M&T Bank Corp (MTB) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the M&T Bank fourth-quarter 2015 earnings conference call. It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.

Thank you, Jackie, and good morning. I'd like to thank everyone for participating in M&T's fourth-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 may contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements.

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

Thank you, Don, and good morning, everyone. Thank you for joining us on the call this morning.

As noted in this morning's press release, we were pleased with our progress in what proved to be a very busy quarter. The overall financial performance was strong, and we completed the merger with Hudson City Bancorp, which was immediately accretive to M&T's net operating earnings, risk-based capital ratios, and tangible book value per share, in sync with our earlier projections. I'll review a few highlights of the quarter and the year, including some perspective on how the merger impacted our results for the quarter; and then we'll share our thoughts on the outlook, after which Don and I will be happy to take your questions.

Turning to the results, diluted GAAP earnings per common share were $1.65 for the fourth quarter of 2015, compared with $1.93 in the third quarter and $1.92 a year earlier. The decline came as a result of merger-related charges in connection with the Hudson City transaction.

Net income for the quarter was $271 million, compared with $280 million in the linked quarter and $278 million in the year-ago quarter. In order to assist investors in understanding the impact of merger activity on its financial results, M&T provides 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.

After-tax expense from the amortization of intangible assets was $6 million or $0.04 per common share in the recent quarter, compared with $3 million and $0.02 per common share in the prior quarter, and $4 million and $0.03 per common share in the fourth quarter of 2014. The increase in the recent quarter reflects amortization associated with the $132 million of additional core positive intangible created through the Hudson City merger.

Included in the fourth-quarter results were significant merger-related charges, including $76 million of noninterest expenses and a $21 million provision for credit losses for the acquired Hudson City loan portfolio. I'll discuss the accounting for the acquired loans in a few moments.

Combined, these items amounted to $61 million after-tax or $0.40 per common share. There were no such charges in the previous quarter or the year-earlier quarter.

M&T's net operating income for the fourth quarter, which excludes merger-related items and the intangible amortization that I just mentioned, was $338 million, increased from $283 million in the linked quarter and $282 million in last year's fourth quarter. Diluted net operating earnings per share were $2.09 for the recent quarter, an increase of 7% from $1.95 in both the previous quarter and the year-ago quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders equity of 1.21% and 13.26% for the recent quarter. Comparable returns were 1.18% and 12.98% in the third quarter of 2015.

In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.

Looking to the balance sheet and the income statement, Hudson City added about $24 billion of total assets after our restructuring, which included $19 billion of loans and $18 billion of deposits. Over the four days immediately after the closing, we retired $10.6 billion of Hudson City's borrowings, which was funded by the sale of $5.8 billion of investment securities and the remainder by Hudson City's cash on hand.

Taxable equivalent net interest income was $813 million for the fourth quarter of 2015, up from $699 million in the linked quarter and $688 million in the fourth quarter of 2014. The increase includes approximately $110 million of net interest income attributable to Hudson City.

The net interest margin was 3.12% during the quarter, down 2 basis points from 3.14% in the third quarter. Our explanation of the decline is relatively simple this quarter.

We estimate that the inclusion of Hudson City diminished the margin by about 3 basis points. On the core M&T side, we estimate there was 1 basis point expansion, as pressure on the core margin was more than offset by rising short-term interest rates, which included an increase in short-term LIBOR rates in advance of the Fed's December action.

Average total loans increased by $13.3 billion from the linked quarter, primarily reflecting the partial-quarter impact from Hudson City. Substantially all of the Hudson City loans are residential mortgage loans, thus the acquisition had limited impact on growth in the other loan categories.

Growth in each of those other loan categories was solid. On an average basis compared to the linked quarter, commercial and industrial loans increased an annualized 6%, aided by the seasonal rebound in auto floorplan; commercial real estate loans increased by about 9% annualized; consumer loans grew an annualized 10%, reflecting continued growth in indirect auto.

While lending conditions on the commercial side remain very competitive, with pressures from both bank and non-bank lenders, loan demand remained healthy, bolstered by repeat business with existing customers who value our relationship approach to lending. We continue to see strong results in the commercial bank in our Metropolitan region, which includes New York City, as well as Pennsylvania and Baltimore. Growth was somewhat softer in upstate and Western New York.

Average core customer deposits, which exclude deposits received at M&T's Cayman Island office, CDs over $250,000 and brokered deposits, increased 16% unannualized from the third quarter, primarily reflecting the impact from the acquisition.

Now turning to fees, noninterest income or fee income totaled $448 million in the fourth quarter, up from $440 million in the linked quarter. The contribution to fees from Hudson City was not significant.

Mortgage banking revenues were $88 million in the fourth quarter compared with $84 million in the third quarter. Residential Mortgage Banking revenues declined by $6 million, the majority of which is attributable to a 23% reduction in residential mortgage loans originated for sale. Commercial mortgage banking revenues were up $10 million from the prior quarter, reflecting a solid quarter of multifamily FHA origination.

Service charges on deposit accounts were $106 million, little changed from $107 million in the third quarter. And trust income was $115 million in the recent quarter, slightly improved from $114 million in the previous quarter.

All other revenues from operation were $144 million, up from $138 million in the third quarter. Both the third and fourth quarters of 2015 were characterized by particularly strong commercial lending-related fees. The recent quarter's results included higher levels of syndication fees, while the previous quarter's results included a sizable gain on previously leased equipment which did not reoccur.

Turning to expenses, operating expenses for the fourth quarter, which exclude the expense from the amortization of intangibles and merger-related expenses, was $701 million compared to $650 million in the third quarter. Those operating expenses included approximately $40 million attributable to Hudson City.

The efficiency ratio, which excludes intangible amortization and the merger-related expenses, improved to 55.5% reflecting the two-month impact from Hudson City. It is notable that on a full year-over-year basis, adjusting for the merger and the sizable contribution to the M&T charitable foundation made in this last year's second quarter, total operating expenses were down slightly from 2014.

Next let's turn to credit. Overall, credit quality remains strong. Nonaccrual loans at the end of 2015 were $799 million, up slightly from $787 million at September 30.

The ratio of nonaccrual loans to total loans was 91 basis points at year-end. The significant decline in that ratio from September 30 reflects the addition of Hudson City's loan portfolio.

Net charge-offs for the fourth quarter were $36 million, improved from $40 million in the third quarter. Annualized net charge-offs as a percentage of total loans were 18 basis points for the period, with the ratio also benefiting from the addition of the Hudson City portfolio to total loans.

The provision for credit losses was $58 million for the recent quarter, which includes the $21 million merger-related provision I mentioned earlier. The allowance for credit losses was $956 million at the end of 2015 and reflects our assessment of the loss content in the loan portfolio.

The ratio of allowance to total loans was 1.09%, which also reflects the addition of the Hudson City loan portfolio. The loan loss allowance as of December 31 was 17 times -- I'm sorry, was 7 times 2015's net charge-offs.

Loans 90 days past due on which we continue to accrue interest, including loans acquired at a discount, were $273 million at the end of 2015. Of these loans, $232 million or 85% are guaranteed by government-related entities.

Before I leave credit I'd like to provide you with some background on the accounting for the loans that we acquired with Hudson City. As you know, GAAP requires acquired loans to be recorded at fair value at the date of acquisition, with no carryover of the acquired entity's allowance for loan losses. That fair value reflects the use of interest rate and credit loss assumptions.

In connection with the Hudson City merger, we recorded $19 billion of Hudson City loans held for investment at their estimated fair value. Approximately $1 billion of those loans are classified as purchased impaired loans, were recorded at a discount to par, and are being accounted for under SOP 03-3.

The fair value of the remaining $18 billion of acquired loans exceeded the outstanding loan balance, resulting in a net premium which will be amortized over the remaining lives of the loans as a reduction of interest income. GAAP does not allow the credit loss component of that premium to be bifurcated and accounted for as a non-accreting difference, as was the case in previous acquisitions when all loans were deemed acquired at discount.

GAAP also provides that an allowance for credit losses on loans acquired at a premium be recognized for incurred losses in that portfolio, even though in a homogeneous portfolio of residential mortgage loans the specific loans to which those losses relate cannot be easily identified. M&T believes that this accounting requirement results in an additional provision for loan losses that was already factored into the fair value of the loans at the date of the acquisition -- at the acquisition date.

As a result, the $21 million incremental provision has been characterized as a merger-related expense. Hopefully that's helpful.

Turning to capital, our common equity Tier 1 ratio under the transitional Basel 3 capital rules currently in effect was an estimated 11.06% at the end of the recent quarter, up from 10.08% at the end of September. Completion of the Hudson City merger added an estimated 80 basis points to that ratio.

Tangible book value per share was $64.28 at the end of 2015, up 5% from $61.22 at the end of September, and up 13% from $57.06 at the end of 2014. As a point of comparison, over the past five years M&T has grown tangible book value per share at a compounded annual growth rate of over 14% through a combination of organic growth and prudently priced expansion.

Next I'd like to take a moment to cover the key highlights of 2015's results. GAAP-based diluted earnings per common share were $7.18 compared with $7.42 in 2014. Net income was $1.08 billion, up slightly from $1.07 billion in the prior year. Net operating income, which excludes intangible amortization and the merger-related expenses, was $1.2 billion, improved from $1.1 billion in the prior year.

Diluted net operating earnings per common share was $7.74, up from $7.57 in 2014. Net operating income for 2015 express as a rate of return on average tangible assets and average tangible common shareholders equity was 1.18% and 13%, respectively.

Before I turn to the outlook, as many of you have seen, on January 6 the US Attorney in Delaware took action against Wilmington Trust Corporation related to alleged conduct prior to M&T's acquisition of Wilmington Trust Corporation in 2011. As the US Attorney noted in his press release, this alleged activity relates solely to Wilmington Trust's commercial banking operations during that time period.

While we are limited in our ability to discuss this matter, it is important to note that we strongly believe that this unprecedented action is unjustified. And Wilmington Trust intends to vigorously defend itself.

Now turning to the outlook, as Don and I were saying yesterday, it's a daunting task we undertake every January to offer you a projection of what we think will unfold over the coming year. But in retrospect, the thoughts we offered you on this call last year weren't too far off from what actually occurred; so here we go again.

I should first note that the end-of-period balance sheet is more representative of our run-rate balance sheet than the averages for the fourth quarter, given the November 1 effective date of the merger. During the fourth quarter, we saw steady to positive momentum in the lending environment. As a result, including the newly acquired loans from Hudson City, we would expect low to mid single-digit growth in total loans in 2016, with a slightly higher pace of growth in commercial and consumer loans, partially offset by contraction in the residential mortgage loans, as we expect that the Hudson City portfolio will continue to pay down. The pace of payoff will obviously depend on interest rate.

Our outlook for the net interest margin is dependent on further actions by the Federal Reserve. Given what the implied forward rate curve is telling us, we'd expect the net interest margin for the full year of 2016 to be stable or slightly better than what we reported in the fourth quarter.

The full run-rate impact from the addition of Hudson City's balance sheet will be a modest source of pressure early in the year. As we've seen over the past several years the impact of cash balances brought in through Wilmington Trust could have an impact on the reported margin but would be additive to revenue.

Excluding the impact from the sale of the trade processing business in 2015's second quarter, both the $45 million gain and the single quarter of revenue we earned prior to the divestiture, we would expect flat to modest growth in noninterest expense and fees. We expect pressure on mortgage banking revenues in a higher rate environment and continued industrywide pressure on consumer service charges to be offset by growth in other fees, assisted of course by higher short-term rates.

Regarding expenses, in light of the limited revenue opportunities we're looking to keep core expenses relatively contained, with continued investment spending, including technology investment, offset with savings elsewhere as other projects reach completion. Our goal is to strive for positive operating leverage over the course of 2016.

As to Hudson City, we'd estimate that an additional $40 million to $50 million of expense reductions will result from further actions we expect to take over the first half of 2016, particularly the branch and systems conversion. These should ultimately result in realizing the majority of our expected expense savings by June -- or let's say the first half of the year.

Separately, we'd estimate that there are about $40 million of merger-related expenses remaining to be incurred, the majority coming over the first half of 2016.

Aside from the national news on energy lending which shouldn't have a material impact on us, we see no indication of a change in the credit cycle. Net charge-offs amounted to just 19 basis points for the second year in a row, which is roughly half the long-term average; but as we said on this call last year, our conservatism won't let us count on beating that figure in 2016.

Income tax expense in the fourth quarter included a $4.6 million benefit from technology research credits related to prior years through 2014 which were approved by the IRS in December. We'd note that the provision in the tax code providing for such credits was extended by Congress in December. Any additional benefits in the future will depend on the size and type of technology investments that we make.

As you know, the capital plan we submitted in connection with the 2015 CCAR process, which received no objection from the Fed, included $200 million of share repurchases in the first half of 2016. We expect to begin implementing that program shortly.

Lastly, we will review our capital position with our Board on both a nominal basis and under stress as we prepare our CCAR 2016 capital plan and stress test for submission to the regulators in early April. We've got another year of earnings retention under our belts as well as the capital accretion from the merger. Looking forward, our expectation is that the Hudson City loan portfolio will continue to pay down, moderating our overall loan growth, and thus our pace of internal capital generation will remain high.

Those are our thoughts. We hope you will find them helpful as the year unfolds. Let's now see what happens.

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

(Operator Instructions) Ken Usdin, Jefferies.

Hey, good morning, Rene. Just two clarifying points on just how the two companies pull together. Just first on the fee side, I just wanted to make sure I understood.

When you're talking about hoping to keep these pretty flat this year, should we be thinking about the $440 million, $450 million run rate for the last three quarters, ex- that $45 million gain you had in the second quarter? I just want to make sure I wasn't missing what you were saying about the pre-business sale quarter.

Well, I was just -- I think what we were doing is looking at the full-year 2015 and taking out that unusual gain in that, obviously the first-quarter business that we had. The gain was $45 million.

And then we were just looking year-over-year because, as you know, Ken, as I look at the going forward, we've got decent loan growth; we will be flat to some margin expansion. So that gives you some single-digit revenue growth.

And if we can get year-over-year a spread on that, revenue versus expense growth, then I think we get a little leverage to that to the bottom line. So that's how I'm thinking of it year-over-year.

Yes, perfect. Then my second question is just on the expense side. You talked about keeping the core M&T flat, and then you just have the natural growth coming with the addition of Hudson City minus the cost saves.

So again just trying to understand. You pointed to the rest of the income statement starting off of the fourth quarter, but I don't think that's quite what you're saying here. How do we just think about the trajectory of where expenses start from, if there is a way you can help us get tighter there?

Where expenses start? Again, I think I'd start on the M&T side with the full year and think about year-over-year. There is nothing much unusual there except for maybe the $40 million tradable contribution that we had in 2015, and that's the basis from which I'm operating.

If you look at the fourth-quarter results, we gave you the number. We said that roughly $40 million of the operating expense came from Hudson City and that was two months. And there were some expense saves in those numbers, but from there, we estimate from that run rate -- we estimate that we have actions to take that would add up to between $40 million and $50 million in annualized expense savings. And that is net of the hires, any additional hires, that we would have to do related to Hudson City in New Jersey.

Okay. So the $40 million is two months; that's about $60 million, that included a little bit. That's $240 million full-year, and then think about the $40 million to $50 million off of that, but that's a net number.

Yes. (multiple speakers)

Great. Thank you, Rene.

Frank Schiraldi, Sandler O'Neill.

Good morning. Just a follow-up on the expense side. Just trying to think about efficiency ratio here. Obviously you're at that high end at least for the quarter of 50% to 55% efficiency ratio.

As you extract those cost saves from Hudson City next year, does that just alone result in further improvements for the efficiency ratio? Or are we more likely to see that benefit show up in investment elsewhere, all else equal?

Yes. I mean our goal is, without Hudson City, to try to maintain some level of operating leverage. In that we've got a number of things that we are doing to optimize our operations, and we're hoping to put that money back into IT spending.

At the end of the day, we'll put the money back into IT spending regardless of how much progress we make in other areas because we think it's really important. So we've talked about that for some time.

On the -- when you think of the efficiency ratio and you think first of Hudson City, I haven't done the math, but you've got one more month of Hudson City, right? So there's probably some additional impact on the efficiency ratio when you have a full three months in the quarter.

And then we have work to do to reduce -- get the cost saves that we talked about. One thing I would point out is that it's not as if we're getting those cost saves on January 1, right, so you get the full-year impact of $40 million to $50 million. That's the run-rate impact that you're going to get on an annualized basis after you've taken the action. So that also should have an impact on the efficiency ratio.

When I look at our performance this past year, I think we did a pretty good job of managing expenses. But I also think, quite frankly, the improvements we saw in the efficiency ratio come from the fact that we did have growth in revenue in a pretty tough environment, and that spread widened. When you think about it, if you adjust for the charitable contribution and the gain from the divestiture, we were 57%-something in the second quarter. We were 57.1% in the third quarter, and I think it's about 2 percentage points that Hudson City benefited our efficiency ratio.

So we're running pretty well. We had a pretty good year on both sides of the equation.

Sure. Then just one follow-up actually on deposit pricing. When I look at New Jersey as a whole it seems like there's a number of institutions, particularly in that state, that are deposit hungry, so to speak. So just wondering; is there significant opportunity to improve margins with repricing of higher-cost deposits at Hudson City? Or do you think you may have to defend share more by holding that pricing over the next, call it 12 months?

Yes, so I think of it -- I'll break it into two pieces. I think about it a little differently.

We've got this very, very large base of deposit customers who primarily hold a CD; so they are single-service households for us. In that group, we don't have a big interest in necessarily rationalizing pricing, so to speak, because we really would like to get to know those customers.

I've got a couple letters myself already of a couple people introducing them to me, and they clearly fit the profile of people we would love to have a more full-service banking relationship with. So I think that will take a little time, and I don't think we'll be hasty to do that at the outset of this year.

But then separately, we do think there's a very large opportunity for full-service checking account relationships that we would typically hold, and most of those relationships aren't just a checking account; they tend to have multiple products and services as we roll out our relationship banking approach.

So it's sort of two. And quite frankly, really what we're trying to do is we get a nice shot of an introduction to those customers, and we will be trying to convince them that we should be their primary bank for all of their deposit services.

So that means you can't move too quickly to just treat it as a financial asset. They're customers.

Right. Understood. Okay, thank you.

Marty Mosby, Vining Sparks.

Hey, I wanted to ask you a little bit about the way in which the premium on those loans that you brought over, how that dynamic worked? Because that's a little different than what we've seen so far with that accounting, with the discounts that were in prior accounting (technical difficulty).

As you bring it over as a premium, like you said, you already had the negative accounted for; but now you also had to put an allowance. So will you have net charge-offs from those loans and go against the allowance that you created? Or -- just was wondering how that will work logistically going forward.

Yes, Marty. Think of it this way. Those loans that you acquire at a premium, you're just not allowed to use the discount accounting that you are used to in a lot of deals or that you saw in Wilmington. We deemed Wilmington as pretty much the whole portfolio to be purchased at a discount.

So, what ends up happening is they get treated -- and the loans that are premium are treated out of FAS 91, just like originated loans. So you have chargeoffs as well.

So it will act more like a regular portfolio going forward, which will make your statistics and metrics look more normal versus being skewed.

Yes, and maybe our lives easier, too.

Right, right. Then the other thing you mentioned in there was the second bank, which I've been keeping my ear open, but today we had now you're the second bank talk about LIBOR going up earlier in December and the benefit.

Think about or explain a little bit more about that, because prime rate tied to the Fed funds rate is where you typically would get some of that repricing on the commercial business, but a lot of that's shifted over to LIBOR. So did you get a full month's worth of benefit in the fourth quarter as the LIBOR moved up ahead of the primary?

I'd have to check. I don't think -- I think it was not quite. It was obviously more than half, but it moved up steadily; and it might have been slightly below the full impact of the Fed increase. But it started -- if I recall, I think it started in late November.

It did start way early. If you look at the percent in LIBOR versus prime what's your percentage at this point on your whole loan portfolio -- floating loan portfolio?

That's a great question. The fixed portion is about -- of our -- you want just the loans or the total assets?

Just the floating-rate loans, just the floating-rate.

It's about 51%. So it would be -- fixed-rate loans would be about $35 billion out of the $88 billion.

Then you've got to think of -- you often think: Well, wow, we just brought on a lot of fixed-rate mortgages. But keep in mind that I think almost half of those are actually variable-rate or floating-rate resets.

So you don't -- it's not quite intuitive. But they are not all fixed.

Got you, thanks.

I think the other part of your question, Marty, is if you look at that in the variable-rate space, so the remainder would be about $52 billion, $53 billion; 35, 36 are LIBOR-based, so those were the ones that began getting the benefit late November.

But you wouldn't have seen anything in many of our prime rate portfolio, so home equity portfolios, because they look to December 31 and then go to the next reprice date, which is different for each customer before they look back. So it would start to occur over the 30 days into January.

Good. That was the mechanics I was looking for.

John Pancari, Evercore ISI.

Morning. Wanted to see if you can give us a little bit more color, Rene, on the loan growth front. Just in general, it appeared a little bit lighter when you exclude the impact of Hudson City -- a little lighter than what I was forecasting, and if you are seeing anything there for the quarter that impacted the level of growth.

Then separately on your outlook, I know you indicated that commercial and consumer growth should strengthen through the year. Just want to see what type of strengthening you expect within those portfolios. Thanks.

Yes. No, I didn't see -- we didn't notice anything unusual in the loan growth. I mean, I characterize it as strong because I think the numbers were pretty decent growth.

But I also know that, if I look to our loan committees, I think we had the second highest loan production in the fourth quarter on the commercial side that we've seen in several years for the fourth quarter. So things look relatively healthy.

And as a way of reference -- and of course I'm going to get this wrong -- but I think year-over-year we've been running at 4%, 4.5% loan growth or something like that. So I think there is clearly no sign that it's slowing.

In terms of the market, it's kind of interesting. We characterize it to still be intensely competitive, as other banks are really offering better pricing and then sometimes structure than we're able to. But on the whole, pricing in most markets is still coming down slightly. It's not stable, but it's still coming down.

Smaller banks are routinely below 200 basis points in terms of margin, maybe 150 to 160 basis points. We're seeing places where there is no recourse, limited covenants, and in some cases people waiving due diligence.

So for us, when we look at the growth, a lot of times what we're seeing is that we're able to do fairly well, but that's coming primarily from existing clients. They really focused on the fact that we're relatively proactive; we spend a lot of time with them; we know their businesses; and we're fairly consistent regardless of what's happening in the environment. So that's where most of our loans are coming from.

Each market is a little different, and we're trying to make sure that we avoid any pitfalls from that by not chasing people in a particular market without the knowledge to take on that customer.

I think I talked a little bit about -- I don't know if I have -- I have the number somewhere. But we saw growth primarily in our -- Philadelphia, Tarrytown, New York region. We had growth that was about 4% annualized; on a year-over-year basis, that was about 6%.

We also saw Pennsylvania was about 4%. And Baltimore, Washington was about 2%; and remember that Baltimore had been relatively slow for us, so, we're pleased that that's actually continued to do pretty well.

The opportunity is different in every market. In upstate New York, which has been relatively slow, there is a huge construction boom, and that's where most of the job energy is coming from. There's knock-on effects in the other businesses, but that's what's driving it.

But if you get down to Washington, DC, it's a different set of factors. So it varies by region.

Okay, that's helpful, Rene; thank you. Then separately, just want to see how much you can comment on this. Just wondering if you can give us an update on the status of your efforts to meet the remaining parts of the regulatory agreement around the BSA/AML deficiencies. Want to see where you stand there; at least give us an idea of the timing maybe in terms of how long it could take to address the remaining parts of that. Thanks.

Yes, thanks for the question, John. I'll start by saying I'm not sure. I think that we've got our BSA program well in hand and off and running. We substantially completed everything that we think we need to do there.

Really what ends up happening -- to happen is you've got to go through -- you go through your normal annual exam cycle and make sure that you're really buttoned-down. So we're very heavily focused on that, and remediating any additional customers that we have to, which at this point in time would be all in the low-risk category because, of course, through the course of last year we got through the high-risk and moderate customers.

Obviously, we have to do a really good job of making sure that as we put Hudson City onto our systems, that all of those capabilities at the conversion extend over too. So we're focused heavily on that.

The other piece I would put into perspective, which is not directly related to the written agreement per se, is that we continue to just focus on all of the rest of our risk management. We think it's really important, whether it be in the compliance areas or whether it be in modernizing or continuing to elevate our CCAR process.

So that's where our focus is on. I think the written agreement over time will just take care of itself; but we don't really control the timing, and it's hard for us to be able to estimate something like that.

Got it. All right. Thank you, Rene.

David Eads, UBS.

Hi, good morning. Maybe following up with some of the loan commentary you just had, I'm curious. We had the regulators come out on -- you're talking about conditions in the CRE market. I guess I'm more curious whether you think you've seen any impact of that and whether you think that's going to have any real impact on the competitive environment for CRE lending from some of these smaller banks.

I don't know. It's interesting; we had an annual update that we do on our real estate in our Board meeting in November before all that stuff came out, and it sort of mirrored everything we said and talked about, sort of mirrored what the Fed is seeing.

So those trends are definitely out there. I think one of the things that's clearly happening at this point in time is that there is still not -- -- in the overall market -- some markets may be different, but there is not yet an oversupply. And to us it's a bit of a warning that you've got to keep -- you've got to watch out for your underwriting.

As you know it's a great question to ask us, because we definitely have a concentration there, particularly in the New York City area. But we tend to not change our underwriting standards.

For example, if you look at our entire real estate book today, total CRE, whether it's in owner-occupied or IRE, our loan-to-value is 59.5%; and in investment real estate it's 58.3%, all right? So our intention is to remain really conservative. We stress cap rates as we begin to -- as we underwrite, as we look at what might happen in that space.

But having said that I think if you were less sophisticated, if you were smaller, it does -- and given some of the things seen, I think everybody is right to be concerned. You've got to be very prudent.

Having said that, there are a lot of great customers out there who are doing great projects which can be underwritten at the right amount of risk and for the right price. And those tend to be customers that we've known for a fairly long time.

Thanks for that. Maybe more broadly on loans, just to confirm, when you talk about guidance for low to mid single-digit loan growth next year, that's off of the 2015 ending balances; correct?

Yes, that's the way to think about it.

Right. Should we think about -- it sounds like (technical difficulty) the net loan growth is fairly encouraging to me, and it sounds like it's much more driven by a stronger outlook for the nonmortgage categories rather than expectations for less runoff in the mortgage book. Is that a fair read?

I think it's a fair read. I think the one thing I might recharacterize is on the existing book of business. What I would say for me personally is that we for a long time have watched loan growth and had sort of a tepid view towards it. Will it keep staying that way?

It's really clear now that the loan growth trends have been really consistent and very solid. So my sense is we don't see any signs of them abating. And, quite frankly, as I said our production in the fourth quarter was relatively high, so slightly positive in my mind in terms of confidence.

Okay. That's really helpful. Maybe just one last one. I know there's a lot of movement in the allowance this quarter when bringing on Hudson City loans. But now you're at about a 1.1% allowance coverage.

Is that a reasonable -- are you guys comfortable with that level? Is that the way we should think about the allowance in the near term?

Well, you know, this is our job to make sure we do a good estimate of what we think the inherent loss is in the portfolio. And it just so happens that when you look at the Hudson portfolio that we're bringing on, not only is it mortgages, right, which are naturally going to have a lower loss content in the overall book; but the portfolio at Hudson City, the majority of the portfolio has very good credit statistics.

I think it's something like, over the last 16 quarters their loss rates have been about 20 basis points. And then if you look at the current LTVs of the $19 billion, they would be at 59.7%. If you look at the original LTVs, they would be at 67.9%. And good FICOs.

So I think there is some subset -- mainly the $1 billion that we talked about that have higher delinquencies than the typical M&C portfolio. But the majority if not all of those loans went to the impaired loan -- the SOP 03-3 category that we talked about.

We concentrated those in there. We looked for those in the portfolio to segregate them out. Okay?

Great. Go ahead.

No, no; that's good. I think the other thing I would say and point to you is, remember, that portfolio is generally going to be running off, so there will be a natural migration back towards our typical allowance ratio.

Right. That makes a lot of sense. Thanks.

Bob Ramsey, FBR.

Hey, good morning, Rene, Don. First question for you. When you talked about the net interest margin outlook, could you share with us what the interest rate assumption is that underlies that outlook? And then let us know what the rate sensitivity looks like today with Hudson City on the balance sheet.

Yes. I think we had two hikes in that, in the forward rate we were using. Yes. In terms of the interest rate sensitivity, I think we've given that number before; bear with me one second.

Sure.

Yes. We would see about a 3.2% increase in the margin for a 100 basis point move in rate up.

Got it. Then circling back to loan growth, it looks like if I add in the $19 billion of fair-valued Hudson City loans in the fourth quarter, balances are about flat for the fourth quarter, with obviously some runoff in Hudson City being offset by the growth at M&T. Is that fair? Because I'm just rounding to $19 billion; I don't know the exact dollars.

I think you've got to remember that the number we gave you, which I think was $13.3 billion, because -- if you're using averages, we only had two months I think. So you only would take out in that average $13.3 billion.

Okay. I was looking at end-of-period to end-of-period. So taking end-of-period M&T, adding $19 billion, and then getting to the end-of-period consolidated.

Give me a minute. I've got some end-of-period balances. No, we had growth -- our annualized growth in end-of-period in C&I was 3.7%; CRE was 6.6%; total commercial was 5%; consumer was 7.8%.

I guess what I'm asking is: Was that offset by the Hudson City runoff? Because if your total end-of-period in the third quarter was $68.5 billion and you add $19 billion, that gets you $87.5 billion, which is where you ended the year.

I think the number -- I've got to get the adds; that's right. So maybe we're looking at there's -- oh, so first of all, I'm going to get it in concept and then I'll have to go back.

Yes. There is run-off every month in that. The end of period -- by the end of the period, that portfolio from Hudson was $18.4 billion.

Okay, and it came on at $19 billion, so you add $600 million of runoff then, right?

Is it at $18.8 billion? $18.6 billion, you're saying, in the opening balance sheet. So we had $200 million of runoff.

Okay.

Those are my estimates quickly to do that, but --

Got it; okay. That helps. That's what I needed, then.

Then in terms of credit quality, obviously credit looks great. Are there any signs anywhere in your book of softness or areas of potential concern? I know you're not really big and energy; but outside of anything energy-related is there anything else out there that shows softness?

How do I say this? The answer is no, not in any particular category. Our nonperforming loans were exactly the same as they were a year ago, which is interesting in the sense that it means that there are some things coming in and some things going out -- which we've seen economies where it's better than that.

But if you think about like even in the quarter the types of things we saw going into nonperforming, there was a beverage wholesale distributor, which I always think should never go into trouble; there was an educational company; there was a provider of fiber optics; auto dealer.

So no themes at all really. Maybe just I would call them almost idiosyncratic issues.

Okay; good to hear. Last question and I'll hop out, but can you remind me how much of these seasonal increases in the first quarter -- I guess especially now on a combined basis -- in that salary and benefits line.

Yes, Don, what is that number?

It would be in the range of $40 billion to $45 billion -- million, sorry. Some of the stuff would be affected by the Hudson City employee base; for example, the FICO reset. But the major component of that is the cash bonuses and the equity grants which they will not be impacted with. So Hudson will not have as huge an impact as the legacy M&T employee base.

Okay, but all together $40 million to $45 million lift in the first quarter?

Yes.

Okay. Thank you.

Geoffrey Elliott, Autonomous Research.

Hello there. Another question on credit. When you're looking for early indicators that the credit cycle might be turning, what are the sorts of metrics which have (inaudible) flagged red earlier in the past? And how are they performing now?

When we say that things look stable on the credit front, we're looking at all measures. We're obviously looking at our own statistics in terms of delinquencies and early-stage delinquencies, which have all been pretty quiet on the front.

One of the things that we've -- that piqued our interest is that, obviously you see in the market the spreads for -- the high-yield spreads going up; and so when you take those out, ex-energy, one of the things we noted is that in that lower level, lower tranches of the CMBS market, since June of last year they're up 200 basis points.

So actually if you take high-yield bonds, ex-energy, they are up 200 basis points in that period. If you take CMBS, they're up 200 basis points. Bank spreads are up a little over that same period too.

So we particularly look at that, and then take a look at the underlying credit metrics. The only place -- and it's not in M&T's book -- on a national level where you see both higher spreads and higher delinquencies is in the indirect auto space. When we look at our book, maybe because it's so concentrated in the 700 FICO space plus, we've actually seen no deterioration there. So those are some of the things we've been looking at lately.

Then just as a follow-up, those market indicators that you follow, do you think there are reasons why the relationship might not work the same way as in the past? Or do you think the historical relationship should hold?

(laughter) It's a great risk management question. I don't know. Look, I think that you -- our MO has typically been to be more cautious, which has resulted in slower growth when times are great and everybody's available to lend. And when you look at the market today, the one thing that I would say that we're seeing is not only are all banks healthy, large and small, but you've got the debt funds in the market, you've got the insurance companies back in the market, and you saw some of the trends that we're talking about. So in our minds, when we look at our reserves, for example, we tend to look at the idea that these loans are being underwritten at historically -- there's more pressure on people to do deals in the lower structure and those types of things. So that means the lost is inherent and all books are probably growing a little bit when you get to these phases.

I guess the other thing that I would say is what sometimes gives us pause -- and in this year we saw a couple of these things. When we look and we see that we've lost a customer and someone has taken our loan out that was actually a classified loan for us, that tends to worry us.

If I take myself all the way back to the 1980s, I remember lots of banks that were reporting low delinquencies and no foreclosures. But when you look at the underlying reason it was because somebody was willing to refinance that buyer out, and so all the losses were hidden.

I don't think that changes. I don't think you can always see it in your statistics, so you have to be very careful when times are good, because that's when the difficult loans are made.

Thank you.

Brian Klock, Keefe, Bruyette & Woods.

Hi, Rene; hi, Don. Just a couple of quick follow-up questions. Rene, in the other revenue from operations, so it was $118 million, it was up $15 million from last year's fourth quarter. The third quarter had, what, $14 million in gains, lease-related gains. So I guess the sequential increase still seems like there is maybe $18 million or $19 million quarter over quarter increase.

Is there anything in there that's nonrecurring or seasonal?

Well, you know what? We had a really strong quarter in terms of commercial loan fees. These are fees on origination or large syndication fees both -- some in size but also in volume. What I would say is those tend to be relatively lumpy.

The gain that you saw from the -- in the third quarter was also related to one of our commercial businesses, our commercial leasing business. So I wouldn't expect every quarter to look like this one by any means. But having said that, I step back and say: Well, on a year-over-year basis, the business seems to be doing pretty well and there is a fair amount of activity.

Okay. Fair enough. Then two last questions, Hudson City related. I guess thinking about the tax rate from Hudson City was higher than M&T's core. I guess after the adjustments for the tax credit, what should we be thinking about for a consolidated tax rate for 2016?

(laughter) I can give you the theory but I don't think I can give you a tax rate. Obviously, we had the tax credits there, so you've got to adjust for that; and you can see where M&T has been running as you do that.

Then we often talk about the marginal tax rate for the next dollar of income. That will be up slightly from where our marginal rate was before.

You'll have to take a look and get a reset as we get into the first quarter; but up slightly after you normalize for the $4.6 million. And when I say slightly, I'm very cautious to say that, because I don't know how much you'll notice it.

Okay, okay. Then last question, just with Hudson City in the books, still feeling good about the mid single-digit accretion for 2016?

Yes, yes. I think we saw some accretion. I think I would say an estimate for me is maybe $0.05 accretion in there from Hudson City in this first two months for the quarter. So that would be -- that would put us right on track if you think about achieving the rest of the cost saves.

All right; sounds good. Thank you for your time.

Gerard Cassidy, RBC.

Hey, Rene. How are you? What's that?

They always put you way in the back of the queue.

I know. I guess save the worst for last, I guess. A couple questions for you.

One, can you give us an update? Obviously you're transitional Tier 1 common ratio came in at about 11% -- just shy of above 11%. We all know everybody has to carry extra capital to make it through CCAR.

Can you remind us what you are comfortable with in terms of keeping a buffer above what you think you need to get through CCAR in terms of this Tier 1 common ratio? Because 11% seems awfully high to me.

Yes, 11% is very high. Think of it this way. We were just over 9% when we entered our first CCAR, and we obviously got no objection. But we also -- the point I'm making here would be we fared well on a quantitative basis.

And then when we entered the second time we were below 10%. We were maybe -- I don't know, 9.80% or $9.70 or somewhere in that range; and we also fared well. So that began to give us some sense of where we needed to put our target governance. In those areas is where our target governance sits, where if we started to get lower than that that we would be thinking about our governance process and maybe not having buybacks and those types of things. But as you can see, we're well above that.

Right.

We're above that because of a couple of things. Obviously, this transaction. But now we're generating capital at a very, very, very high rate.

Correct.

So our thought process is that our optimal capital structure is definitely lower than where it's at today. But we'll have to work our way through the CCAR and go through that process.

Having said that, when you look at this, to us it's one of the more important things. I mean it's why we would go to pretty heavy lengths to continue to invest and make the CCAR process like perfectly linked with the rest of our processes in the Bank, because it's so important to be able to do well and to be able to show your risk profile so you can return that capital. So that would be our view and our intent.

Last year, if I recall, I think you lost -- through the CCAR process your capital was reduced by just under 300 basis points. If we say the bogey for everybody is 5% Tier 1 common after CCAR, which in your case if you add 300 that would get you up to 8%; and obviously you'd never want to run at 8%.

Could you actually lower your Tier 1 comment to 9% if you wanted to? Or would that be some sort of violation of governance that you'd be hesitant to do that?

Well, no, I think you've got to go through your process. The idea that you would dramatically start lowering your capital ratios I don't think makes much sense.

We tend to think about moving it in the right direction. But having said that, as I just framed, that's probably where our optimal capital structure is, in that range, right around what you're talking about and framed by our last couple of CCARs.

So there's a lot of excess over that, not quite 200 basis points, but near that. And you're on the right topic.

The way I think about it, Gerard, is I was looking at the fact that as we talked about we grew, I think we said 13%, our tangible book value per share. So we've done that. We're probably over our target capital ratios in generating that growth in tangible book value per share. So the good news is we haven't destroyed it or wasted it. laughter)

Right.

At the end of the day we've got to protect it until we have the opportunity to return it to you or invest it in something that's above the returns that we get today.

Sure; which leads me to the next question. I believe last year your combined return of capital, dividends and buybacks, as a percentage of earnings was under 50%. I'm guessing you're probably going to ask for more, once you get all the scenarios that they are going to give you guys for CCAR.

But are you guys comfortable being in that 80% to 90% of earnings like some of your regional peers are at already in returning that capital to shareholders?

Well, I think for us what I would say is that -- you're right. We've been -- we've maintained a much more conservative posture in terms of payout ratios; and there is nothing on the surface that you could see that would suggest that we shouldn't be returning capital at the same rate as others.

If I break that down for you, I think now what you're going to see in terms of our peer group that we share with you in our investor decks, we would now have the highest Tier 1 common ratio but for one. But the most important thing also is we're generating capital at probably at a faster rate as well.

So there's nothing that would suggest, once you get through your stress test, you look at your risks -- one of the risks we'll be looking at is our new concentration risk with mortgages in New Jersey. But as I should point out to you, when we ran the last two CCAR tests we had New Jersey in it, and we had those presumed-to-be-acquired loans in our stress test.

So we'll focus on that. But to your point, there's nothing that would suggest that we shouldn't be able to return capital at a rate at least consistent with others.

Great. Then just some quick questions. The Federal Reserve -- Congress has reduced the amount of dividends the Federal Reserve will distribute to their members. I believe Bank of America said today it's going to cost them $50 million a quarter.

Have you guys come out with anything that might affect you, assuming it affects you?

It's about $9 million, the change.

Okay. Then finally on your tech spending, you mentioned that you're spending additional monies or continuing to spend on tech. Can you give us an idea? As a percentage of total expenses, is it 5%, 10%? Any kind of color there?

How do I do that? No, I think -- I'm going to get it wrong if I do, because I don't have it off top of my head. But I think we're talking tens of millions of dollars when we talk about increasing the rate.

And if we can accelerate the rate of that technology spend a bit, we'll be in good shape. Would you notice it? You might notice it when I step back over six months and the full year, that we would be able to talk to you about how much that is.

And I guess the reason for that is that when we think about technology we've kind of shortcut it a bit. We've talked about just IT, but it's not just buying a system and putting it in. We're doing a lot of process change.

For example in the wealth and institutional services division in Wilmington, we're looking a lot at the different capture systems when a customer gets onboarded, and going from that end and streamlining and changing the process, which involves automation. So it's not like you just turn the spigot on very fast; it will be a gradual rise, and we've been focusing on that a couple of quarters.

So, I don't know. Don't think huge jump. Tens of millions maybe but not a huge jump, and we'll probably talk about it more as we get through 2016.

Great. Thank you so much for your time.

Thank you. That was our final question. I'd now like to turn the floor back to Don MacLeod for any additional or closing remarks.

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

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