've talked about on the ground we have 129 people there; so you can do something there.

And then -- but in totality I think when you count people back here at M&T, it was more like 170 people that we hired. So you can get some sense of what the cost of that would be on an annual basis if you throw in a little bit of extra for occupancy and so forth.

Then just one last follow-up. If you look at the seasonality, you have seasonality in really three buckets.

You have the fewer days, $10 million you mentioned on NII. You got fees which -- if you look at mortgage already are starting to kick in; maybe you soften that. But that's generally about $30 million.

And then you've highlighted another $30 million on expenses. Typically you have a little bit more than the rest of the regional banks in this seasonality. Is there anything that would soften that if you kind of look at it in total, about $70 million, $75 million from first quarter to second quarter in normal progression?

I'm glad you mentioned that. So a year ago, from the fourth quarter of 2013 to the first quarter of 2014, I think in total we saw revenues decline about $36 million. This time we saw them drop about $33 million.

So pretty much it's -- while there may be some different categories here and there, there is nothing that is atypical about the seasonality that we are seeing. And everybody is well familiar with what happens on the expense side.

Again, that's why I spend a lot of time focusing on the year-over-year space. Because for us to do all the things that we've been doing and actually produce 6% growth in net income I felt pretty good about it. And if we can keep doing that and we can keep producing operating leverage, I think that's pretty good.

I think what we're going to have to begin to do as we get into the next year is start working on capital efficiency and those things, because our capital ratios have -- we've passed two stress test and our capital ratios continue to rise. And so I think it's a good time to begin to think about what our optimal capital structure is and how we rationalize that as well.

Thanks.

Ken Zerbe, Morgan Stanley.

Great, thanks. You guys mentioned that you have seasonality in the trust business; but it doesn't seem like a business that should have seasonality. Can you just remind us why that's a seasonal level of revenue?

Yes. The two reasons off the top of my head, one is we get paid in different ways. Sometimes we get paid on a monthly basis; some fee arrangements are quarterly. But there is also a significant portion where we're on an annual fee basis, right?

So you would see that at the end of the year; and then as you get back up you lose that source. So that whole collection of people that pay you on an annual basis you wouldn't see in the first quarter.

And then taxes. For example, you should see an uptick in the revenue next time because all of the -- a substantial portion of our tax fees are paid in the second quarter.

Got it. So that means fourth quarter is higher given the annual payment; and then -- sorry, your comments mean that first quarter was lower or second quarter is higher than first because of the taxes?

First quarter would be lower than the fourth for the annual fee reason.

Yes.

Yes.

Okay. Then second quarter is higher than the first because of taxes?

Because of taxes.

Okay.

So there's -- some of it is -- if you go back it's pretty consistent. I think a year ago -- if we do the same thing, a year ago, fourth to first we were down $4.7 million. This time we were down $4.6 million.

Okay, great. Thank you.

Jill Shea, Credit Suisse.

Hi, good morning. With the merger current date extended to October 31, could you note for us any potential differences in certain expense line items relative to your initial estimates for a potential April 30 close? Does this keep some expense line items higher over the near term?

And then does this factor into your thought process in terms of timing of additional investments in the business in order to manage to the goal of positive operating leverage year-over-year?

No. All my comments about the financials to date have been M&T's standalone. And all the comments that we make about Hudson City, think of it as times zero out 12 months for the first year, right?

There is nothing we can do until we all bring those franchises together and start working on it. So the start date, both of when we pay for the franchise and both when we get to operating has just moved.

But I think that's the best way for me to answer your question. Am I getting that right?

Yes, that's helpful. Thank you.

Gerard Cassidy, RBC.

Hi, Rene. Question on your common equity Tier 1 ratio that you pointed out at the end of March is 9.78% under the transitional capital rules. Do you have an estimate for what that ratio would be at the end of March if you had the fully implemented rules applied?

Yes, I do. It is just slightly less. It is 9.71%.

Okay. You've touched on, more than once on this call, about having to focus on optimizing your capital levels, especially after the Hudson City deal closes this year. Where do you see optimal common equity Tier 1 ratio from your guys' eyes? Where do you think that could settle out at in a couple years, let's say, once everything settles down?

I think -- so we've been searching for that, right? A year ago -- two stress tests ago, we entered the stress test with a Tier 1 common of 9.08% and we fared pretty well in the stress tests.

And we entered with something like 9.76% or something like that this past time, and we fared pretty well. So now that -- we've had our internal models for some time, but we're getting to get a chance to see the third party's view of that.

So we're zoning in on that. And I think that starts to frame the idea of where our target ratios might come out.

What I know is that to be on a comparable basis you have to use the other measure which is 9.98%, right? So clearly as we start pushing up above 10%, you are starting to get into the space of excess capital.

So at some point, we will probably start disclosing a target capital ratios. But again I think we haven't really done that in particular because of this uncertainty with the transaction, because that transaction will give us even more capital; and we need to think about what the difference is between our target ratios and what we practically can -- and actually get to.

So that's what our thinking is, but hopefully that frames for you where we are zoning in, what we're beginning to zone in on.

Great. Can we come back to your comments about the loan portfolio? We've heard from a number of banks this quarter about the pressure on spreads due to to increased competition.

You are one of the few that have talked about maybe underwriting standards now are starting to weaken if you well. Is this relatively new?

The spread pressure seems to have been talked about a quarter or two before from others as well. But the weakening of underwriting standards, is that something new that you guys are seeing? Or am I being too harsh in saying that?

No, you're not being too harsh in saying that. I think what I would characterize it is it's been slightly increasing for a long period of time, and that increasing trend has not gone unabated.

So when we look at our own numbers, I look at some of the things that -- for long-term clients that we are doing for them; and I say to myself: wow, we are now getting into a space where if you're going to see any kind of loan growth, you are probably going to be -- it would be tough to generate high-single-digit loan growth in this environment when you're competing with the capital markets.

I would expect like in the real estate space, the multifamily space, the CMBS issuance will be up 20% this year. So that's pretty natural for us to not be able to compete with those guys in the level of both structure and price.

Do you think it will be more challenging for M&T in this environment? In the past you guys have done a very good job of managing capital. And then when markets became aggressive in underwriting, your numbers would show that you would pull back, have better credit going through the down-cycle; but then take that excess capital that you weren't using, and you were one of the best at giving it back to shareholders.

Now that you have this new regulatory control on returning capital, could it be more challenging for M&T going forward if you decide to pull back because the underwriting is way too aggressive, but you now may have to sit on the capital longer?

It's a great question, Gerard. I hope not. We've got a large organization with lots of people, and so we have a strong culture of not chasing revenue. I think that culture is still intact.

And at the same time, we are investing very heavily in modernizing our risk management infrastructure to make sure that doesn't happen. All we can do is continue to talk about it and be very transparent about it.

Having said that when I look back at the cycles, I think -- this is just me, but I think that when we look back we will be talking about how when a lot of the standards were weakening and deal economics were lighter, we were making investments in our risk management infrastructure and we were focused on efficiency. And that's been the way the cycle has been -- has carried out over a number of decades for us.

I think as long as we have that good work to do, it makes us less antsy about the fact that revenue growth is slow. Our clients seem to be very loyal to us, and so our focus will be on maintaining those relationships and making sure that we take some of the excess capital and invest it in our franchise and our infrastructure.

My last question -- last one is, obviously, it's been a tough go with this Hudson City acquisition. After it's completed, has your view or Bob's view or the Board's view on acquisitions in the future changed because of what you have had to go through in this process with HCBK?

I'll start -- I'll try to answer that question if you promise to ask me again post the deal.

Okay.

I mean look, I think the way I think about it is, this might be the largest transaction since Dodd-Frank. There is a lot of uncertainty out there, but clearly the standards are high.

And I feel good about the fact, while it may seem counterintuitive, that we are in there working on finding out firsthand what those standards are. I think that as we get to a place our investments should be leveragable; and I have never heard anything to suggest that the regulatory environment doesn't want deals to happen ever again.

So I try to be somewhat optimistic. Having said that, I will tell you that clearly the standards are high. I look at all the work that we have done and the way I think about it is, we have done a tremendous amount of work -- I won't recite it all -- but we've done a tremendous amount of work in a relatively short period of time. And it kind of makes sense that the Federal Reserve would want to take an appropriate amount of time in this environment to get their arms around that, those improvements we've made, and get comfortable with it as part of the application process.

I try not to think too much beyond that. But I don't see any reason why with the infrastructure we have in place that we shouldn't be able to do deals in the future.

Thank you for all your time.

Sure. Thank you.

Frank Schiraldi, Sandler O'Neill.

Good morning. Just, Rene, I think in the past you've talked about a 50% to 55% efficiency ratio, of getting back to that level over time. Assuming Hudson City closes, is that a place -- is that a range you think you can get to in the current revenue environment? Or do you foresee needing some help from rates to get there?

No, I think -- yes. You've got cycles, right? I think that revenues are very, very depressed because of the rate environment.

So you see how asset sensitive we are. It's significant.

And you also have -- Don touched on the fact that on the mutual fund space, where we have $9 billion to $10 billion of mutual funds that are earning zero to negative, those would gain back -- go all the way back up to 40. So we think of it in terms of the revenue and expense spread, and I think that clearly you could get to those levels with a different rate environment and not being where it is today.

Okay, so those levels in a more normalized environment then is a fair statement?

I think so. I think so. But can you make improvements in the current environment? Yes, we definitely have the ability to do that because we've been spending a lot of money.

If you look at the peers that have been reducing expenses, we have not over the last two years. We've increased expenses. There is a big spread between what we've invested and the peers. So we have opportunity, I think, to improve without a turnaround in rate.

Okay. Then just finally on modeling I just want to make sure I heard you correctly. In terms of the accounting change, given the effective tax rate in the quarter, that's a decent run rate going forward just using that, the tax rate from 1Q?

Yes, 36%-ish, somewhere in that range is -- what you see there is probably pretty good.

Okay, great. Thank you.

Thank you. I will now turn the floor back over to Don MacLeod for any final closing remarks.

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

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