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M&T Bank Corporation (NYSE:MTB)

Citigroup US Financial Services Conference

March 06, 2013 1:20 pm ET

Executives

René F. Jones - Chief Financial Officer, Executive Vice President, Chief Financial Officer of M & T Bank and Executive Vice President of M & T Bank

Analysts

Keith Horowitz - Citigroup Inc, Research Division

Andrea T. Jao - Cowen and Company, LLC, Research Division

René F. Jones

Thanks, Keith. We appreciate the introduction. Good afternoon, everyone. So I'm always a fan of coming to the Citi Conference. In addition to Keith, I like the fact that it's at the beginning of the year. And since they've moved it to March, it gives you a little bit of time to actually reflect on the year past. You don't get much time to reflect on the year. But one of the things you'll notice is that it's also given us time to finish -- our Chairman and CEO, Bob Wilmers, writes a message to the shareholders every year. So that was out this morning, and it's out there on the web. And so we're kind of fresh on thinking about what's happened over the past year in 2012, but also what's happened over the past 5 years or so.

So I thought what I'd do is I'd sort of take you through a little bit of that, take you through also kind of how we think about capital allocation. There's a lot of questions that are out there these days about what are you going to do with your dividend policy, when will you be able to do this or that. We tend to think about it very differently. But hopefully, if I kind of take you through it, it gives you some sense of how we might make decisions in the future. And then, obviously, talk about that and our outlook towards the end.

If we sort of start off here with our forward-looking disclaimer, a couple points I would make is that we tend to talk about operating earnings, as well as GAAP earnings. And we include a reconciliation of the 2 in the back, if you're not familiar with that. But generally, our operating earnings are taking out 2 things: amortization of intangibles and merger-related costs of our deals. And we think it gives you a good picture of sort of what the core trends are underlying our results when we're not in sort of an integration mode.

If you look at who we are, you guys I'm sure are very familiar with us. We've been around for 157 years, 1856 is when we started. We've got about $83 billion in assets. When we close the Hudson City deal this year, that will jump up about $100 billion. We've got 15,000 employees, just over 700 branches and 2 million consumer households.

Primarily, though, we're a banker to middle-market customers. As you go through our footprint, we'll talk a bit later about our deposit share, but we have very strong share in each of the communities that we choose to bank in middle market and in particular, in business banking. We are the #1 SBA lender in each of the markets or most of the markets in which we participate in. I think that's important because it tells you about the type of bank we are and what service we produce and providing the communities that we operate in.

We've done a lot of acquisitions, 23 over the last 25 years, 5 of those have been government assisted. But those are things that tend to happen to us because of our operating model and the stability that we've enjoyed over the years.

If you look at our operating model and we talked about this a little bit in our letter, the core of our process is sort of prudent underwriting in local markets and markets that we know. We think that, whether it be M&T or other institutions, when you get away from your home markets, you don't know the customer, you don't have a tie-in to that community. It doesn't necessarily serve you well, and you don't have an advantage in making loans outside of your footprint.

Our products are straightforward. We try to make them uncomplicated. Essentially, what we do is we take deposits, safe-keep them and invest them with entrepreneurs in our community. And we think because our product is so plain vanilla, we generally have a commodity. One of the most important things is to do that in a very efficient way. And to the extent that we can be an efficient operator, maybe have a slight advantage over the industry, we can continue to maintain very, very boring -- a very, very boring profile and stay out of trouble. And what you see in that culture also comes through in our credit profile, which you'll see in a minute.

At the heart of all of that is our people. Bob Wilmers devoted a significant part of his letter this year to sort of our talent, our people, where they came from, how they grew up and how we've sort of maintained that over the time. Not a lot of people talk about that, but it's really core to who we are.

And that is also planted and supported by ownership structure. So we own 18.5% of the shares between our employees, our directors and the management team, and that affects our behavior. So as you see on the slide, we tend not to take care too much about volume of loans. We really do care about the quality of the loans we underwrite in terms of return, and we have a very disciplined approach to allocating our capital, which I'll share with you in a minute.

So as you kind of look to support of that, I'd thought we put together this slide that we show here. A lot a people talk about trying to maintain a low-risk profile. And this is a slide, along with others, that we track internally to kind of get assessment of what our balance sheet is performing, what kind of risk profile that we actually have.

And so if you look over the past 20 years, the first column shows our volatility or our onestandard deviation of our charge-off ratio over time. And on the right, we have the FDIC's definition of core earnings, it's sort of an ROA with some adjustments. And we show the volatility -- quarterly volatility over that ratio over the last 20 years. And under both cases, our volatility is half that of the next closest institution.

If you look in our peer group, our peer group has been adjusted a little bit this year, so it includes BB&T, Comerica, Huntington, Fifth Third, Key, PNC, Regions, SunTrust, U.S. Bancorp, Wells Fargo and Zion. If you were to look at anyone of these, either one of these 2 columns, divide it into the first 10 years and the second 10 years, it looks very much the same. One of the things that we've noticed is that when times are not volatile, you can still look at the underlying volatility of the loan book and the balance sheet that institutions have, and you can actually understand it just as well as if we're going through some sort of a crisis.

So the point of the slide is that we try to maintain a very low-risk profile, and we seem to have done a pretty good job at that. But in turn, while we're doing that, we're still able to produce returns that are at least the industry average or, in many cases, over long periods of time tend to be well above average.

So what you see on this slide here is we've done this sometime ago. We took the top-50 bank holding companies in 2000, so at the beginning of that decade. And we showed over time the ones that still remain, and we show in yellow the position we had in terms of our stock price return. And if you kind of focus on the center, what you see is that we kind of have average to slightly above-average performance, and we're trying to do that without changing our risk profile and to go towards the median. We always want to be below the median in terms of the volatility of our portfolio that we have.

And when you add all those up, despite the fact that we're never #1 in the first 10 years that you see through 2009, we're #1 by a longshot. We stopped there. We needed to do some work to reset that and look to the next 50 that exist in 2010, but we didn't have time to do it. So as we get into the next 3 years of this coming decade, we're starting off pretty well, all with taking and maintaining a pretty conservative risk profile overall.

So in terms of the financial review, we've had a pretty strong year. If you think about it, we've had a once-in-a-generation opportunity in Upstate New York with the disruption that's happened there. We talked about the fact and I was talking earlier today about the fact that we had about $6.5 billion of loan growth from the end of 2011 to the end of 2012, so that's not affected by any acquisition. And we had about $6.2 billion of deposit growth. 36% of our commercial loans that we generated in the last year came from Upstate New York, and 44% of all of our deposit growth came from Upstate New York.

So if you take that away, you're left with pretty industry-standard mid-single-digit loan growth that's in there. The opportunity the we had by deciding actually not to participate in a transaction that occurred there and step back actually was one of the things that produced significant growth and returns for us. So a lot of times, the value that's created in M&T is by sort of not doing something, whether it be not making a loan that's sort gotten in a frothy environment or maybe turning down a transaction and focusing on it organically.

Overall, we converted Wilmington, finished our conversion of Wilmington, and then we began and signed a contract for Hudson City. So it's been a strong year. If you look at our financials, the thing that probably sort of earmarks the results that you see here, which we go back to 2006, is that we earned $7.54 in GAAP earnings per share. So it's the first year -- first time we're able to eclipse what we made in 2006. None of the intervening years did we actually reach that same level. So by definition, that number and the fact that we made $1 billion is the highest earnings that M&T has ever produced in the last 157 years.

If you look at our peer group of 12 institutions, including ourselves, there are only 3 that are back to where they were in 2006. We're the third. If you look at the top 25 banks by asset size, there are 6 who have done it. We're the sixth, so we sort of just crossed that threshold. We're behind a few, so it means we got a little bit of work to do, I think, as we kind of move forward.

I also think what's really important, and we talked about this every time we do a presentation, is our key ratios. Because we focus so heavily on returns, it's sort of the ratios that matter much more than size. You'll see our earnings per share on top again. But if you go down to margin this year, 3.73%. We finished equal to what we had in 2011. So despite a bit of industry compression, we fared pretty well by keeping a pretty stable margin. But more importantly, it looks a lot like it did before the storm started in 2006.

You'll see our efficiency ratio is coming back as we integrated Wilmington, coming off the 60% down to 56% and moving back in the direction that we tend to be comfortable. And as you kind of work your way towards the bottom, you'll see that our capital ratios have sort steadily improved. I circled the 2007 number because that was sort of pre-storm. And then from that point on, starting with Provident, we used some of our earnings, plus some of our existing capital base, to sort of to do value-adding transactions, starting with Provident in 2008. So you see that.

So despite the fact that -- I think this sort of starts off the idea that despite the fact that our earnings are the same as they were back in 2006, we're doing that with more capital. And from my perspective, the thing that we did best last year is we were able to produce a 19.42% return on our elevated levels of tangible common equity. A lot people ask us that question, as your capital grows and you settle in with the higher cost of regulation, higher cost of capital, will you still be able to produce that, those returns? This is what we're trying to do. We're trying to do that without taking on too much risk and changing the profile of our -- or the risk profile of our institution.

So if you look at -- I added a quote from Bob, which is similar to what I just mentioned, is we're not only different, we're actually a much stronger institution. We've been able to do a tremendous amount of investment, whether it be the Upstate New York loan growth or Provident, Wilmington or now the $2.6 million, $2.7 million of shares that we'll issue to do Hudson City. It's been a tremendous opportunity for us to grow through investment.

And in a minute, what I'll show you is that the last 5 years really contrast the 5 years previous to that. In that earlier period, everyone was happy. Bank stocks were trading really hard, and what I'll show you is we were investing very little in -- back into the franchise. We were giving all the money back. In the most recent 5 years, the opposite is true.

We also point out at the bottom that we were able to sort of just smooth exit from the TARP program, and we talked in our letter of the returns that we gave to the treasury.

So one of the things that's unique is if you look back in 2006, this is our footprint back in 2006. It's all located in the Northeast. And at the outermost top level, for those who have ever been to Watertown, New York, that's sort of the outer reaches in the top. And some of you might have been to Snow Hill, Maryland, which is down in the coast. So that frames it. So that's 406 miles. The radius is 203 miles. There's a town in the center, it's 40 miles north of Harrisburg. It's called Herndon, PA. It's got a population of 325 people. That's the kind of town that we like.

If you go to look at what's happened since, one of the things that I think is really important is to think about we had a lot of acquisitions. People have asked us recently, what -- how big is too big? How many more opportunities we have? We tend to take advantage of opportunities that come to us because of the environment. Our job is to figure out whether we have opportunities to allocate capital. If they're not there, we'd prefer to give the shares back to you.

If you look on the left, we have our deals. These are all the deals back to 2000 with $1 billion of consideration, and we've got ours sprinkled in. And you go back to our first earlier deal in 2000, which was Keystone. A bunch of thrifts were coming together. They had some disruption in the conversion. Things didn't go too well. We came in, and we were able to help them out. They got all sorts of movements of fraud, lost $800 million of capital. When we came in, we were able to help them out there. But generally speaking, we're paying relatively low prices in a time when the market price for bank stocks was relatively low.

If you look at the middle, we did very little investment in the middle. And you can kind of see from just eyeing the chart, that bank stocks were trading at very, very high prices. It was also a time when we had difficulty growing revenue because we thought spreads were thin and people were pretty aggressive.

If you go into the period they had at the end, which we've been through, which we've invested some $600 million, $700 million, $800 million to date before we get to the Hudson City transaction, you can see that we're investing at sort of record lows. And to date, we've put to work probably $700 million or $800 million well in excess of the 20% return. I think by the time we're done with Hudson City, the totality of $3.5 billion that we will have put to work will all be at returns over 20%.

And you can kind of see that in the slide that we have here that talks about our capital allocation. And at the bottom is a slide that we do forever. We kind of look at our current management team, that's when Bob Wilmers came in, in 1983. And pretty much, we gave 1/3 in dividends, 1/3 in buybacks. And we invested about -- retained about 37% of our capital for growth through organic loan growth or through transactions that we did.

So despite the sort of profile that we have as an acquirer, we are getting back much, much more of our capital over time than we actually are in investing back into expanding our geographies and our footprint. That total amount of earnings over that period is just over $10 billion.

If you look on the top left, we earned about $3.8 billion over the last 5 years. We gave 49% of that back to the dividend. As you know, we didn't cut it through the crisis, so we are able to continue to pay that out. And we used over half of that either to do organic loan growth or to do the transactions that we've had.

And if you kind of flip your way back, we're allocating that capital and investing it back in our franchise at a time where prices of bank stocks have been at a historical low. Right? If you kind of compare that to the previous 5 years, in the right, the 51% that we invested back in the business over the last 5 years compares to 20%, just 20% in the first 5 years at a time when M&T itself was trading at 5x tangible book. And most of the folks in the analyst community complained because we had no loan growth because we just couldn't find it in a profitable way. And at that point in time, we gave most of the money back to the shareholders.

And I'd point this out because, in part, a lot of what we do when we're operating a commodity type business is we focus on things that are relatively boring to most. We're in the communities, getting to know people that we know. And the differentiator in our performance is really how we think about reallocating capital. Over the long term, this is what really allows us to continue to produce returns.

So as I look at issues that we'll talk about, what's going on with mortgage, what's going on with loan volume this quarter and the rest of year and so forth, at the end of the day, what makes me very comfortable is the fact that we were able to deploy the capital in an efficient manner, and that probably sets us up very well for the future.

When we're done, our footprint looks like this. And you'll notice Provident. You'll notice Wilmington and Hudson City has fielded in. But the radius of our footprint is now 230 miles, so it's grown by 27 miles. And this matters to us because we have a good strong long-tenured management team and our ability to make sure that we have control over the business and that we're not stretching too far into markets that we know becomes really important to us.

The bad news is that -- are the center of our universe moved. It's now in Lake Harmony. But the good news is the population of Lake Harmony is actually 439 people. It's 40 miles south of Harrisburg. So I say that kind of in a joking way, but we really do focus on a lot of towns in America that are not big, big cities. We find that we have a large advantage in those places.

On the right -- on the next slide, you'll see the tenure of our management team. Our 14 folks that lead the strategic direction of the bank have, on average, 23 years with the bank; senior managers, 20. 4 years. But the one that really gets you is we have just over 700 branches. We have 678 managers who, on average, have a tenure of 14 years with the bank. If you think that doesn't make a difference when you're making loans with -- to customers and trying to figure out whether you know those individuals or not, right, you'd be sadly mistaken. This is a big part of the strength of our institution.

We've grown talent consistently over time. We like to hire people specifically when there's recessions because that's the only time we always joke around that we can get them to come to Buffalo. That's why I joined in 1992. And our ability to do that over the years and continue to hire people is really what has prepared us to be able to have the talent to actually expand when the opportunities come up.

The other thing you get from the slide that I'm showing you is the market share position. So we had a debate with someone that wanted to say at M&T, that the strength of the bank was the fact that we have more liquidity. And I said, "Well, all the banks have more liquidity." So I guess they got upset with me, and they handed me this slide.

And what it shows is 2006 market share from the FDIC versus where we are now. So I'll just read a couple of them. We had 32% deposit share in Buffalo. No acquisitions in that region. We have 42.8% now. Syracuse goes from 19.5% to 23%. Rochester goes from 19% to 24%. Binghamton goes from 27% to 50%. Harrisburg is the only one that declined, it's about 2 points. If you look down at Maryland, it doubles from 7.9% to 15%. And we go in Delaware, from 0% to 27%. Right? So every market, except for Harrisburg, over the crisis, we've gained a significant advantage. We think deposits are the heart of the bank. Right? And we think that, that sort of bodes well for the future and the value creation that we've had, much of which you may have not have actually seen yet today in our financials.

When you look at our ratios over the long term, we like to have an advantage in terms of where we sit with our net interest margin. We're not trying to chase volume. In 2006, when things were pretty frothy, we were right on top of the market. Today, we come out with a slight advantage over our peer group.

On the bottom right, we maintained a long advantage in terms of efficiency. That actually has widened. You can see it's up because of the regulatory cost in the environment. Right? Up significantly from where we were in 2006. But relative to our competitors, we've maintained a wider advantage. And on the return on tangible common equity, which is what we're very, very focused on, we've been able to maintain that at 19%. And we never once dipped below what we believe our long-term cost of capital, which is around 12%.

Credit, as always, on the bottom, has remained very strong. So over the years, this has worked for us. Long term -- I won't read all these, but you can see our long-term performance is quite positive. And most recently, if you look at our performance against the S&P bank index, we're 21%, 63%, 68% above for 3-, 5- and 10-year performance. And we think our model works. We get a lot of questions about the regulatory environment changing, holding more capital. We think we're pretty efficient allocators of capital. And what I would argue is that to the extent that we all have to hold more capital, we're not a bad place to put it. We'll try to do the right thing. If we can't deploy it, we'll give it back to you.

If you look at this slide, it shows our net operating income of 17% compounded since 1983, almost 30 years there, and our dividend at 15%. Well, one of the things that strikes me is as you begin to look at that upward sloping dividend increasing year-after-year and then, since 2008, flattening out, I sort of think about it, if you think about adding the Hudson City deal, while that dividend payment has sort of flattened out, it's simply been the reflection of the fact that we've used that cash that typically would have gone to you, and we've actually invested it into the business over those last 4 years.

So that's our culture, that's our story. We think we've had a great 2012 but probably even more of an outstanding 5 years -- over the last 5 years, and we think we're a much stronger institution. I have on the next slide sort of an update on Hudson City. The update really is that there's not too much of an update. It's a big balance sheet. But as we look at the changes we've seen in rates and so forth on the whole, we're pretty much in the same place that we thought we'd be at this point, still targeting upon getting regulatory approval, a second quarter close.

You can note that we're going to have our shareholder meeting on the 16th to approve the deal, a special meeting at the same date that we have our regular shareholder meeting. And then 2 days later, Hudson City is intending to hold theirs.

These are the things that we announced with the deal. The only one I would point out is sort of towards the bottom. One of the things, if you followed M&T, that will be a little bit different for us is that we've now done several acquisitions, 4 of them, where we purchased loans at a discount. And as a result of that, we've sort of marked those loans. We don't set up an allowance for those loans, and we are carrying the loans with a marked position our balance sheet. So charge-offs that we take have been going against those marks, right, so you haven't really estimated them well. You haven't seen any impact on the income statement or capital beyond your initial mark.

Interestingly enough, in preparedness, you buy a loan at a premium, there's a different accounting rule. And in that case, you actually set up an allowance, and you might have a slightly higher yield because you're amortizing less premium. So what we're going to have to do in the Hudson City deal, because it was an institution that had a little trouble on its funding side, we're going to have to carve out the loans that are actually purchased at a discount. Those will look a lot like Wilmington Trust and the other deals that we did, and then the remainder of loans will have a small allowance, right, and probably a higher yield than we would have had with the other accounting method.

So a little different, not significant a noise, but I thought I'd start talking about that and mention it for you as we get closer to the deal. Economically and really in terms of earnings, there was very little difference. But the topic of acquired loan accounting has been so confusing to the market, I thought I would share that with you.

In terms of our outlook, again, much of what we said on the call is very similar. We think that we're going to have 3 basis points of core margin compression a quarter is sort of our best guess. Hudson City provides a little bit of margin pressure beyond that but nothing too significant. There will be noise because we'll have the $10 billion -- that looks now about $12 billion of securities in our books. And to the extent that we don't get rid of that whole thing or had it for a portion of the quarter, the margin will come down but not the net interest income. Right? That trail is just very thin. So we'll free up capital when we delever the institution and take out the structured liabilities as well, which we're going to mark. So all that's about the same.

On the front, in terms of the rest of our outlook, a couple things I would point to. You heard a lot of talk about mortgage volumes being slower than they were, particularly in October. December was a little low, but things have continued to be relatively slow on that front in terms of volume. And as a result, you're also seeing lower gain on sale spreads, right, as people are trying to fill up their pipeline.

I would suggest really nothing different than you've been hearing from everybody else, but that's sort of the current state of affairs. It really looks much like the record that we had in the fourth quarter could end up to be a peak in terms of mortgage banking right now.

And then we talked a lot about -- we talked a little bit on the call about the fact that we had a huge loan growth, particularly in the last 30 days, a lot of around tax-related transactions where people were either trying to recap for dividends or trying to sell portions of their business. So a portion of those were bridge-type loans, and what you're seeing now is that those are paying down and coming down from that sort of year-end balance.

Having said that, if you look at it from December to December, last December was the same because there was this threat of a tax spike. There was a huge spike in loan growth at the end. We had about 11% loan growth. If you take my comments before and take out the Upstate New York stuff for a minute, it kind of puts us back right in that mid-single-digit loan growth. When we look at our operating plan versus -- which we prepared back in October, well, we're kind of where we are and where we thought we would be. But we do see a decline from sort of the asset December number because of all the noise around tax-type planning and transactions that were going.

Keith Horowitz - Citigroup Inc, Research Division

Or a decline in the quarter?

René F. Jones

I'd say, on average, you won't see a decline on average. But just so much focus has been on the idea, for example, that we grew $1 billion in the last 2 weeks and then maybe $1.6 billion in the last 30 days. And if you kind of think about that, the idea that, that would keep happening, right is a little silly. And in fact, much of that has sort of come -- that excess is going to come down. Right?

Keith Horowitz - Citigroup Inc, Research Division

So average out, any period could be down [indiscernible]

René F. Jones

I think averages are better to look at. It's probably the best way to look at and the normal growth that we've been getting...

Keith Horowitz - Citigroup Inc, Research Division

I was trying to clarify. When you said decline, was that on the growth rate, was that on the absolute level?

René F. Jones

Absolute level from December 31 as people put on loans, right, and put those bridge loans and pay them down. So if you're thinking about December 31 and the asset loan growth being the trend, right, I would love if you're correct. But I don't think that's going to happen. So those are the things -- not much else is different. I'd be happy to stop and take all -- to take questions that you might have about any topic.

Question-and-Answer Session

Keith Horowitz - Citigroup Inc, Research Division

Loan growth has been a theme in this conference. There have been some management teams that have great records, records like yourself, USB, BB&T, they're very cautious. They feel like the terms aren't good. They've kind of got it down on loan growth. There's another bank that says, "you know what, we can outgrow the market," and things like that. But you said you didn't know for being very good on capital allocation and started pointing back to like '06 when you see product spreads are too thin. So what are your thoughts on the loan market right now? Are you still on that spectrum like you're more on the cautious side or you fell like you can now grow?

René F. Jones

I'd say we're on the cautious side, but that hasn't changed. And if you look purely at our numbers and I gave you those numbers around Western Europe for that reason, because if you take what's going on in Western Europe York and the disruption from HSBC exiting, you would have pulled that back. I would say, we're sort of smack in the middle of mid-single-digit 5% growth, which is not really robust. I don't see any big sign that, that's changing, and I wouldn't expect it to be greater than that. Behavior really hasn't changed much quarter in and quarter out from what we've been seeing in sort of growth steady improvement, people reluctant to lend. So while -- if you take it from what we saw in the fourth quarter, I guess I'd do the same thing I did there. But if you take it over the last 8, not much has changed.

Keith Horowitz - Citigroup Inc, Research Division

Well, I'll say prices have gotten irrational in the same markets.

René F. Jones

It's increasingly -- people have stretched, increasing expense as we go on. We really haven't seen -- if you look at our loan origination volume, margins have stayed there, And that's not in part -- that's in part because we're kind of disciplined and we'd rather slow the loan growth down than sort of lower our margin. We see the same thing in pockets. And like you see on the investment side, people are seeking returns. We issued this week $300 million of LIBOR plus 30 on the other side, and we issued $500 million of 5-year at LIBOR plus 55. So those are the unprecedented levels, which tells you a lot about the fact that the market in general and banks are looking for yields. We do our best to stay away from that because size really isn't important to us. It's returns.

Keith Horowitz - Citigroup Inc, Research Division

One theory, as we talk about investment. We focused on return on tangible equity. There's a lot of investors who feel that companies who acquire a lot should look at ROE because -- and the goodwill capital that you put out. So I just want to kind of get your thoughts on why you focused on return on tangible equity versus return on equity.

René F. Jones

Yes, because we're shareholders. And when we decide to put more money in the institution or we decide to do an acquisition and issue capital, that's the investment that's always made it tangible. And you saw that from the crisis. We used to joke around with CFOs, someone would come in and say, "Oh, I had a write-.down. I had to take a huge write-down on my goodwill." And we'd all say, "Geez, I wish I could do that." But it's just not cash. Right? So when you look at the components, we just tend to think of it not as tangible, we tend to look at cash. And with our Hudson City transaction, we don't get to issue that at the book value that they originated. We have to issue that at our market price, so that's what we're putting forth. So the way I think about it, Keith, is if we're trying to track the cash, if you look at our pie charts, how much we make and how much we put out, right, both of those measures our cash. And if you stick to that, you won't get dismayed by the accounting.

Keith Horowitz - Citigroup Inc, Research Division

On Hudson City, just on the noise, because when you -- it's going to take a while. From what I understand, Hudson City can't really sell to sellers securities right now in terms of downsizing. So it's going to the -- the $12 billion is going to come on to your books. Isn't that going to take a while? Because when you talk about the noise in 2Q, it feels like the margin can come down a fairly significant amount in 2Q. Again, it won't impact earnings but, optically, the market could come down a lot in 2Q.

René F. Jones

Yes, it...

Keith Horowitz - Citigroup Inc, Research Division

Depending on the pace.

René F. Jones

Yes, the printed margin will see noise. It will come down. But I think -- the way to think about the -- listen, we've only begun prepaid, so we started at $15 billion. Now we're down to maybe $12 billion. Right? And if you look at that, so much of that focus just plain vanilla standard securities. Right? So we're not dealing with any credit-sensitive type stuff. If you go back to Wilmington, we sold over $2 billion of loans. Some of that was credit sensitive. So we kind of got a sense that we were able to execute that pretty quickly. And this will take a little while but 3 months, something like that, my sense is that's very, very doable. The bigger issue is on the wholesale side. So when we get the funding side, we're going to mark that down by $2.5 billion. Right? And then we'll have taken the economics there, but we actually have to unwind that. We can't unwind the securities side until we unwind the funding side. The funding side has a little bit more complexity into it. Some of it is FHLB, but some of it is unilateral, one-to-one repos. So that's really, in my mind, what drives the timing and sort of how quickly we're able to unwind the funding equity market down.

Keith Horowitz - Citigroup Inc, Research Division

Andrea, you have a question?

Andrea T. Jao - Cowen and Company, LLC, Research Division

Yes. You mentioned, obviously, you run the business through the cycle of acquiring when prices are low and reserving capital to shareholders when they're less attractive. Where do you think we are now in terms of that cycle? Are you going to be investing more money beyond the Hudson deal? Or is that going to be the last deal for some time when you move to a higher dividend pay or repurchasing shares strategy?

René F. Jones

Yes, it's a good question. If I answer in the M&T way, I'd say I have no idea. But let me go a little further. The first part of the question is we sort of have a lot on our plate today. Right? So we'll spend all of our time stabilizing what we're doing with Hudson City, and we still, in our minds, have work to do on Wilmington Trust. It doesn't just happen overnight. So we're very content to kind of focus on what we've done to date and make sure we integrate that well into the environment because we can't participate if we're not healthy. Right? But having said that, I don't know. I mean, you're still looking for what the ultimate level will be in the capital levels in the banking industry. Right? You're still putting on additional regulatory costs, so that efficiency ratio that I shared with you is not likely for the industry to be coming down rapidly. And if you're -- part of the industry that is at your cost of capital or below, right, then a lot of decisions have to be made. And people have to decide -- you guys will decide whether those guys can produce enough returns to add value or there may be a fair amount of consolidation. So I can't really tell you about M&T. But as I kind of look forward, there's a lot of resetting that's going on. And a lot of the higher regulation naturally, regardless of whether people have approval to do it or not, is something that is forcing a lot of people to rethink their ability. It's why we don't focus on size. Because at the end of the day, if we can produce 19% returns, right, that allows us to sort of stick around. But we're not the average in the industry. So in my sense, if I were to look out, I would not be surprised to see that over the next 5 years, that there tends to be a lot of opportunity. If prices get frothy, we'd have to flip that around right because it just doesn't make sense to grow for the sake of growing.

Unknown Analyst

[indiscernible]

René F. Jones

It's almost kind of simultaneous. It's kind of simultaneous but our thinking, to Keith's question of what would take you longer versus shorter is really on that side as you think about it. So if we think about them together, the securities are so liquid, we would get that done pretty quickly.

Unknown Analyst

[indiscernible]

René F. Jones

The mark-to-market on each component has changed. But when you look at the total, no, there's not any -- for example, the marks that we record, well, we don't see much of any difference.

Keith Horowitz - Citigroup Inc, Research Division

Last question, on Hudson City. The place was adequate [indiscernible] the banks have generally [indiscernible] best locations. And there are some bank managers that feel like it's not worth the hassle. You're better off just kind of doing a de novo and putting eventually where you want them to be. Or when JPMorgan kind of when they bought [indiscernible], they had to kind of close branches and kind of reopen in terms of new parts of town. So just from a high-level point of view, why does it make sense for high-performing banks, like M&T, to go ahead and buy what I would say is a broken franchise in terms of the thrift and try to fix it as opposed to just doing a de novo in certain areas?

René F. Jones

I guess, first, Keith, we don't necessarily have a problem with de novo. We have a problem with seeing how to get appropriate returns. Right? So if we have a long-term horizon and a low hurdle rate, we can build a nice bank in a community in 10 years that we find. I don't know for you, I'll be happy about that. So we thought about being in New Jersey for decades, which just logically fits with where our footprint has been. But we've never had an entry point where you could get the infrastructure and make the investment work. So it came at a time with the -- if you read into price of the whole deal and what you're getting with the existing balance you've got there, you've got a low entry cost. And that lower entry cost allows you to take this 130-some odd branches, provide enough money to invest and build those up. We'll doing significant investments that are actually taking place now through first part of the summer to upgrade those banks that are -- those branches that are used to taking time deposits to be able to be a full-service retail branch and also be able to deal with their own business banking franchise. Right? So if your price is right, you do it. If you were to strip away the transaction, which when we were analyzing it, we did, we evaluated it as a bank deal and a de novo. And we looked at our price in that fashion. Right? And we spent probably most of our time -- a lot of time talking about risk management but a lot of time with the board talking about exactly your question. How do you do it? Could we do it? What we like about it is it's right smack in the middle of our footprint where we have a lot of commercial bankers and infrastructure. So we're not exactly in the Jersey. Right? We have about $400 million in loan in New Jersey. But it's not a lot of distance for us to do a coverage. You might have noticed, we did a press release when we announced basically the leadership of each of those pieces, people crossing the border from New York to go into Connecticut, the leadership there, and then on Long Island. Right? These are people that are known in the market. They're known in the market for 20 years. Right? So we think doing what we're doing is not easy. But if you price it right, you give yourself a lot of time and a lot of leeway, and we built pretty modest growth in building a franchise there. In fact, as we got our estimates from what the line thought they We could do, we cut in half before we price the deal. And the reason for that is the greater challenge in New Jersey in my mind will be not getting self-selected, i.e., not growing your loan book too fast and thinking you're really good, right, when there are a lot of other people who have been around there for a lot longer than you and probably know the customer base a little bit better. So we'll take a modest approach. I don't think you could have gone in any other way. But we got lucky, and we have an opportunity to do it.

Keith Horowitz - Citigroup Inc, Research Division

Excellent. Please join me in thanking René Jones.

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