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Executives

Donald J. MacLeod - Vice President and Assistant Secretary

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

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Brian Foran - Autonomous Research LLP

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Adam Chaim - Deutsche Bank AG, Research Division

Gary Lu

M&T Bank (MTB) Q1 2013 Earnings Call April 15, 2013 10:30 AM ET

Operator

Good morning, my name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank First Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Mr. MacLeod, please go ahead.

Donald J. MacLeod

Thank you, Jackie, and good morning. This is Don MacLeod. I’d like to thank everybody for participating in M&T's first quarter 2013 earnings conference call, both by telephone and through the webcast.

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

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

Now I’d like to introduce our Chief Financial Officer, René Jones.

René F. Jones

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today. Before I get into the discussion of M&T's results for the first quarter, let me say a few words about the announcement we made on Friday regarding the pending Hudson City merger.

I believe this is the first time since current management came to M&T that we have had to publicly disclose a matter arising from a discussion with our regulators. However, in this case, because it has an impact on the pending merger, we are able to make a limited statement.

As you may recall, we announced the merger in August of last year. Apart from any issues specific to M&T, in terms of context, the industry is already in a regulatory environment that seems clearly heightened in at least 2 relevant ways. First, if you look at recent merger activity in the banking sector, the trend seems to be that it's taking notably longer to get regulatory approvals. Said another way, we don't take regulatory approval for granted. Second, industry as a whole is subject to a heightened regulatory environment and expectations, including bank's -- the Bank Secrecy Act and anti-money laundering compliance programs. So that's the context in which our Hudson City deal is taking place.

During the 7 months we've been working on the Hudson City merger, we, of course, were also involved in our normal ongoing discussions with our regulators as part of the continuous supervisory process. In addition, we have been continuously working on scaling up and strengthening the overall risk management infrastructure of our growing bank, along with planned improvements to the BSA/AML process.

We recently were made aware of the fact that certain deficiencies in our BSA/AML compliance program rose to a level of significance such that they would impact our ability to close the merger with Hudson City in the near term and that we would have to implement the plan for improvement and demonstrate its efficacy [ph] to satisfaction of M&T management, our board and the regulators prior to obtaining regulatory approvals for the merger. Our ongoing investment includes bolstering internal staff and hiring an outside consultant to help us evaluate and improve our governance, people, processes, controls and systems. Fortunately, these efforts are already under way.

Of course, we then talked things over with Hudson City. Both companies remain strongly committed to this merger as it is a highly beneficial transaction for each of us for all the reasons we've discussed previously. So we mutually decided that we would proceed with our shareholder meetings on the merger and would also allow more time under our agreement, an additional 5 months, while M&T works hard to resolve these issues. We definitely appreciate the fact that Hudson City has been a totally supportive and steadfast partner in this.

So what are the regulatory issues? As you know, we have obligations to keep supervisory information confidential. So there is a limit to how expansive we can be today. And we can only talk about what we know as we sit here today. While we don't anticipate any other material issues cropping up as we get into this, of course that can never be completely ruled out. We have no reason to believe that the issues involve any wrongdoing or illegal conduct by anyone in M&T work or any identifiable instances of actual money laundering activity using our bank.

Independent of the merger, we are fully committed to resolving the BSA/AML compliance concerns and to carry out any further requirements our regulators may ask of us that we are not aware of today. It is important to note that these things take time.

However, we should be helped by who we are -- who and what we are. Compared to some other institutions that have had these issues, M&T is relatively uncomplicated and locally focused business. We don't have any significant international operations and don't have the kinds of diverse complex businesses that the larger money center banks are engaged in. However, we do have a lot to do as we take having strong compliance programs seriously.

With that said, we are optimistic that we can make the progress that we need to make to satisfy our regulators and to obtain regulatory approval for this merger. And I know both parties are as firm as ever that this is a deal worth getting done. And that's why M&T and Hudson City remain strongly committed to the deal and to do whatever we need to do to see it through.

Next, I'd like to review the highlights from our first quarter results, after which Don and I will take your questions. The results were comparatively strong, exceeding our internal projections and get us off to a good start for 2013.

Turning to the specific numbers, diluted GAAP earnings per share were $1.98 in the first quarter of 2013, up 32% from $1.50 in the last -- in last year's first quarter. When you compare this to the $2.16 in the first -- fourth quarter of 2012, the decline reflects lower mortgage banking revenues and seasonally higher equity compensation and benefits costs.

Net income for the recent quarter was $274 million, up from $206 million in last year's first quarter. Net income was $296 million in the fourth quarter of 2012. Other than our normal seasonal uptick in compensation and benefits expense, there was very little in the way of unusual items in our first quarter results.

Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effects of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions.

Included in GAAP earnings for the first quarter of 2013 where after-tax merger-related expenses related to the Hudson City acquisition amounting to $3 million after tax or $0.02 per common share. There were no merger-related expenses in the fourth quarter of last year.

After-tax expense from the amortization of intangible assets was $8 million, unchanged from the prior quarter, and this amounted to $0.06 per common share in the recent quarter compared with $0.07 per share in the fourth quarter.

M&T's net operating income for the quarter, which excludes those items, was $285 million compared with $305 million in the linked quarter. Diluted net operating earnings per common share were $2.06 for the recent quarter, up 30% from the first quarter of 2012. The comparable figure was $2.23 in the linked quarter.

Net operating income, expressed as an annualized rate of return on average tangible assets and average tangible common shareholders' equity, was 1.48% and 18.71% for the recent quarter, up from 1.18% and 16.79% in the year ago quarter.

Said another way, we increased our return on tangible common equity by nearly 200 basis points. On an average tangible common equity base, that is nearly $1 billion higher than the first quarter of 2012. The comparable returns were at 1.56% and 20.46% in the fourth quarter of 2012.

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

Next, I'd like to cover a few highlights from the balance sheet and income statement. Taxable-equivalent net interest income was $663 million for the first quarter of 2013 compared with $674 million in the linked quarter. The decline compared with the linked quarter is entirely due to the lower day count.

In line with the guidance we offered in January of this year, the net interest margin contracted by 3 basis points to 3.71% during the first quarter compared with 3.74% in the fourth quarter. The reduction in margin is almost entirely due to what I characterize as core compression as yields on new loans, both commercial and consumer, is -- are somewhat lower than that on maturing loans. This asset side pressure is being slightly offset by a lower cost of interest-bearing liabilities, including lower rates on core deposits.

While the day count diminished the net interest income, it added about 2 basis points to the reported margin, and that was offset by a 2-basis-point decline as a result of the lower loan fees as compared with the fourth quarter.

As for the balance sheet, loan growth for the first quarter was pretty much in line with our outlook as average loans increased by $840 million or an annualized 5% from the fourth quarter. On that same basis, compared with 2012's fourth quarter, changes in average loans by category were as follows: commercial & industrial loans grew by an annualized 8%, commercial real estate loans grew by an annualized 9%, residential real estate loans were up 2%, while consumer loans declined an annualized 5%. Upstate New York and our metro region, which includes greater New York City, Philadelphia and New Jersey areas, experienced the strongest loan growth in both C&I loans and commercial real estate loans, while loans in the mid-Atlantic declined slightly.

On an end-of-period basis, loans declined an annualized 4%. A fair amount of the borrowing activity that we saw late in the fourth quarter was done by customers in anticipation of changes to tax rates and was comprised of short-term and bridge-type loans that paid down relatively quickly.

The average investment securities continued to decline as a result of the -- as a result of paydowns, combined with our low appetite for reinvesting in the current rate environment.

Average core customer deposits, which excludes deposits received at M&T's Cayman branch and CDs over $250,000, grew at an annualized 2%. And during the quarter, we were opportunistic and took advantage of the tighter spreads in the capital market by issuing $800 million of unsecured bank notes. The $500 million fixed-rate tranche carried a 5-year fixed rate of 1.45%, while the $300 million floating-rate tranche was issued at a 3-month LIBOR plus 30 basis points.

Turning to noninterest income. Noninterest income totaled $433 million in the first quarter compared with $453 million in the prior quarter, and improved by 15% from $378 million in the year ago quarter.

Mortgage banking revenues declined to $93 million in the recent quarter, compared with $117 million in the prior quarter. The decrease is primarily attributable to an approximate 50-basis-point decline in gain on sale margins, while origination volumes were down about 6%. These downward trends have become evident at the end of last year, although recently, while the competitive environment continues to exert pressure on margins, volumes appeared to have stabilized.

Fee income from deposit services provided were $111 million during the recent quarter compared with $112 million in the linked quarter. Trust and investment revenues were $122 million, up from $117 million in the prior quarter. But particularly encouraging was the strong sales activity we saw in the Wealth Advisory business, which was the primary driver of the linked quarter increase.

Turning to expenses. Operating expenses, which exclude merger-related expenses and the amortization of intangible assets, were $618 million for the first quarter. This compares to $612 million in the fourth quarter.

The seasonal increase in salaries and benefits that I mentioned earlier amounted to $37 million in the recent quarter and included items we typically note, such as accelerated recognition of equity compensation expense for certain retirement-eligible employees, higher FICA, higher unemployment insurance expenses and expenses related to the 401(k) match. As in prior years, we would expect a decline in the second quarter as these items return to more normal levels.

The efficiency ratio, which excludes securities gains and losses as well as intangible and amortization -- intangible amortization and any merger-related gains and expenses, was 55.9% for the first quarter, improved from 61.1% in last year's first quarter, which also included the seasonal uptick in salaries and benefits expense. That comparable figure was 53.6% in the fourth quarter of 2012.

So next, let's turn to credits. While credit quality remained strong, we saw an increase in nonaccrual loans. Contributing to the increase was a change in the method of identifying nonaccrual home equity loans and lines of credit to reflect the repayment performance of the related senior lien loans that is not owned by M&T. As discussed in our 10-K, prior to this quarter, we had limited knowledge about the repayment performance for such senior lien loans not owned by M&T. This change had not impacted -- this change had no impact on our allowance for loans.

Nonaccrual loans were 1.60% of total loans at the end of the first quarter compared with 1.52% of total loans at the end of the previous quarter, but down from 1.75% of total loans at the end of the first quarter of last year.

Other nonperforming assets consisting of assets taken in foreclosure or defaulted loans continued to decline, down from $104 million at the end of 2012 to $96 million as of March 31. As has been the case for some time, we expect to report a further decline in our level of criticized assets when we file our 10-Q next month.

Net charge-offs for the first quarter were $37 million, down from $44 million in the fourth quarter of 2012. Annualized net charge-offs as a percentage of total loans were 23 basis points, down from 27 basis points in the linked quarter. And the provision for credit losses was $37 million for the first quarter compared with $49 million in the linked quarter. The provision very slightly exceeded net charge-offs. And as a result, the allowance for credit losses increased to $927 million as of the end of the first quarter.

The ratio of the allowance for credit losses to total loans was 1.41%, up from 1.39% at the end of the linked quarter. Both the allowance-to-loan ratio and the nonaccrual loan ratio were impacted by the decline of end-of-period loans as compared with the prior quarter end. The allowance -- the loan loss allowance as of March 31 was 6.2x the annualized net charge-offs for the quarter. We disclose loans past due 90 days but still accruing separately from nonaccrual loans because they're deemed to be well secured and in the process of collection, which is to say there's really low risk of principal loss.

Loans 90 days past due, excluding acquired loans that have been marked to fair value at acquisition, were $331 million at the end of the recent quarter. Of these, $312 million, or 94%, are guaranteed by government-related entities.

Loans 90 days past due were $358 million at the end of 2012, of which 88% were guaranteed by government-related entities.

M&T's estimated Tier 1 common capital ratio was 7.39% at the end of March, up 36 basis points from 7.57% at the end of last year.

Lastly, our outlook for legacy M&T, which excludes any impact from the Hudson City merger, is little changed from what we discussed on the January earnings call. The 3 basis points of margin compression and the mid-single-digit loan growth we saw in the first quarter were consistent with that guidance and still reflect what we expect for the remainder of 2013. As I noted earlier, based on what we're seeing today, we're expecting a slow tapering off in the mortgage -- in mortgage banking revenues, especially in comparison to the record levels in the fourth quarter. Having said that, we are encouraged by the recent extension of the HARP program through 2015.

On the expense front, much of the lingering benefits from the Wilmington Trust cost savings as well as other initiatives are being redirected into infrastructure investments, which of course includes our regulatory infrastructure. And I'd also remind you that the high -- seasonally high salary and benefits expense in the first quarter will return to more normal levels in the second quarter.

And with respect to credit, we expect stable to slightly lower charge-offs in 2013 from the levels that we saw in 2012, which are already below what we've considered to be our long-term loss rate. The first quarter results further validate that expectation.

Now turning to the Hudson City transaction. While we can't predict the timing, we remain confident about the economics of the proposed transaction and do not expect material changes to the benefits of the transactions to our net operating earnings in the first full year following the close of the merger. Of course, all these 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.

We'll now open up the call to questions, before which Jackie will briefly review the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Klock with Keefe, Bruyette, Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

And so just real quick on the BSA update. I guess, thanks for giving us some of that color. I know you can't say much. But as far as the expense base, and I guess your guidance for expenses for the rest of the year, you mentioned you hired a consultant. It looks like on your website you had 5 new postings for some BSA-related employees. I guess should we be thinking about an uptick into the second quarter kind of an expense base related to that BSA issue?

René F. Jones

Well, I think, Brian, the first thing I'd say is we'll clearly make the investments we need to make, and we'll sort of go full steam ahead. I thought that's wonderful you already noticed the postings.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

[Indiscernible].

René F. Jones

Let's see. I think let's put it in context. We have been making quite a bit of investment in our overall infrastructure for some time now. Last year, it was heavily focused on -- the year before, focused on investments in our capital planning exercises, which, of course, affect our technology but our people as well. You saw that we hired Don Truslow as the Chief Risk Officer. You saw that we hired Mahesh Sanakran about a year ago, a little more than year ago, around our forecasting process. So we've been doing a lot on that front anyway. And I guess the way to think about it is, when you think about a over a course of a year, we now spend $2.5 billion. So we have a lot of resources to be able to sort of put to bear. And I just think when you sort of think about earnings models, I think it's kind of hard to find it all in that, right, because we're constantly making investments. The other thing I'd point you to, Brian, is that if you look at -- because there's so much change, we're constantly tweaking our business models. If you look at just the first quarter results over last year, our salaries and benefits are up $10 million, $11 million, $12 million. But that's totally offset by FDIC expense coming down because credit quality is improving and we're issuing the funding and so forth, right? So we're sort of constantly trying to manage the whole. So if I had a line item that said compliance, you'd see that go up and we'd make a lot of investment there, but I'm not sure how to sort of put that in the context of the overall spending.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And maybe just a quick follow-up on the expense side. You pointed out the rest of the core cash expenses were down nicely sequentially from the fourth quarter. And you mentioned the FDIC insurance. So it looks like the assessment rate has come down. So should we look at that assessment rate irrespective of the changes in the base, should that continue to work down? It was actually as high as 17 basis points last year's first quarter. It looks like it's closer to 10, 11. And I guess first question, is that a good run rate to go forward? And then that other cost of operations, which was $170 million, was there any sort of credits or adjustments in there that should -- that we should adjust for? Or is that a good run rate going forward?

René F. Jones

So let me do it in reverse. So overall, I mean, typically, we tend to have a lower expense base, and the first quarter tends to be little bit higher other than the salaries in the force [ph]. So that decline is kind of normal. I don't know that it forecasts anything, right? I think if you look at what happened last year from the first to the second, it shouldn't be much different, right? I just tends to be a little low. Then your first part of your question was?

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

The FDIC assessment base.

René F. Jones

Oh, yes, the FDIC assessment. I think look, the formula is affected by a lot of things. So as classified loans start to continue to come down, you're going to get lower rates there. As we begin -- early on, a year or so ago, we talked about changing some of the way we did business. That's affected that.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Right.

René F. Jones

The issuance of the $800 million has an impact. And so to the extent that as we kind of go out and look at the liquidity coverage ratio and kind of move our -- in that direction, you would logically see some offsets there.

Operator

Our next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Has there been any MOU or a cease-and-desist order or any of the formal written agreement established with the Fed regarding the BSA or the anti-money laundering issue?

René F. Jones

So let me answer. I think so -- okay, so let's step back for a bit. So as you know, the regulatory dialogue that we have by its nature is confidential, as you said. But it's also ongoing. And as -- if you think about how it works as an industry matter, formal enforcement actions are disclosed by the appropriate regulator. While some informal regulatory matters, such as MOUs and so forth, are disclosed by the institution if they're material from a securities law perspective, we didn't wait to receive any formal findings before disclosing this issue last Friday. And as such, we're not really aware of any sort of final outcomes or conclusions from the regulators. We did this in part because of its impact on Hudson City, and we tried to be as proactive as we possibly could. Having said that, we don't believe -- we do believe that we have the full understanding of what the issue is -- issues are to be addressed, and so that's why we're running ahead and working on all of them. And in the end, I guess it will be up to other parties to sort of determine the appropriate sort of type of action that they take. But as I said before, we have never in our minds -- I think this is the first time that I can remember in my 21 years, and as I talk to others, where we've really ever discussed a regulatory matter in public, and it's related to the transaction.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it, René. And just as a follow-up, one of the local newspapers in Buffalo was commenting that some M&T employees were leaving Hudson City branches that were in the process of preparing. Can you confirm if that was true? And if it was, when would these employees be actually going back into the Hudson City branches preparing for the closure?

René F. Jones

So, I mean, what I can say is that each of the institutions kind of have to focus on their own issues. And until you get yourself close to a date and actually close to or having approval, you've got to be very careful to make sure that each institution takes care of their own matters, right? So that's what we'll do. Hudson City will continue to focus on managing its balance sheet and trying to keep themselves safe and sound. And on our front, we're going to focus heavily on this issue and make sure that when the time comes, we're ready.

Operator

Your next question comes from the line of Bob Ramsey with FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

I know you can't really pinpoint sort of the timing of the Hudson City acquisition. And I forget, the language in the release you all put out Friday said something like a significant delay or a sizable delay. Is it reasonable from a modeling perspective to stick it in the fourth quarter? Or how should we sort of think about the rough timing?

René F. Jones

Thanks for your question, Bob. I mean, the thing that we're going to focus on is keeping our regulatory issues as the most important sort of issue, regardless of the transaction. So I got to say that right at the outset, right? And we have every intention that we're going to remediate the issues that are outstanding. And we're going to do so quickly and we're going to do so in a manner that probably exceeds expectations. And second point I'd make to sort of get to where you are is that we need -- to be able to complete the merger, we'll need to obtain the regulatory approval, which, by their nature, are pretty uncertain. And -- but if we can do so, we'll try to get them as soon as possible. But that said, we've not really provided you with a specific date at this time. And I would say that from our perspective, it really seems prudent for us really not to engage in that discussion till maybe later to -- towards the end of the summer when we've made progress on our own things. And at that point, if we have better clarity, we'll do it. But I think internally, we're just going to focus on hitting this one out of the park.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. And I think previously, the sort of margin assumption around Hudson City was that it would be relatively neutral to M&T's margin. Is that true regardless of the timing of the close because the yields will sort of all be marked to market as long as the yield curve is more or less where it is today?

René F. Jones

Based on what I know today, that sounds like it makes a lot of sense. And how -- my understanding of how the 2 institutions are -- I mean, particularly how that institution is hedged. And that gets tweaked a little if you were to see changes in their balance sheet and if you were to see rates move a little. But I think you're thinking about it the right way.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. Although changes in their balance sheet won't matter much because you're really only keeping the loan book. I guess you'll have the securities book until it winds down. But mostly, you're just getting loans and deposits, right?

René F. Jones

That's correct.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. And then last question and I'll hop out, and I'll shift direction to loan growth. The loan growth on an end-to-period basis this quarter, as you guys mentioned, was actually down. How much of that do you think was volume being pulled into the fourth quarter ahead of year-end issues? And how much of it do you think is maybe anything else in terms of are you hearing anything different from your lending customers today in terms of their appetite to borrow from where they were in the fourth quarter?

René F. Jones

Okay, yes. I mean, I guess directly to your question, I mean, I think basically, look, you average from the third quarter to the first quarter and you're going to see that a lot of that stuff was timing. And I can't believe that people were -- I mean, we're -- they were changing the timing in the fourth quarter because of the tax events we talked about. But at the end of the day, I think if you look just from the month of -- from February to March, after we saw the drop, we saw the sort of normal mid-single-digit -- low to mid-single-digit loan growth. So I haven't noticed any change. What we -- I mean, I think it's an interesting thing. So in upstate New York, as we talk to people and actually all the way across through Albany, we're seeing that some of the clients are actually -- have more utilization in their lines, that we're hearing stories of people looking to make capital investment, a few capital investments. When you flip all the way down to the other end of the franchise, in Washington D.C., it's more reserved, people are worried about the sequester, the competition has picked up. We were talking 2 quarters about life companies, and we were talking about conduits. Now what we're seeing, and I think it's probably because of the limited, fewer opportunities, that the competition sort of heed up among the large national players that are in that market. So when you look at the overall thing, it's almost a -- I'm kind of laughing at the back of Bob's letter. Middle America seems to be doing very fine, and all of those areas that are affected by specific-type events, right, have gotten more competitive.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

In terms of the BSA stuff, can you try to quantify? I mean, when you think about the new people you have to bring on, the new systems that might go in place, what kind of total dollar expenditures do these sort of add to the run rate on an annualized basis?

René F. Jones

Yes, I mean, this is -- I mean, how do I say this? I mean, look, let me just say it again. We'll make whatever investment it takes. We're not starting from 0, right? So if we do this, we do it pretty well, but we need to make some additional investments. I think the difficult part will be that relative to some other things we've done, I mean, you saw we agreed to bring on the 600 people from -- in the local community here in the mortgage servicing space, right? I mean, those types of things are probably more relevant or so visible, I should say, than maybe hiring of 100 people or whatever the number may be. Really, what you got to think about, though, is on the systems and data side, right? And a lot of those capital investments that you're making, you might not -- they might be significant, but you might not necessarily see them right out of the gate on the -- in the financials, right? They'll come over time. So that would be the one area where you definitely see -- you see spending, but you don't necessarily see the impact being significant in any given quarter. So it's hard to say. I mean, that's basically the best I can do, Ken. As we learn more about it, I'll talk to you about it.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, that's helpful. And then just last question. In terms of your higher-cost troughs [ph] that you have outstanding, has your thought process changed at all in terms of what you might do with those or when just given the push out of Hudson City?

René F. Jones

No, it hasn't changed at all. I don't know that we've said it before, but we can. We do have approval to begin refinancing those out. And I just haven't really thought about when we're going to do it. In part, I think if we saw attractive pricing or something like that, we would probably go ahead and try to seize that opportunity. But we're really focused on decent pricing. So that will probably dictate the timing.

Operator

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

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

So a few people have asked me about what, if anything, that BSA/AML kind of a catch-up means in terms of M&T, broadly speaking? What I mean by that is M&T, which has been a historically above-average-efficiency company and a very conservative company over time, is there anything -- and knowing that the industry is very much getting focused on by the regulators on BSA and AML, so I don't want to read too much of that. But is there anything we should take away here about M&T's investments or degree of investments that the company has been making? I guess the question I'm getting is, are you underinvested in other areas? And is that part of what's happening on the BSA/AML side?

René F. Jones

One of the things that, Ken, is -- let's step back and think about what's unique. We were engaged in 3, 4 or 5 transactions through the crisis when most people weren't. And so what I think is confusing is when you look at the numbers, it looks like the expenses have been well controlled. But what you're seeing there is all of the synergies in -- from the mergers of -- the transaction have gone right back into building the infrastructure. So I already talked about the hiring of people. If you sort of looked underneath that, that's been continuing. But we've put in new data centers, one down in Hillsboro, Delaware last year. We spent $20 million on our way to a $43 million spend. On the one up in Amherst, another new data center, we've been involved in the building out our capital planning process and our compliance structure. We hired a new Chief Compliance Officer about 1.5 years or so ago. So I don't know if you've really noticed when you're looking at the numbers, but really a significant investment has been made. And so as we look at this, we kind of see it the same way because at the end of the day, you can't be a strong institution unless you're -- unless you've made these investments for the future. So I don't really look at this as a sort of short-term thing. I think we're going to take our time. We'll do this right. We'll exceed expectations because we tend to be sort of here for the long term, right? And the other thing I will say is that if you look back, there have been 3 periods of expansion for M&T: in the early '90s, at the turn of the century and then recently. And all 3 of those periods came to us because we were healthy and the industry was not. And what we did in the interim is we built up our infrastructure. So that's kind of what you're seeing today. I think we do it pretty well, and I don't think this is a sign of anything that's changing in our operating model.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

That's important color, René. And my -- just I have one follow-up on the timing of the deal. Can you just walk us through what the path is from here? I know it's going to be hard to say about when it is you go back to the Fed or they come back to you and then when you start to put the merger process on -- back en route. But can you just walk us through what benchmarks -- how we can understand, what has to happen between now and closing and how that's now changed, what are the differences there?

René F. Jones

Sure, I'll say it again, Ken. We do not take regulatory approvals for granted. That's what we have to work our way through. The significant issue that you have to get through is you've got to put in place your infrastructure on BSA/AML, and you got to do it to meet the standards of the firm, the board and the regulators. So that's what we're doing.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Right. I'm just wondering more of like is there a path? So is that -- does that just imply then there's a period of time where you put your work in, there's a period of time where you ask if it's okay, there's a period of time where they tell you it's okay and then we move back on to just normal last-mile approvals? I think that's what people are just trying to understand, is what needs to -- what back-and-forth needs to happen between you and the regulators in order to get to that point, rather than trying to again perfectly gain like when that time is actually going to be.

René F. Jones

That -- I mean, how do I say this? That is just a hard question to answer. I think what you're requiring me to do is put your head down and make sure everything is in place. Our examiners, each one of them, who are from different places, are here all the time. They're continuously monitoring us. And so we feel that if we do our work, then the rest will take care of itself. But in terms of talking about timing, you just can't do it.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

That -- that's I understand. And my last question, René, is just on the mortgage business, can you just give us a little color on -- you mentioned that originations had stabilized. But can you give us an understanding of what the pipeline looked like at the end of the quarter and what your commitments to originate were?

René F. Jones

Yes. Yes, sure. So let me just do the pipeline a bit. So we had just about 1 point -- just under $1.9 billion in our pipeline going into the -- at the end of fourth quarter. And that's now $1.6 billion, $1.64 billion. So it's down 12%, 13%. And if you look at what we locked, we were at $2 billion, and this quarter we were $1.9 billion. So that came down 6%. So it's a little lower. And as I said, I think we saw things drop significantly by the time we got to December and then January. But it seemed relatively stable as we kind of went through the 3 months of the quarter. So I don't think we're seeing any kind of an acceleration from where we were in lower volume. Although we would expect that over the next few quarters, that will be the trend, right?

Operator

Your next question comes from the line of Brian Foran with Autonomous.

Brian Foran - Autonomous Research LLP

I guess coming back to the question of Hudson City and the ability to do any of kind of the initiatives you had planned for accretion and cost savings and stuff like that. I mean, I guess one of the things that strikes me is some of the stuff Hudson City was thinking about doing as a stand-alone entity before the merger and some of the things you had planned for post-merger accretion initiatives are overlapping initiatives. And so, I guess, should we just expect Hudson City to run on a status quo basis? Or is there some subset of things like expanding into agency mortgage origination or maybe a start on the branch rationalization that they could do because then, even in a scenario, unlikely scenario where they end up being a stand-alone entity, they arguably would have done those things anyway?

René F. Jones

Okay. So I can't -- Brian, I can't comment on specifics because Hudson City is going to have to go down their path and run their institution. But having said that, there's a number of things before we showed up that they were trying to do that would strengthen their franchise and that would change the mix of business they have on their balance sheet that are very consistent with things that we would do if we were operating in New Jersey. And one of the benefits of the transaction is that we were able to accelerate that, but they were very much aligned. And so when I look at the whole thing, if there's a delay or significant delay in the transaction, I don't see much of the changes in the economics. I mean, it's very small things. Like obviously, there'll be no benefit until Hudson City either significantly improves their -- or either significantly changes their operating model or does the merger with M&T before you'd see lower FDIC expenses, right? And in this case, that was a large item. So that'll just be delayed. But I think the way you've characterized this is right, but it's very important to understand that we don't have any influence over that whatsoever.

Operator

Your next question comes from the line of Mike Turner with Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

What about -- can you remind us what percentage of your mortgage originations are HARP related?

René F. Jones

Yes, it was about 26% this quarter.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, pretty much unchanged from last quarter or...

René F. Jones

It was like 30%. It was -- it might have been 30% last quarter. I'll get that number for you in a minute.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And René, I know you commented on sort of in the past what new origination yields sort of are in the ballpark, I know. Maybe if you could comment where those are relative to some of your overall average loan yield that was, I think, 424 basis points for the first quarter.

René F. Jones

Oh, you're -- I'm sorry, I was back on mortgage. So you're saying what's going on with loan yields?

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Yes, just new origination yields sort of relative to the current book, which is 424.

René F. Jones

Oh, yes. Yes, it's interesting. So last quarter, we talked about it a little bit, and I said that we hadn't seen much change in the competitive pressure. And we heard more comments across our footprint about competitive pressure this time. So I grab this chart, which actually, I think, I got in front of me. And really, what you see is there really has been a steady, downward pressure on margins probably for 6 quarters. It's been slight, so you don't really noticed it. But I would say that we're running now at levels that we hadn't really seen since maybe the fourth quarter of 2010 because it's kind of been very gradual. And I think what you're seeing there -- so now, first, having said that, it's still much, much higher, the spreads to LIBOR, from where we were than before we went into the crisis and all that, right? So they're still relatively healthy. But having said that, I think what you're seeing is that there are limited opportunities. Whether people should be thinking about it this way or not, they are thinking that they have a lot of capital, right, and they're trying to find something to do with it when the economy really hasn't moved that much, and it's creating a fair amount of competitive pressure and particularly in those customers who are very, very healthy, right? Everybody wants the same individual. So when you look at the trends, I would say that it's just coming down slightly. Maybe it's dropping 2, 3, 4 basis points a quarter, right? But there's -- clearly, you can see the pressure.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

I know, I guess really the yield dilution or yield pressure, a lot of it has really been on the securities book. And I seem to remember new originations were sort of coming on close to where the average loan book is. So what's your -- where is the number sort of relative to the 424? Is it sub-4%? I guess if you're assuming 2 or 3 basis points a quarter, I guess that's what you would apply.

René F. Jones

Some I'll throw some numbers out there just as a rough reference, right? And I don't think about loan yields that way. I think about them as a spread to LIBOR. So if we're running up at 300 basis points now, 18 months ago that might have been 320. And that 300 basis points is kind of consistent what we were in 2010, but we might have been at 400 back in middle of '09, right? So -- and you kind of think that steady progression. Having said that, we were 200 or right around 200 and trying to hold our ground, which is why our industry loan growth was low, maybe 190, back in '07, right? So we're still about 100 basis points higher than that. And then -- and so that's good news. But in terms of what you're thinking about the rollover of the balance sheet, you got some downward pressure there.

Operator

Your next question comes from the line of Marty Mosby with Guggenheim.

Marty Mosby - Guggenheim Securities, LLC, Research Division

I had 3 questions for you. How much traction are you still feel out in the marketplace with the HSBC branch sales and the disruption of the customers? A lot of those in-market acquisitions that go to somebody else create a pretty substantial market share gain, so I just was curious if you still felt like there was some momentum there.

René F. Jones

Yes, I think -- again, I guess the best indication was Western New York, again, had our best loan growth. So I think we said we had 5%. I think it was 11% loan growth in Upstate New York on average this quarter. And while I would expect some of that to begin to taper off because a lot of the activities that -- the significant activity that took place last quarter. Marty, I don't know if you'll appreciate this, but as I live here in Western New York and I go to dinner parties, people -- every time I say I'm from M&T, people still come up and say, "I need to switch to your bank." So I think there's a lot of momentum.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Right. [Indiscernible].

René F. Jones

But I wouldn't expect it to be as strong as what we saw last year.

Marty Mosby - Guggenheim Securities, LLC, Research Division

Right, okay. And then BSA and AML are long-standing requirements. And as you pointed out, you really don't have a lot of international activity and complex businesses. And the acquisition of Hudson City really doesn't add to that exposure as well, so not specifically in that area. How do you -- is it just the size, so your size of the organization, that kind of puts you on a threshold? Because this isn't the first review you've had of these requirements. They've been out there for quite a while.

René F. Jones

I think, Marty, that what you're seeing is that in this environment, there's a lot of change and you've got to continuously make improvements and investments. And you've got to go above and beyond to make sure that you're ahead of the curve. And you can't -- you just can't step back. You've got to keep making investments. A huge change is going on in the industry. And it's not a matter of sort of saying, well, I was okay last year, so I'll be okay this year. You've got to make those investments. And I think in our case, it's a little bit exacerbated by the fact that we're a bigger firm.

Marty Mosby - Guggenheim Securities, LLC, Research Division

There's no signs before in reviews or anything like that that there was imminent issue?

René F. Jones

Yes, you -- well, Marty, you've been on my team. I guess I'll leave it at that.

Marty Mosby - Guggenheim Securities, LLC, Research Division

We'll go on to the next question. Any change in your balance sheet perspective for the positioning? Since Hudson City was only going to balance the balance sheet and kind of use some of your asset sensitivity, any change in your perspective with the delay? That was the last thing I wanted to ask. And thanks for humoring me on some of my questions there.

René F. Jones

No change at all. We don't see any change at all. I think we're just -- we'll keep -- as we said in our outlook. But there's no restructurings or anything. Or if we're working on anything where, as you saw with the issuance of unsecured debt, we're sort of steadily working our way to make sure that we have the appropriate liquidity and so forth. And we will -- I wouldn't be surprised to see a few more of that type of thing.

Operator

Your next question comes from the line of Erika Penala with Bank of America.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

This is Ebrahim on behalf of Erika. I had a quick clarification to Brian's question earlier on the other expense line item. Did you say we should expect that $170 million to sort of trend back higher to sort of where it's been in the second half of last year, like the first quarter is seasonally low and it goes back up?

René F. Jones

Yes. Usually, there's a seasonal dip in that, and I can't explain exactly why right off the top of my head. But in terms of professional services and those types of things, they tend to be light in the first quarter, and I think that was the case this quarter. So I wouldn't be surprised to see a little uptick there. Put it this way. Our -- in the past, going from the first quarter to second quarter, you don't get the full benefit of the change in the salary and benefit swing.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Good, okay. And I guess just one question with regards to the Hudson City deal. Does that change in terms of your hiring plans in the New York area with regards to commercial bankers, like that deal will reduce the rate of hiring? Or how does that impact the thought process there?

René F. Jones

No, I don't think so at all. I mean, I think -- remember, the thing to think about it, which people tend to forget about, is that we're already there. And so we've hired quality people. And if we find -- we continue to find quality folks who we think can add to our franchise, then we would continue to hire them. But it -- you will almost again think of that as a little bit separate from the transaction. I know we accelerated everything because of it, but I think quality people are always welcome here.

Operator

Our final question comes from the line of Steven Palestri [ph], a private investor.

Unknown Shareholder

This is Gap Lester [ph], René. I'm concerned where the new shares are coming from that you're going to be issuing to HCBK shareholders.

René F. Jones

Could you just repeat that question again? You're just a little -- your voice was a little light on the call.

Unknown Shareholder

Sure. I'm concerned where the new shares are going to be coming from, that you will have to be issuing HCBK shareholders. Are you issuing new shares and will that dilute the current shares of M&T?

René F. Jones

Now so the proposal of -- as the agreement we entered into specifies, is that we would be issuing shares of M&T to the Hudson City shareholders. 60% of the consideration would be in shares, and the remainder would be in cash. And because they would be issued in conjunction with the -- a positive economic transaction, there would be no dilution.

Unknown Shareholder

But are those shares currently in circulation only held by M&T so that they're -- you're just not loading more shares to the [indiscernible] of shares?

René F. Jones

Well, what would happen is those shares, part of the shares would be exchanged for the Hudson City shares. And in return, we would get the capital that sits on Hudson City's books today.

Unknown Shareholder

Okay, so there's no dilution of the current shares of M&T?

René F. Jones

Not as we projected.

Operator

You do have a question from the line of Matt O'Connor with Deutsche Bank.

Adam Chaim - Deutsche Bank AG, Research Division

This is actually Adam Chaim in for Matt O'Connor. I just had a follow-up on the balance sheet management question ahead of HCBK. Sorry if this has already been asked, but you started selling almost all your residential mortgage production late last year, I think, partially given anticipation of Hudson City closing. So I think you said earlier that your balance sheet management wouldn't change ahead of this given the delay. So this doesn't change your thought process in terms of holding more of that until the deal is actually closed? The transaction [ph]?

René F. Jones

We don't have any change in thought process from where I was in January. So I don't plan to do -- we don't plan to do anything different.

Operator

And your final question comes from the line of Gary Lu with First Investors.

Gary Lu

So René, so if the timing of the regulatory issue is so difficult to predict, can you talk about your thoughts behind putting out a January 2014 time line in the press release? And also, the second question is, assume we are in January 2014 and you still haven't received the approval. Do you intend to maybe extend the deadline a little bit? Or do you really want to walk away from the deal?

René F. Jones

Oh, that's a lot of questions. I think it's tough to say that. But think about it this way. In banking and in regulated -- definitely in regulated industries, it's not unusual, first, for shareholder approvals to be obtained prior to getting any kind of a regulatory approval, right? So that is not unusual at all. And I think if you kind of go back and look at what we've been talking about for the past 7 months in investor conferences in our original deck, this transaction is unique and adds a lot of value to both sides. So our thought process was -- our thought process when sitting down with the Hudson City folks is that we all remain really committed to the transaction because it adds so much value and it improves both financial institutions. So -- and I don't -- I think at the end of the day, not much else to say about that. I mean, you can see it in the market's reaction. Everybody gets this transaction, makes a lot of sense, and so we're very committed to it. So we thought we would extend the time line, give ourselves a little bit more time to get our issues resolved and move on.

Operator

At this time, we have no further questions.

Donald J. MacLeod

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

Operator

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

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