M&T Bank Q1 Earnings Conference Call: Full Transcript

Operator:

Welcome to the M&T Bank First Quarter 2016 Earnings Conference Call. It is now my pleasure to turn the floor over to Donald MacLeod, Director of Investor Relations. Please go ahead sir.

Donald J. MacLeod: Investor Relations:

Thank you, Lorry and good morning everyone. This is Donald Macleod, I'd like to thank you all for participating on M&T's first quarter 2016 earnings conference call both by telephone and through the web cast. If you have not read the earnings release we issued this morning you may access it along with financial tables and schedules from our website www.mtb.com and by clicking on the investor relation link.

Also before we start I would like to mention that comments we made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings including those found on Form 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

Now I would like to introduce our Chief Financial Officer Rene Jones

Rene F. Jones: Executive Vice President and Chief Financial Officer:

Thank you Don and good morning everyone. As noted in this morning's press release M&T's results for the first quarter reflect reflected strong growth in net interest income, which was driven by an expansion of the net interest margin and solid loan growth, controlled operating expenses and stable credit performance. All of these contributed to an 11% growth in diluted net operating earnings per share over last year's first quarter.

As we noted on the January call, we closed the merger with Huston City and restructured its balance sheet in last year's fourth quarter. In the first quarter, we completed the migration of Huston City's customers to M&T's products and services, as well as the conversion of its branches, systems and operations on to M&T's platform. Huston City's risk management framework has been fully integrated into M&T's risk governance structure, and our task now is to continue to evolve the Huston City, continue the evolution of Huston City from what was essentially a monocline drift into a real commercial bank, which will of course take some time.

Overall we feel the first quarter was productive one.

As we usually do, I will start by reviewing a few of the highlights from M&T's first quarter results after which Don and I will be happy to take your questions.

Turning to the results, diluted GAAP earnings per common share were $1.73 for the first quarter of 2016, improved from $1.65 in both the first quarter and fourth quarter of 2015. Net income for the quarter was $299 million, up 10% from $271 million in the linked quarter and up 24% from $242 million in the year-ago quarter.

Consistent with our long term practice, 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 expenses associated with mergers and acquisitions.

After tax expense from the amortization of intangible asset was $7 million or $0.05 per common share in the recent quarter compared with $4 million or $0.03 per share in last year's first quarter and $6 million or $0.04 per share in the fourth quarter. Also included in the first quarter results were $23 million of pre-tax merger-related charges in the form of noninterest expense incurred in connection with the Hudson City acquisition. This equates to $14 million after-tax or $0.09 per common share.

Merger-related charges in the fourth quarter included $76 million of noninterest expense and $21 million of loan loss provision. Combined, those amounted to $61 million after-tax or $0.40 per common share. There were no such charges in the first quarter of 2015.

M&T's net operating income for the first quarter, which excludes intangible amortization and the merger related expenses, was $320 million compared with $246 million in last year's first quarter and $338 million in the linked quarter.

Diluted net operating earnings per common share were $1.87 for the recent quarter, up 11% from $1.68 in the year ago quarter. That figure was $2.09 in last year's fourth quarter.

Net operating income yielded annualized rates of return on average intangible assets and average intangible common shareholders' equity of 1.09% and 11.62% for the recent quarter. The comparable returns were 1.21% and 13.26% in the fourth quarter of 2015. And in accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP, non-GAAP results including tangible assets and equity.

Turning to the balance sheet and the income statement, taxable equivalent net interest income was $878 million for the first quarter of 2016, improved by $65 million or approximately 8% from the linked quarter. About $45 million or some 70% of that increase reflects the full quarter of Hudson City's results compared with two months in last year's fourth quarter.

Contributing to the growth in net interest income was a six basis points expansion of the net interest margin to 3.18%, up from 312 basis points in the fourth quarter. The primary driver of that increased was the full year quarter effect from the Fed's mid-December action to increase short-term interest rates, while the benefit from the day count in the shorter quarter was largely offset by the diluted impact from a higher level of deposits placed at the Fed.

Average loans increased by 8% or $6.5 billion compared to the linked quarter. This included a 27% or $5.5 billion increase in residential mortgage loans which primarily reflects the impact from the full quarter of Hudson City results.

Looking at the other loan categories, on an average basis compared with linked quarter, commercial and industrial loans increased $497 million or an annualized 10%; commercial real-estate loans increased $452 million or about 6% annualized; consumers loans grew at an annualized 1% with growth in indirect auto loans offset by a decline in other consumer loan categories.

The loan growth was broad-based. Excluding the impact from Hudson City mortgage loans, we saw a 6% annualized growth in upstate New York, 5% annualized growth in our metro region, which includes New York City and New Jersey, 9% annualized growth in Pennsylvania, and 4% annualized growth in Baltimore, Washington-Delaware region.

I would note that end of period loans grew by 2% annualized with a 15% annualized decline in residential mortgages, more than offset by 9% annualized growth in other loan categories.

Average core customer deposits, which exclude deposits received in M&T's Cayman Islands office and CDs over 250,000 increased by an annualized 32% from the fourth quarter, also reflecting the impact from Hudson City.

Turning to noninterest income, noninterest income totaled $421 million in the first quarter compared with $448 million in the prior quarter. Mortgage banking revenues were $82 million in the first quarter compared with $88 million in prior quarter, largely the result of a $5 million decline in commercial mortgage banking revenues to about $22 million, down from $27 million in what was a solid fourth quarter.

Similarly, credit-related fees were lower by $14 million coming off what was also a very strong fourth quarter. That decline is largely related to fees that are often event-driven such as a syndication fee and can vary somewhat from quarter-to-quarter. Several fee categories were impacted by the typical seasonal factors that we see. For example, fee income from deposits service charges provided was $102 million during the first quarter compared with $106 million in the linked quarter. Trust income was also down modestly.

Turning to expenses, operating expenses for the first quarter, which exclude merger-related expenses and the amortization of intangible assets, were $741 million compared with $701 million in the prior quarter. We continue to be pleased that we've kept expenses relatively stable while absorbing Hudson City as well as funding our technology and other initiatives. This is reflected in our efficiency ratio, which was 57.0% for the first quarter, improved by 450 basis points from 61.5% in the year-ago quarter. We estimate that approximately 280 basis points of that improvement is attributable to the merger and 170 basis points is from M&T's legacy operation, the result of our ability to grow revenues at a faster pace than expenses following several years of strengthening our infrastructure. The efficiency ratio was 55.5% in last year's fourth quarter.

As usual, the first quarter comparison with the fourth quarter reflects our normal seasonal increase in salaries and benefits relating to accelerated recognition of equity compensation expense or certain retirement eligible employees, the 401(k) match and the annual reset in social security or FICO payments and similar items. Those items accounted for an approximate $40 million increase in salaries and benefits from the fourth quarter, similar to last year. As usual, those seasonal factors will decline by some $30 million to $35 million as we enter the second quarter.

One item worth noting is the increase in FDIC assessment to $25 million in the first quarter from $20 million in the fourth. This reflects in part the fact that one component of the FDIC's assessment calculator looks back at Hudson City's earnings and treats them as if the Hudson City merger had been in place for the entire year instead of just the final two months of 2015 and notwithstanding the fact that Huston City paid its own FDIC assessment as an independent company through the first three quarters of 2015. This factor will normalize as we move later into the year.

Also as you know, the FDIC has imposed a surcharge on large banks to recapitalize the deposits and insurance fund more quickly, likely starting in the third quarter. We estimate that this will add about $5 million per quarter to our assessment expense starting, as I said, in the third quarter.

Next let's turn to credit, our credit quality remains in line with our expectations, which is to say strong with continued low levels of nonaccrual loans and net charge-offs. Non-accrual loans increased to $877 million and the ratio of non-accrual loans to total loans was 1% at the end of the recent quarter.

The $77 million increase from the end of the fourth quarter is primarily attributable to Hudson City mortgages. As you know, loans obtained from Hudson City that were 90 days past due as of the acquisition day were recorded as purchased impaired loans, and in accordance with GAAP, interest continues to accrue on those loans despite their delinquency status.

Appropriately, those specific acquired loans were not in the non-accrual balances as of either March 31st 2016 or December 31st 2015. The higher level of non-accrual loans at the end of the first quarter reflects the normal migration of approximately $80 million of previously performing loans that became more than 90 days past due during the recent quarter, and which could not be deemed as impaired at the acquisition date because they were paying at the time of the merger.

As a result, we should continue to see a migration of the Hudson City loans acquired at a premium into and eventually out of non-accrual status as this process normalizes to a more steady state through the passage of time.

Net charge-offs for the first quarter were $42 million compared with $36 million in the fourth quarter. During the first quarter of 2016, M&T charged off loans associated with consumers who were either deceased or filed for bankruptcy that in accordance with GAAP had previously been considered when determining the level of allowance for credit losses. Such charge-offs totaled $14 million in the recent quarter, and included $11 million of loan balances with a current payment status.

Annualized net charge-off as a percentage of total loans were 19 basis points for the first quarter, up slightly from 18 basis points in the previous quarter and matching the figure we reported for each of the past two calendar years.

The provision for credit losses was $49 million for the recent quarter, exceeding net charges offs by $7 million and the allowance for credit losses was $963 million, amounting to 1.10% of total loans at the end of March. Loans 90 days past due, which continue to accrue interest, excluding the acquired loans that have been marked to fair value at the acquisition, were $336 million at the end of the recent quarter. Of these loans, $279 million or 83% are guaranteed by government-related entity.

Turning to capital, M&T's common equity tier 1 ratio under the current transitional Basel III capital rules was an estimated 11.06%, a little change from 11.08% at the end of 2015. Recall that the capital plan M&T submitted in connection with the 2015 CCAR process and which received no objection from the Federal Reserve included the repurchase of $200 million of common stock over the first half of 2016. We began execution of that buyback program in January, and expect to complete it by the end of the second quarter.

In addition, because the completion of the Hudson City merger occurred later than contemplated in the capital plan submission, we did not pay all of the projected dividends associated with the M&T common stock that was issued as a merger consideration. As disclosed previously, the distribution of that capital, some $54 million, is being redirected into the repurchase program for the second quarter of 2016.

Now turning to the outlook, as is our usual practice, without giving specific earnings guidance, we would like to offer our thoughts as to how we are tracking against the outlook for the full year that we gave to you on the January call. Loan growth this past quarter was largely in line with or slightly better than our expectations with solid growth in commercial loans in both commercial and industrial and commercial real-estate loans, partially offset by slower growth in consumer loans and the expected decline in residential real estate loan.

We were pleased with the strong performance of our net interest margin. Our outlook on the January call for stable net interest margin was predicated on two increases in the Fed's funds target in the calendar year 2016. More recently, the forward curve is implying one increase in mid-year which would still be a benefit. To some extent, the margin is dampened by our decision to maintain pricing on Hudson City's time deposits which we will revisit overtime.

Fee revenues are in line with our expectations given the normal seasonal effects that we talked about. As is normally the case, we would expect the seasonal increase in salaries and benefits during the first quarter to reverse itself again to the tune of some $30 million to $35 million in the second quarter and we remain on track with realizing our expected cost savings from the merger.

Overall our basic outlook for expenses is unchanged. We remain focused on producing modest positive operating leverage on a year-over-year basis. Our outlook for credit is a little changed over the short term. While we've had a little or no impact from the energy-related credit headwinds that others are seeing, the current low level of losses has persisted for over two years.

Overall, our areas of focus for 2016 are fairly straightforward and relatively consistent with what we've talked about in the past: to continue to improve the efficiency of our balance sheet with an emphasis on building out our commercial banking profile in New Jersey; to manage the revenue expense dynamic to produce positive operating leverage; to capitalize on the M&A-driven disruptions within our footprint; and to optimize our capital structure while conforming with both regulatory capital threshold as well as the annual stress test.

Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.

So now let's open up the call to questions before which Lorry will briefly review the instructions.

Question & Answer

Operator:

At this time I would like to inform everyone if you would like to ask a question please press star than the number one on your telephone keypad. Your first question comes from the line of Brian Klock of Keefe, Bruyette & Woods.

Brian Klock: Keefe, Bruyette & Woods Inc.:

Hey good morning Don and Rene.

Rene F. Jones:

Good morning.

Brian Klock:

So Rene the loan growth and the period loan growth was very strong in the C&I book. So interesting it seems like the Gary Keith survey that he did in February it seemed to be directionally down sort of like the NFIB survey that just came out a week ago that seem to be more negative. But it seems like the loan growth maybe later in the quarter picked up on the CNI side. So maybe can you talked about what you guys saw was it in certain region that you saw stronger CNI growth and others.

Rene F. Jones:

Not really and I think Brian I try to gives those total loan growth numbers which we driven most of that obviously commercial and it was pretty strong across the board. Maybe slightly more leading towards commercial real-estate in western New York. But other than that CNI growth is strong across the board. I think the thing that impress me most was we get our results when we look at them.

But them preparing for the call we tend to look at the quality, so what is the quality of the loans, what's the pricing and we're able to get the growth without seeing deterioration and the margins and you know total return that we're getting on that populations loans. One of the other thing that I think was interesting is that, in some of our markets Philadelphia, Pennsylvania, and New Jersey upstate New York and to some extend and Washington DC and New York city.

We saw the margins actually and new deals come up maybe 20 to 25 basis points, which we I guess estimated that had to do with widening spreads that we saw on the capital markets and the slowdown in the CMBS market it has some small effect. So I was very encouraged by what we saw, I thought the pace was pretty even and I think our pipeline continue remained fairly robust.

Brian Klock:

Okay, and so again so the outlook is for overall loans growth is probably a muted by the rising market mortgage run off coming out of Hudson. But do you think the C&I and commercial real estate would be as strong as was in the first quarter.

Rene F. Jones:

Well I would say this, we're going to stick with our outlook for January. I am really pleased with this quarter may get a little lumpy here and there. But I don't see anything that suggest that things feel little better than they did for the whole of last year started off.

Brian Klock:

Okay and then one last question, can you break out that residential mortgage decline linked quarter how much of that was Hudson City versus core M&T?

Rene F. Jones:

There wouldn't be any of the declined, remember almost all of the client is on the commercial side. So and that's coming off a pretty strong first quarter, we had about a 10% increase in our quarter end pipeline for residential mortgages. So we started of slow we've kind of made up or and as we went into April here volume still remains pretty decent, and then Hudson City I don't have the exact numbers, but we did begin we do have production in the first quarter of production that we would have seen in doing the normal gate agency stuff that we selling to the market.

Brian Klock:

Okay thanks for your time Rene.

Rene F. Jones:

Sure. Thanks, Brian.

Operator:

Your next question comes from a line of Ken Zerbie of Morgan Stanley.

Ken Zerbie: Morgan Stanley:

Great. Good morning.

Rene F. Jones:

Good morning.

Ken Zerbie:

First question just in terms of a Hudson City loans that we down accrual to $80 million. Just when you have a sense of magnitude is that is that a normal sized quarter or was a little heavier or little weaker just trying to get sense of how much we should be expecting going forward?

Rene F. Jones:

Yes I mean, it's a normal pace so we're seeing probably I mean just to this roughly $25 million a month. Roll into the delinquency status but you know have we not done the acquisition accounting you would see a similar amount rolled out. So considering next to Mike Spychala so -- going to kick me when I said it's.

But as rough proxy this quarter if you go in the press release and you look at page 11, you will see there is a we disclosed purchased impaired loans, you will see that those came down $80 million. So those would the ones that are still on accrual status and so you'll get a normal migration in and normal migration out. So I think what that means is as a percentage of non-performing as a percent of that book it will continue to drive. I would expect and about the same pace that it is that you saw this quarter.

Brian Klock:

Got it. Okay that helps and then just with the expenses the $30 million to $35 million seasonal that comes out in second quarter just want to make sure that we are using the right base the 753 that you reported this quarter. I know there is just a lot of moving parts with Hudson's City but is that the right base used or you serving the $720 million range next quarter or is there any other moving pieces.

Rene F. Jones:

I am using which you might not be obviously but I am using 741, yes, because remember you have got or you also having the numbers you have sounds like you can't see the onetime expense that are in the salaries. So if you take out the merger related expenses and you take out the -- you had 741 and I am when I say its $30 million to $35 million I mean off of that number.

Brian Klock:

Okay but off of that number that is the right base to use.

Rene F. Jones:

Yes.

Brian Klock:

Okay. All right perfect. Thank you.

Operator:

Your next question comes from the line of John Pancari of Evercore ISI.

Rene F. Jones:

Hi John.

John Pancari: Evercore ISI:

Good morning. Just wanted to ask on the fee income side again around service charges I know you give us little bit of color around seasonality, on a year-over-year basis service charges were flat. How should we think about what's going on there and how that think about the growth as we model out?

Rene F. Jones:

I mean I don't see anything unusual in those numbers. We know that commercial mortgage origination fee income since we lumpy you saw that we talked last quarter about the fact that the third and fourth quarters in commercial loan fees was very, very strong. So that bounce back down I would expect that to come back at some point and continue to be a little bit of lumpy just can't predict exactly how it's going to be work.

So, there was nothing there that really concerned me I didn't changed my outlook or view of what's going to happen for the year based on what I saw this quarter.

John Pancari:

Okay and you would see the same thing around the trust income obviously that was impacted by the markets etcetera, but nothing really changing your view there?

Rene F. Jones:

No let me explain not a little bit. I think to me there is may be three factors there the market which you mentioned was probably a third of that extra million bucks and then we do have income from affiliate managers and we also offer collective funds to other relationships that we have and essentially you remember that both of those are down a little seasonal, a little bit about the actual balance is just being lower because of the market participation. On the collective funds you've get almost an equal offset on the expenses because right you just pasting that through.

So that was probably a third and then I think the last piece is probably just a bit a seasonal stuff that were tax reporting in those types of things you should see bounce back in the second quarter.

John Pancari:

Okay, alright, and then lastly just wanted to get a little bit more color on the efficiency ratio it kind of follow-up to Ken's question. But at the current level what you are your expectations for full year efficiency, how we should think about that thanks.

Rene F. Jones:

Well I think what I have been doing is that I just simply look at the first quarter results relative to last year's first quarter, and then I super impose that performance over on the full year and I think as I said obviously we got benefit from Hudson City but we've got a substantial benefit right now from the core M&T operations, and I think our job is consider to maintain that, and again we are just looking for over long period of time some modest spread between the two. So I don't the number in my head but I think if you do that you probably get somewhere around 54.5 or somewhere 54 range with you can do that

John Pancari:

Yep, got it thanks, Rene.

Operator:

our next question comes from the line of Bob Ramsey of FBR.

Bob Ramsey: Friedman Billings Ramsey:

Hey, good morning. Hope that you could elaborate a little bit, I know you mentioned that you all are maintaining city pricing on the Hudson City with the positive ways. I am just kind curious sort of what the time line looks for that? How you I guess what the interactions developed Hudson City customers so far when you think you will be able to start to migrate that to positive base.

Rene F. Jones:

Well you know I think the first thing I would say Bob is that we are sort of set up right. Because we spent the whole quarter getting ourselves on the same platform and systems and we spent also the whole quarter with our approach that from legacy M&T and the retail bank seating side to side with new Huston City employee, and so that training is been ongoing, and I think we will need more time some part of this year to make sure that those balance will stick around, and that we have the opportunity to interact with those customers overtime. One of the things that you're seeing is that we're getting about our prepayment speeds on the mortgage book of 15% so to say $300 million of a months.

But we haven't really seen a similar run off and in the time deposit time deposit book because we are maintaining those prices in the network to reach out of contact those customers to the course of the year. When we talk about some diminishments of our margin that's embedded in our margins to the top of the house.

So I mean while we're calling for a stable margin for the full year I wouldn't be surprise to see couple of basis points decline in next quarter, and you'll see that will be solely the effective maintaining those that sort of higher time account balance is in pricing. But that's totally in our control, so at some point as we target the customers that we are very focused on getting into this high probability that we can convert the rest of the book will just heard that process to normal rational pricing that we want to do in New Jersey and that will give us some benefit. But we are not in a rush we've got the ability to introduce ourselves to those clients, so we are going to make sure we do that.

Bob Ramsey:

Okay, that's helpful and could you remind me when you talk about a stable margin for the year are you sort of talking about stable in this 318 level or stable to 314 for the full year last year was it somehow in adjusted number included in included Hudson City.

Rene F. Jones:

We were talking about stable to the last years 4Q which was indicative of the post-merger so in 312.

Bob Ramsey:

So 312 is still sort of full year or you guys expect to shake out?

Rene F. Jones:

I don't think I expect significant change during the course of the year and if we were to keep our position where we are offering the current rates in New Jersey and in the metro market my sense is that the any fed rate hike of 25 basis points more than offsets it and we'll managed those two. So somewhere between what Don said and where were this is probably the right answers, but it's stable as the way to think about it.

Bob Ramsey:

Okay, great. And then last question on about but nice to see the uptake in loan you mentioned that reflected the fed increase. Just curious if from where we sit today is that fully factored in or is there any sort of lag follow on benefit you should see in the second quarter from what you said its already done.

Rene F. Jones:

No I think it's fully factored in right now.

Bob Ramsey:

Got it. Thank you.

Operator:

Your next question comes from the line of David Eads of UBS.

Rene F. Jones:

Hi, Dave.

David Eads: UBS:

Hi, good morning. Maybe if we could on the you talked a little bit about FDIC expense just want to trying to confirm is it fair to think about you've done a little bit of improvement from the kind of assessment based in Hudson City rolling off and then you guys step up in 3Q so basically it's kind of flattish for the rest of the year so is that a reasonable when you think about it.

Rene F. Jones:

Yes. Directionally that's right. We should see that increase we saw now roll off by the end of the year, but then we're going to add the -- per quarter for the assessment.

So fair way to look at it.

David Eads:

All right and then it was help to talk about the 170 basis points for core efficiency improvement, is that kind of in the fair way of what when you talked about kind of modest efficiency improvement or if you is that kind of on upper end where if you continued there you might want to front load from the technology expenses you talked you have more ability to do that.

Rene F. Jones:

Two things what you're seeing in this quarter is the work from last year and that has a lot to with we talked about lot of professional services that were in place that came down over the course of the year. We've only begun to really ramp up our technology spend so to give you some sense our technology spend this quarter was about $29 million higher than it was a year ago in the first quarter and my sense is that, that will continue to ramp up to the third and fourth quarters, before its hits a run rate level and that's why when we get the additional savings from the Hudson City that should dampen that somewhat and so you won't really see a big changes it's my guess overall.

David Eads:

Okay. That make sense and its good. Thanks for all right thanks for taking my question.

Rene F. Jones:

Sure.

Operator:

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

Matt O'Connor: Deutsche Bank:

Hello, Rene. Can you remind us the money market where ever within the trust fees how much that were in the fourth quarter as Cindy got some improvement there this quarter and then how much last if short-term go up further.

Rene F. Jones:

Well, I think I going to answer your first question in a minute, but I think yes, you are right. The full impact is in the quarter. Unless we were to see another rate increase, and just not I don't have the amount off

Donald J. MacLeod:

We will got back to that probably there will be a couple of million. So the -- previously disclosed would be just less

Rene F. Jones:

$6 million to $12 million a year?

Donald J. MacLeod:

No, it's more like 30ish.

Rene F. Jones:

I am sorry so 6 in the quarter?

Donald J. MacLeod:

Only we got that much.

Rene F. Jones:

Somewhere around there should be the full effect of the quarter. It'd be I think about $6 million but I am just doing that of my head.

Donald J. MacLeod:

But just expand on that little bit, the guys are little worried about our ability to fully recoup all the wavers given the fundamental changes that are happening in the money market industry. For example the migration of settlement accounts from prime funds in the government funds, and how will corporate customers take the redemption restrictions on prime funds and will they choose to go the other alternatives?

Rene F. Jones:

Yes, than I think our view on that is that we will be more conservative, to a less income in the near terms. But overtime may be more later but not this year.

Matt O'Connor:

And then I guess just more broadly speaking, there have been some changes in the trust business, maybe in the back half of last year. I mean how are you thinking about outside of market movement impacting that line, how are you thinking about the business and is there expense right-sizing you need to do may be for example for things like not getting the money market few wavers back overtime or just kind more broadly how do you think about the business?

Rene F. Jones:

Yes thanks for that. And I am glad you started that way. Because we spent I don't know good 18 months since we getting rid of parts of the business that we didn't really things we had a strategic focus on it. So you saw that year-over-year with the retirement business portion retirement business that we got rid of we've also got rid of a number of affiliated managers or those balances have run down. So I think just starting to get sort of core what we will keep going forward and underneath the things are going very, very well both in the global capital markets portion of the institutional client service business, and as well as on the wealth side of my sense is that still has underlying growth 4%, 5% in a revenue space.

But more importantly its heavy expense business, and so what we have been focused and I believe we just trying to make really good traction on is sort of streamlining the back office which comes in couple of forms.

Right, and sort of not that we've been in all of our controls in place, we are beginning to change our statement process we are beginning change our on boarding process. Which has an impact freeing of expenses, but it also improves the service quality, and so I think we will would be add that for the at least and at the year so, and it should from a bottom-line perspective continue to grow bottom-line both of those businesses have grown every year as we brought them on board. So we are pretty pleased with where they doing.

Matt O'Connor:

And then just lastly stick on this topic here, I mean holding the markets constant do you thinking to grow revenues in this segment and then on the expense side how much cost actually do come out as it streamline and back office you were just talking about.

Rene F. Jones:

Yes, you know I do think that I am absolutely positive that we can continue to grow revenues in this space. Remember one of things I guess I would share with you as I think about this in many places we are getting paid and balances. So be careful just looking at that trust line because in the global capital markets business we are making a choice either as we sign up new business sometimes we are getting paid fees, sometimes we getting paid balances.

So it's hard for you to see that total picture, and I would look back at don't look for that expenses a number because we are investing in that businesses, and so I would say widening margins is really what we are focused on. And so you know you might not see expense decline somewhere in average you should expect to see the whole business growth in the margins to bottom-line widening.

Matt O'Connor:

Okay, yes if I may just suggesting more detail on that business overall might be helpful. Because I just feel like it's been in decline from your revenue point of view has even kind of change in mix it may be helpful to show kind of a broader business how is performing longer-term if you are concern.

Operator:

Your next question comes from line of Marty Mosby of Vining Sparks.

Marty Mosby: Vining Sparks:

Good morning, Rene and Don. I wanted to ask you one the quick one restructured charges are we getting towards the end of that with integration of Hudson City or do we have a couple of more quarters to go there.

Rene F. Jones:

I think we are thinking maybe 10 may 14 million somewhere in there more both of which should be next quarter

Marty Mosby:

And then what's the transition of mortgage banking from Hudson City coming on board are you kind of seeing now what just kind of shifting out and a since of what's going to go on the balance sheet and portfolio or what really it's going to be securitized and just on origination capacity.

Rene F. Jones:

Yes I mean the much large majority of what we produce there, I think you will get a better up and running view maybe next and then after what that volumes looks like. But all of that is the majority is been we sold and where it's not and were done for a balance sheet it will be specifically either retaining the certain targets customers that are with us already, in balances may because they haven’t own a business or have a profile that we would like to see if we could bank them, but I think that will be harder to see as a segment I would trying to think focus on that government related type business that we are putting into securitization mark.

Marty Mosby:

And then when you talked about the servicing income being down was that the $5 million from the commercial side or was there any right down in servicing income related to the drop in long term rates towards the end of the quarter?

Rene F. Jones:

No right downs and if I used the word servicing I might have miss spoke it commercial mortgage origination income that was down.

Marty Mosby:

Yes that's what you have highlighted just in the press release there is something about servicing income but so that helps. Thanks.

Rene F. Jones:

A little bit of the pressure on the commercial side was servicing but more of that was more origination.

Marty Mosby:

Okay, thanks.

Operator:

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

Rene F. Jones:

Good morning.

Matt Burnell: Wells Fargo Securities:

Good morning guys, thanks for taking my questions. Just Rene may be a question for you related to deposit pricing it looks like that was helped pretty stable despite the action in December and you gave us some good information in terms of the loan growth by market.

I guess I am curious if you're seeing any deposit -- deposit pricing competition and I guess on specifically focusing on upstate New York given some of the people in that market that's been announce over the last few months.

Rene F. Jones:

No, not yet not seeing anything in any, we are seeing a little bit more on the advertising fund and those types of things but nothing that really as affected our book at this point. But its early.

Matt Burnell:

Fair enough, and then just as a second question you mentioned it will take a little bit a time to train the Hudson City team to be more of a true commercial bank how long do you think that will take.

Rene F. Jones:

Well are the folks are fantastic and as our RS and so I think the pure training will be done over the course of the summer I think will be run on our way I think it takes a long time this converting a thrift platform into a commercial bank and quite frankly maybe a better description that you actually are creating a commercial bank while you are rightsizing the thrift roughly you to think about it and we have done it before we did it in -- it just takes time but on an incremental basis here, a lot of folks are writing about well maybe M&T's balance sheet will grow that fast but the growth is never how we think about it. We think about transforming the quality of that book and so if we can make New Jersey look a more like full service commercial bank with also retail capabilities each year or so you will see a difference in it and it will improve the overall profitability profile. So it just takes time.

Matt Burnell:

And then just finally Rene you've got reserve to loans ratio at a 110 basis points its obviously down year-over-year due to Hudson City, but you did build the reserve little bit this quarter I guess I am curious how you're thinking about that trend over the course of 2016?

Rene F. Jones:

Similar to what you saw from the of first fourth to the first and then if I broaden your question overtime I would expect that's the migrate back up as the again similarly as we end up with the book that looks more like a commercial book and not residential mortgages we are tend to have a very favorable low loss rate I would guess that the history of the Hudson City charge-offs annualized charge-offs sort of less than 25 basis points, 15 to 25 basis points , right, so that's what campaigning that and does that down you will the allowance to the loan ratio move up.

Matt Burnell:

Okay. Thanks, Rene. I appreciate your color.

Operator:

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

Ken Usdin: Jefferies & Co.:

Hey Thanks, hey good morning guys. Hey Rene some at last point so now that we've got unless we've gotten three or four quarter of Hudson City is the kind of run down in the mortgage looking that migration towards the faster commercial growth. Is this about the pace that we would kind of see that run down and remix of it look back like the mortgage was down about a $1 billion sequentially?

Rene F. Jones:

Yes I think the short answer is the random walk answer is yes, right, but longer answer as you think towards the end of the year is to think about what mixed do we want to have of run off in the mortgage book and in the time book and right now they are miss match right one is running of, the assets are running of that are $300 million a month whereas the time is being held up. Both of those might normalize a little bit so that they are moving and think is the way to think about it and that will help us with any pressure on the margin but then we'll have to think about how long we deal with that right, because it is those two trades are very low margin trades.

Ken Usdin:

Yes and on if yes and in that regard do you have an idea yet of how big that you want to mortgage book to be as a percentage of either your loan book or your earnings asset mix so I am sure that got as a securities component to at is well right just from the total wage rates prospective.

Rene F. Jones:

So, in the near term all we are going to do we will sitting on a table and we'll look at statistics are we able to convert folks, what the offer do we have or they bringing over checking accounts right and we will go through that whole thing. But really if you think about it in the simple way the way out we've got a 130 branches no deposits for branch that you think will be healthy in our market and upstate New York 50 would be big, and sometimes in the places like Jersey or New York 100 would be more like sort of takes an average in there you can actually see that you are building $10 billion bank in the space right?

Ken Usdin:

Yes.

Rene F. Jones:

Over a long period of time and if we view as looking like a typical M&T footprint you kind of go there for over a long period of time.

Ken Usdin:

Right, okay and then last quick one you mentioned that you are on track as far as the conversations do you have sense of when you get to kind of your run rate savings on that conversations front what quarter we kind of get there in term of the cost saves.

Rene F. Jones:

Yes so Hudson right?

Ken Usdin:

Yes.

Rene F. Jones:

So this is way we are thinking about it. So prior to our acquisition their annualized expenses were above $280 million a year, we think if you look at the first quarter and you would annualized those expenses we would see about 230. So there is $50 million of savings that are taking place, we think that as we get end of the year maybe that's 190- 200 alright somewhere in that range, and then stays there until we build bank and grow the bank.

Alright, so it will take some time, but again I don't know that you'll see those remaining things. because we expect an uptick the offset by the things that we are trying to do on technology side.

Ken Usdin:

Right the other investments okay got it thanks a lot Rene.

Rene F. Jones:

Sure.

Operator:

Our next question comes from line of George Cassidy of RBC.

Rene F. Jones:

Hey, George.

George Cassidy: RBC Capital Markets:

Hi, Rene. Can you give us some color on the automobile lending business clearly you have been in the business for quite some time and we have been reading different stories about to set prime aspects having some stress particularly in the South West. How are you guys looking up at the automobile lending business?

Rene F. Jones:

Well we haven't changed much our volume that we've been doing in that business is been running or I think we are doing something like a $130 million a months of volume in the low point of that business when we were kind of shine away as we were uncertainties may be five years ago would be something like $80 million or $90 million and in the high point we may be we are doing $200 million when that business is really robust.

To keep in mind that we sort of stay in the prime space right, so for example this quarter, we averaged 729 our average score which is pretty consistent if you go back over four five quarters it's all around 725 or so is our average. So, with that said we are seeing growth because of their opportunities because of this a record year. Our pricing is really, really competitive and so that's what kept us in that $130 million a month because that's what formfitting our standards.

Within that most of that volume we're trying to direct towards the dealers that we also supply them we finance their () loan. So it's a trying to run at more, more like a relationship business. The one thing that you're seeing which we're in unlock step with although in a higher competitive credit profile is the delinquencies are moving is the one portfolio where you see an increase in delinquencies and to give you some sense these are rough numbers. But if we were at December of '14 I think 30 days plus was 1.97% and this quarter at the end of the quarter it was 2.32% or 2.36% right.

So similar migration that we are seeing and what I think is interesting about it is you don't see it anywhere else in any other portfolio which is the same nationally.

George Cassidy:

And what's your view on what's going on with the deal of reserves with the consumer financial protection where you guys move to a flat fee as few banks have done or what should on that.

Rene F. Jones:

We will watch what happens with the industry I think from the intelligence that I have people that have taken that move have seen in an immediate decrease in business but had number of folks have told me that subsequently overtime that's rebounded as the customer base get used to it and they get a slightly different make-up of the customer base that are rebound. So we will watch that overtime no decisions to change anything that we are doing right now.

George Cassidy:

Okay and then you touched on the integration of Hudson City obviously being first thrift you've got experience with doing these types of integrations was there any benefit from all the money you had spent over the years and upgrading your internal systems was this integration easier than what you've done in the past or did it go smoother because of the money you had spent.

Rene F. Jones:

Okay. So two things that answer two ways what the reason it was smoothly is because Hudson City was relatively uncomplicated we had a lot of time to think about it right and the lot of time to watch the portfolio. So our team is I shouldn't say but I will say that our team is really good and they have done a really good job over the years as these integrations and so that the lack of complexity was what made this goal so smooth I think.

Having said that we did have a much more robust approach sort of beyond the due diligence to looking at the integration area-by-area and monitoring the potential areas for risking and closing them down so for example as we run into this conversation specifically focused on exactly 70 different places where risks could exists and where that risks would exist between deck we acquired it the portfolio and the date we integrated it. So and then we were able to go through and close all of those down all the time we got just sitting here today. So I think one of the shifts is that because of the way the process works the idea of anybody doing simultaneous merger conversions as long gone we are sad about that from the standpoint that it limits your risk so you need a much more robust process now that if you are going to only institution in that converted right away and that was something that we add at this time which I think very, very smoothly.

George Cassidy:

Okay. Thank you and then recognizing you with dominant market share in Buffalo. Can you give us any color on any customer migration that you're seeing from the transaction between first and -- key.

Rene F. Jones:

It's early, but we have a lot of positive signals as you know we have been in the market for a long time we live here so our view is that we should be positive migration of customers. It will just take a little bit of time to do that and then obviously that transaction hasn't sort of being completed and there is no conversion going on now. But our sense is its early but there is nothing in the indications that we see that don't suggest that we won't fair well on the disruption.

George Cassidy:

Thank you and finally, can you give us any updates on your written agreement regarding BSA/AML when you might think that would be listed?

Rene F. Jones:

Yes I don't know we haven't been focused on, we've been focused on our work, and I think from a BSA/AML prospective we are really, really pleased as I said last quarter was everything what we've done. We think we got a great process and we also think that we've got a much more broader and more robust process overall when it beyond BSA/AML. So will keep doing what we do and there is nothing in front of us we are focused on Hudson City now, and that will just happens when it happens, but nothing to point, nothing good or bad no news really there.

George Cassidy:

Okay. Appreciate it. Thank you.

Operator:

Your next question comes from a line of Steve Alexopoulos of JP Morgan.

Steve Alexopoulos: JP Morgan:

Hey, Rene. Good morning, just actually I had a two follow ups. In regards Ken Usdin's earlier question on the residential mortgage run off, was there anything unusual this quarter in terms of the $970 million period-end decline?

Rene F. Jones:

No, I mean that is like as steady as it goes.

Steve Alexopoulos:

Okay, okay that's helpful. And then I just want to follow up on the comments about the additional investment in technology, I would think in these two invest in front offices is really broad of this point particularly you convert Hudson City into a commercial bank do is this a year that you guys really step up broad investment you () manage out through the efficiency ratio or you have a opportunities to reinvest. But can you talked about the from office investment () this year? Thanks.

Rene F. Jones:

Yes let me just ask a question for first, when you say front office investment do you mean people? Or do you mean

Steve Alexopoulos:

Yes I was thinking if you going to build out of commercial sides Hudson City need to bring bankers in over there for example?

Rene F. Jones:

Yes and that has been happening and it's all embedded into what we've got in our operating plans for this year. So that's incorporated in the numbers I am talking about another place where the is some Huston City expense saving I am talking about our net. And so we have made lot of progress quit a few a pick up and hiring business, a middle market lender, we had quite a few business bankers and we have more to go through the course of the year.

I think one of the things that we are thinking about in terms of we know that we are bringing on increased headcount in those areas of discipline and while we recruiting from the outside we are also very focused on of the idea there is an M&T person that wants to be in New Jersey that benefits us very well because they are bringing all of our experience. So we are also looking at addition to adding people we are looking at migrating people to.

Steve Alexopoulos:

Okay so thanks for your saying as investment needed in Huston City we are seeing in the numbers today.

Rene F. Jones:

Yes you are seeing in the numbers today and I think will be in good stage by the end of the year little complement will finished by end of the year.

Steve Alexopoulos:

Okay, that's what I had. Thanks.

Operator:

Our next comes from the line of Matthew Kelley of Piper Jaffray.

Matthew Kelley: Piper Jaffray:

Yes. Hi just staying on the Huston City cost space, I believe when you announce transaction Huston was running at about $222 million of operating expenses and 24% was the savings bogey. So $53 million in dollar terms can you just give us update on how much that is already have been extracted relative to that number and correct me if those are inaccurate numbers in a dollar term for the cost base.

Rene F. Jones:

I don't have in front me. But I think difference between logically is the difference between two numbers maybe SEIC expense or something but that was about 280 what we had all then where they are running. No, I mean just turn things as the specific area we no I think we are just able to realize a little bit more expenses than we thought. So we're above the $53 million I think it is not an anyone category

Matthew Kelley:

Got it. Okay and then on the deposit cost the average CD cost during the quarter is 75 basis points there is a lot of institutions that are in need a funding in New Jersey, metro New York City, high loan to deposit ratios and where you are right now in terms of roll over rates for existing Hudson City customers on typical city terms one to three years.

Rene F. Jones:

I don't want to quote the exact rate, but we're very competitive, we're up there over 1%, I think, on some of those and those are both in renewal and then looking at places where someone like bringing on a checking account.

Donald J. MacLeod:

I think the lot of that book is in the under the year category as well there is not a little longer date -- there.

Matthew Kelley:

Got it and then what shows will be using for an effective tax rate going forward.

Rene F. Jones:

This is a pretty ordinary think Mike.

Donald J. MacLeod:

I would say we are spot on this quarter each quarter is the amount of pretax income changes there is lot of permanent deficit -- steady and then it's up this quarter because there were some tax credits.

Matthew Kelley:

Okay. Just over 36%

Rene F. Jones:

Yes so this is a good quarter.

Matthew Kelley:

Got it and then just one last one on your commercial real-estate yield before '16 up 5 basis points versus year end. What categories you're seeing type of new production anywhere near those types of four plus handles on commercial real estate yields and may be just talk about origination yields versus that number.

Rene F. Jones:

I don't think in terms of yields I always think in terms I see the yield increase you're talking about but I think mostly in terms of and spreads and one other things that you'll get is sometimes there is a lumpiness in the prepayment penalties also go into that space, but while I think pricing was solid this quarter it's not significant enough on new loans to be moving that yield.

Matthew Kelley:

All right. Will prepaid is particularly high this quarter?

Rene F. Jones:

They were, they were not higher than last quarter.

Matthew Kelley:

Okay. All right. Thank you.

Operator:

Your next question comes from the line of Jill Shea of Credit Suisse.

Jill Shea: Credit Suisse:

Good morning. Just in terms of capital return given your strong capital positioning can you just talk about how you think about total payout and your appetite for sure buyback where I think that you're out quarters are contingent on the CCAR results, but can you just talk about how you think about total capital return and payout overtime?

Rene F. Jones:

Yes, I mean I think I talked a little bit about this may be in January, but we've done an evolution that evolution is to be our third CCAR and we were at the capital before that and in the last two CCARs we were at about 9, 10 in our tier 1 common ration and then may be 970 and we faired it pretty well. But at that time we weren't thinking about -- in capital because we are in a space where we still had a transaction to do and so we just out of that normal principal we wouldn't be doing that. Because there is some risk when you enter a transaction of may recession happens when you doing it or this some operation issues.

So because that took us a long it allowed us to build up that capital overtime.

Also think about the idea that when we first announced that deal we had about $28 billion in mortgages and that's gone down town to 17 right. So we have all of the capital, but that we expected to have but the book has run down over that period of time as also we expected. So overtime we have got no we have got distribute that capital back to the shareholders or to put into a decent use as sort of our task that we were trying to do.

We to date been lower than everybody in the total payout in the ratios probably half of what industry has been, and I think I have said that potentially we would be to normalize that, and over long period of time because we run model that not based on growth based on profitability I think we will always to be we having lot of access capital relative to the average in industry.

We will try to do a right thing we put a good history so far, but I think one of the things that you won't see as doing is necessarily buying banks just because we have access capital. We think that might be the fastest way to destroy value depending on what the price is. We will be cautious and trying to get back to you.

Jill Shea:

Very helpful. Thanks.

Operator:

Our next question comes from the line of Peter Winter of Sterne Agee.

Peter Winter: Sterne Agee:

Good morning, two questions. Can you show me loan growth is moderated this quarter. I am just wondering was that the seasonality or was it something else that cause that?

Rene F. Jones:

Well home equity loans I think were down and they are down in utilization has been below I only imagine that sort of the natural offset with rates being low and mortgage volume picking up. But it's been pretty steady, and you're talking about loan balance right?

Peter Winter:

Yes.

Rene F. Jones:

Yes that's what it was the continue low utilization at home equity.

Peter Winter:

Okay and then I am just wondering do you have, what the impact could be with regards to trust wealth management business with this fiduciary rule?

Rene F. Jones:

We will going through it, it's nice to have a little bit more time. We think on some level over a longer a period of time it fits us very well because of who Wilmington Trust is. But at this point in time I think I don't I actually do not see any profitability impact. It just how we migrate to the right space and for us I don't know that we're all that far from where we need to be in principle today. So my sense is we work our way through but I don't see any negatives quite frankly longer-term maybe there is a positive for us.

Peter Winter:

Got it. Thanks very much.

Operator:

Our next question comes the line of Geoffrey Elliott of Autonomous Research.

Geoffrey Elliott: Autonomous Research LLP.:

Hello there. Thank you squeezing me in. You kind of peck my interest when you mentioned that wider how you will spread and CMBS spread giving you an opportunity to many more during the first quarter.

Because back in the last call you talked about those as an early indicator that you look at on the credit term of things potentially deteriorating. So I guess I am curious do you think that this cycle this cycle is different or are they both an indicator and the reason that they make sense to lend more?.

Rene F. Jones:

Yes, I guess what say this we got pretty granular disciplined process. So if I provide more color I would say the feedback I am getting from the commercial bankers is that on larger or what complex transactions is where you were able to see slight movement pricing, and I think that does tell you a lot because things are I think the capital markets along with life companies have been providing the extra competition that have pushed pricing down and so when you see a hick up in that space like you saw on the CMBS markets and like you saw with the wider spread trend. It's interesting to me that you can feel it pretty quickly.

I don't think that's not really a positive thing I think its tells you how sensitive the market can be to mood swings of the mood swings of those capital market. Having said that at the same time I think what's interesting Jefferies is that competition didn't change ounce with the smaller institutions. They working on their balance sheet they are not necessarily looking at the capital market and competition on that front remain pretty intense when it came to smaller institutions.

Geoffrey Elliott:

Great. Thank you.

Operator:

Your next question comes from the line of Bill Carcache of Nomura.

Bill Carcache: Nomura:

Thanks. I just had one quick one Rene on the GAAP and operating EPS differential. So we had been seeing a conversions between the two up until a last couple of quarter is obviously with Hudson City and its the merger related expense line item that where we seeing some of the disconnect and was hoping if you give us a sense what that looks like going forward you mentioned earlier $10 million to $14 million in restructuring charges next quarter and that's it. Is that so is that in that merger related expense line item.

Any color on that would be helpful?

Rene F. Jones:

Yes now you've got it, you've got it exactly and we would expect at we don't expect to see much of anything in the second half of the year so that should normalize again with the exception that may be from a year-ago we might have to slightly higher amortization.

Bill Carcache:

Great. Perfect. That make sense my other question have been answered. Thank you.

Rene F. Jones:

Thank you.

Operator:

Our final question comes from the line of Frank Schiraldi of Sandler O'Neill.

Rene F. Jones:

Hi, Frank.

Frank Schiraldi: Sandler O'Neill & Partners, L.P.:

Hi good morning, good afternoon that's right. Oh man, I have to change my script here. Just two real quick ones if I could. First on the NIM, setting aside where you ended up in the quarter, in lieu of further rate hikes and no rate hikes through rest of 2016 directionally from here the reason just to assume a few basis points of a core compression of quarter in this environment and that still reasonable.

Rene F. Jones:

I think in that scenario you () that's exactly right and I think all of that compression will be coming from time account book of Huston City and depending on what we do is we changed of course because we saw it wasn't beneficial for us we learn to capturing customers from that profile. We could just change it and I think we will go back.

Frank Schiraldi:

Okay great and then just one on repurchases you went through the reasoning for I think its $54 million and the additional share up buyback I realize there is small incremental number and I don't know maybe the process is different. But if you had to go get the non-objection from regulators what is the thinking behind not seeking or asking for the full additional 1% of tier 1 capital which seems like would have could on the table.

Rene F. Jones:

It sounds we just simply follow our process we had asked for certain amount of this distribution in the plan. We think it make sense to follow that process and then we sort as we looking at most deal we realized that while we haven't distributed all the dividend, and so one on its phase we should probably go back and ask and then it just so happen than also fits within the context of the 1% rule as well. I think number would have something like 90 total number would have been 92, 93, 94.

But you know I don't know it just seem like a were we are focused on distributing the same capital that we ask to distribute and then we kept of that. Obviously the 1% roll is you needed down the road would be bigger now because our capital base in the tested figure but having said that I mean from our view we should be just be focused on to do figure out what the right thing to do is based on the test project that and stick to it is that I would think about it.

Frank Schiraldi:

Okay, all right. Thank you guys for taking the questions.

Operator:

Thank you. I will now turn the call to Donald MacLeod for any additional or closing remarks.

Donald J. MacLeod:

Again thank you all for participating today and as always if any clarification that items on the call or new releases necessary please contact our Investor Relations department and 716-842-5138. Thank and good bye.

Operator:

Thank you. This concludes M&T Bank first quarter 2016 earnings conference call you may now disconnect.