M&T Bank Corporation at Barclays Global Financial Services Conference - Transcript

Sep.10.13 | About: M&T Bank (MTB)

Call Start: 14:45

Call End: 15:27

M&T Bank Corporation (NYSE:MTB)

M&T Bank Corporation at Barclays Capital Global Financials Conference

September 09, 2013 2:45 p.m. ET


Rene Jones –EVP, CFO


Jason Goldberg – Barclays

Jason Goldberg – Barclays

Moving right along, next up we're very pleased to have M&T Bank. I can give a long-winded introduction about its consistency of results, about its ability to manage through different cycles, its ability to acquire underperforming institutions and correct them over time, which are all certainly inputs of its attractive story, but I always like to look at, and I'll kind of lead with Rene's conclusion, of slide 17 of their deck that just lists the best-performing stocks in the banking industry over time. And no matter how you want to slice it or dice it, M&T physically shows up on top.

From the Company, very pleased to have Rene Jones, Chief Financial Officer, and Don MacLeod, Director of Investor Relations. And with that, let me turn it over to Rene.

Rene Jones

Good afternoon, everybody. Thanks, Jason. Appreciate the intro.

So, obviously grateful to have the opportunity to share some thoughts with you here at the Barclays Conference. We've come here many years in a row now recently, and it's always nice to see familiar faces.

I think what I'm going to do is cover a couple of topics, so let me just sort of give you a bit of an outline.

First, as we all know there's been a lot of changes in the banking industry and we would like to talk about a little bit about how that's affecting our business today and maybe a little bit about how we think it might affect the business in the long term.

I'm going to highlight some of the key financial items from the second quarter in part because it was a relatively noisy quarter with a number of the actions that we took. Essentially we took advantage of sort of market conditions to do a number of I'll call them transactions that both improved our liquidity and our capital profile as we enter for the first time the CCAR test in 2014.

I want to talk a little bit about what we're seeing in terms of fee income, particularly on the mortgage banking side. We've talked about that for some time. There were some things in our second quarter which I think sort of mask the real existing trends there so we'll talk about that.

And then, I've also spoke for some time about the amount of investment that we're making associated with all the change that's been going on. And I'll continue to do that, but I think clearly you'll begin to see some of the impact of those investments that we've been making in the third quarter, so I think that's a timely topic.

And then, I'll wrap up with sort of our near-term outlook. I'll also walk you through our, as I kind of go through the prepared presentation, what I want to give you a chance to sort of think about it and ask any questions of either myself or Don, so happy to do that.

Obviously, this our standard forward-looking disclaimer slide. It talks a little bit about our forward-looking risks and as they relate to the Bank and as they relate to the pending transaction with Hudson City. We talk about our GAAP earnings and operating earnings.

As I always say, we came up with a measure of operating earnings in 1998. We're always very consistent in using that term “that measure.” We haven't changed it ever since, but because it's non-GAAP we include in the back a reconciliation of GAAP to non-GAAP items in the back.

And apparently as I've said, they always tell me that the efficiency ratio and the pre-tax pre-provision number is non-GAAP. We use them a lot, but I guess I've got to tell you that.

I will cover our slide here that tells you a little bit about who we are.

Most of you I'm sure are probably pretty familiar so I'll go through this briefly. We're a top-20 US bank, commercial bank holding company ranked by assets. And if you rank it by market cap, we're a top 15. We were founded in 1856. At $83 billion in assets, about 2 million customers, 215,000 commercial customers. On the loan side our balance sheet is heavily weighted towards commercial loans and commercial customers.

One of the things that we think sort of differentiates us that I will mention is that we tend to operate in markets where we tend to have a pretty strong position. So while we're not in every major metropolitan area in our footprint, the places that we do choose to operate we're either number one or two of market share, sometimes market three. We think that's a big factor in sort of differentiating us, especially as we get into some of those sort of higher infrastructure needs that we think you're going to need as you kind of move forward as a banking institution.

So, as you know there've been a lot of changes in the banking industry over the past several years, and we note that sort of both regulations and our regulatory expectations are rapidly evolving for banks, all large banks, M&T included. So, let me sort of talk about a couple of these.

So, we think liquidity capital levels in the banking system are going in only one direction. That's up. Risk management infrastructure, capital planning, stress testing, and governance will continue to be areas of focus. And of course you can't really do a good job in any of these without good systems, good data, and good management information. So, we'll talk a little bit about the investments we're making on that front.

The bar continues to rise in terms of the US banking system from a safe – from protecting against illicit activities, so that's your BSA/AML activities. You guys are very fully aware of the work that we're doing on that. We think that the infrastructure that you need to build is the same infrastructure, regardless of whether you're a global bank or a regional bank headquartered in Buffalo. We think that the cost associated with those two things are probably equal. So, they're hurdles that you have to get through and you've got to be able to deal with them and have the right systems to be able to sort of play in the future.

The management team has been very focused on all of these things, more recently with respect to long-term rates. You've seen a decline in mortgage banking revenues, which again I'll talk about on kind of one of our future slides, but that continues into the third quarter.

And then, if you look at the combined effect of liquidity and capital levels, soft of modest loan growth, lower yields, and then the environment that I talked about for investments or expenses, it really clearly bodes for sort of lower relative returns in the banking industry going forward.

And I think the thing that we think about as a management team is sort of how do we embrace all those things and sort of take our strong position that we have, and we believe our goal is to try to be the best relative performance in the banking space, risk for – or return for risk that we – return that we provide for our modest risk profile.

We continue to be very bullish that we're able to actually do that and do that in a strong way. Much of that comes from the fact that as we make decisions, remember we own 19% of the firm ourselves in the Board, Management, and our employees. So, we think as we tend to focus on these types of activities that we're doing, we're tending to focus on them in a large way for the long term.

With that as background, let me see if I can sort of summarize some of the actions that we've already taken in our second quarter. You see here our results for the second quarter. Really simply up on a GAAP basis 29% from the previous quarter. Up a similar amount diluting that operating earnings per share, we're up a similar amount on an operating basis. But really there were three things in those numbers that we talked about on the call that I'd like to sort of talk about again and sort of reiterate.

We sold just over $1 billion of private label mortgage-backed securities that were previously in our held for sale – available-for-sale portfolio. We had an after-tax loss of about $28 million, or $0.22 a share. And this is the portfolio that had been generating the majority, if not all, of the other-than-temporary impairment losses that you would see from time to time in our quarterly results.

Really two things are going on there.

One, if you think about it, that is a non-core asset for us, and for all of the time that we held them, all the way through the crisis up until we sold them, our internal valuations of those models were suggesting that they were worth more than the market was willing to pay for them. That changed in the beginning of this year, end of the second quarter as things – prices started getting a little bit frothy, it flipped, and we thought that our internal valuations were saying that they were fairly valued where quite frankly the market was sort of over-valuing those securities. And at the same time, when we were running our stress testing, we were running those securities through a severe adverse scenario, which automatically produces results. And much of your capital is no longer driven by just where you are today but it's driven by those sort of forward scenarios, so you kind of have a double win.

One, we were able to sell those transactions for an economic price – those securities for an economic price that made sense, we reduced our risk profile in the stress testing, and as a result, if you take a look at what we were able to sell the securities for versus where sort of the depth and low point of the crisis, the differential in proceeds was over $240 million on a $1.1 billion investment.

So, we are looking and have been looking at our balance sheet for some time to do those types of transactions where we can lower the risk profile, improve liquidity and/or capital metrics. So, what we did with the proceeds is we then turned around, as rates had risen by about 100 basis points, we then reinvested those proceeds into GNMA securities with the idea that we would start to build our liquid asset buffer that you needed for the liquidity coverage ratio.

If you – let's see what we've got here.

Actually I'm going to go back one. Also during the quarter what we did is we liquidated our holdings in both Visa and MasterCard. Very similar reasons. Non-core holdings and it allowed us to generate – get a capital benefit from that, $62 million.

And then, finally the other thing that happened in the quarter was that we came to the end of our second anniversary and our agreement. We inherited a contingent liability that we had reserved for, and that liability expired around the severance agreements with Wilmington Trust. So, if you take those things in total, that added $50 million to net income, or $0.38 per share.

Let's take a look – Jason, do you know how to go back? Oh, there you go. Okay.

So, let's take a look at the key ratios. First, starting off with the net interest income.

We were at 3.71% in the quarter. It was similar to what we had last quarter. But if you're going to look underneath, we have been talking for some time about the 3 basis points of quarterly margin compression that's inherent in our balance sheet, and really what we saw is that there were higher pre-payment income and non-accrual income.

So, what you had when rates were touching on the historical lows was a massive amount of folks were in our – of our customers were looking to lock in those low rates, refinancing, so it actually put some pressure, particularly on our real estate balances, but we got a lot of pre-payment penalties. If you took that out, you probably would have seen 3 to 4 basis points of continued margin compression over time.

If you look at our loan less allowances held steady at 1.41%. Our charge-offs were bouncing around a little bit. They were 35 basis points but were just below our long-term average over the last 20 years or so of 37 basis points, so kind of credit is sort of where the long-term average of the bank has been.

And then, if you look down towards returns, we're always fairly pleased that we've been able to maintain a significant return on tangible common equity. Our strategy is always about trying to maintain those levels of returns as opposed to focusing very much on growth, and we're very much willing to sacrifice growth and the size of our balance sheet for those things.

If you were to look at that normalized, that 22.7% is probably like 19% return, which is roughly 18% to 19% return that we've been able to provide through 2013 sort of adjusted for those unusual items. So, we're fortunate. We're fortunate in one sense to be starting off in a good place as we sort of tackle a number of our initiatives.

Lastly, I point you down to the capital metrics. They've been rising pretty steadily over time. We will continue to have those metrics rise until we get through the CCAR process and get a little bit more understanding of what that process is about. We've obviously been through the capital process and we've run our own internal models, but as we go into the CCAR, obviously we're up against – our numbers will be run against the internal models. So, we'd rather have more capital than not. And you can see we moved about 62 basis points just in the linked quarter, so that should continue as we kind of finish off a number of other initiatives and then of course our earnings, our core earnings generation is pretty strong.

So, these again are the actions – some of the actions that we took in the second quarter. I won't cover them again except for one of the things we did is we also securitized a little under $3 million of FHA loans that were on our balance sheet, turned them into GNMAs, and held them in our securities portfolio. And again, that's all geared towards moving towards the liquidity coverage ratios.

As we move into the third quarter, we're sort of continuing that effort. So what we did is in addition to the actions in the second quarter, we did approximately $1 billion of additional FHA loans that were already on our balance sheet and moved those into the securities book. We also noted in our 10-Q our intention to securitize and sell up to $1.5 billion of consumer loans in the quarter, again, all geared towards improving our liquidity profile, which we would then invest in liquid assets. We expect that transaction to be a true sale, and we would again deploy those into liquid assets.

So, essentially what we're doing in those types of transactions is if you look at M&T in our Tier 1 common basis we're low relative to the peers, but on a tangible basis we actually are not low. And what it means is that we've got a lot of our equity in the firm is invested in loans. And so as we've been watching for some time as the rules play out, our goal is to sort of optimize our balance sheet, and what you're kind of seeing in that last sort of transaction that you'll see in the third quarter is really looking at loans that sort of fit a lower return profile and having it be the sort of least cost way to sort of improve that profile of liquidity.

So, we've talked about all these things for a very long time, but as we kind of get ourselves into the second and third quarter and into the rest of the year, you're really beginning to see us sort of take advantage of the market conditions to execute those transactions.

A few other points that I would make are simply that we've got a note program out there. We did about $800 million of a $5 billion program. We likely will continue to do more of that. I don't know exactly the timing. And then of course we have approval to refinance out our trust preferred that we had in our 2013 capital plan.

This just gives you a quick snapshot of kind of what we've done in terms of our capital ratios. And the actions that we took in the second quarter and then our combined balance sheet initiatives along with our strong earnings has really given us a nice boost. And again I just point again to the Tier 1 common ratio. We would expect that to continue to increase through the third quarter significantly and then into the end of the year.

So, specifically I wanted to spend some time sort of with this slide talking about the mortgage-banking outlook. I went back this morning and I looked at my comments from the second quarter call and I think we kind of got everything, but we've been kind of surprised. We think that sort of the outlook that people have for mortgage banking revenues seems a little rosier than we would have expected.

So, if you look at the slide and up in the top right-hand corner, what you see in the green is the decline that we've seen since the fourth quarter in our residential mortgage gain on sale volumes. But as we said in the second quarter, one of the things that happened with the low, low rates and people refinancing out, which I said gave us a benefit in the margin from pre-payment penalties, actually it also gave us a benefit in our sort of for sale operations on the Freddie and Fannie DUST programs that we have. And essentially what you see is we had record mortgage banking gains on the commercial side.

So, if you take those away, which they've already begun to go away, and you continue that trend down, we should see a pretty significant decline in mortgage banking volumes. And from going and talking to people we sort of weren't seeing quite the response we would expect, so we wanted to really highlight that.

Another question we're getting on the mortgage banking front is that we obviously have taken on some more servicing and sort of which we'll get into on the expense side, but remember we entered a contract to do some subservicing, a significant amount of subservicing, which we have done now in the third quarter.

But really how that works is we hired 500 people in one day on July 1st, and then much of the activity that we have to service will not sort of be fully up and running until we get into the fourth quarter. So, we'll have some benefit, but it will be much less than sort of what you see on the expense side, particularly in salaries and benefits.

So, you won't see a big boost from that. People have been asking us about that, but you won't see a particular significant offset in the third quarter. You will never see higher salaries and benefits expenses. And that brings us to sort of the significant investments that we've been making.

Again, I say this because we try to give everybody a heads up. We've been talking about significant investments we've been making for several quarters, and perhaps sort of in some ways none of these investments that we're going to make kind of fit our culture, which is that if we make the right investments for the future, we tend to focus heavily on which investments we should make and not make. I think that's probably the differentiator at M&T. As we make those investments we think that they should bode well for the longer term in terms of the viability of our franchise.

If you look at – again, we're the first time in the CCAR bank and the expectation for us is – for this effort is that we've got to build out our capital planning, stress testing, and infrastructure, our governance process. That involves hiring a lot of specialized talent. It involves hiring a lot of outside consultants to help us sort of set up our process. And so, you're going to begin to see a fair amount of that rise on the professional services side.

We've also mentioned the data projects, which we think are key to that process. We've been investing heavily over the past three quarters in the data warehouse and restructuring the information that we produce at the customer level. This is relatively expensive and probably should take some time.

We're investing in building a stronger risk management framework. We talked about the fact that in January we split our audit and risk committee, and Jerry Hawke, who many of you know as a former Comptroller of the Currency, joined our Board to chair that committee. We brought on Don Truslow who was formerly with Wachovia as a Chief Risk Officer. And we're building out that infrastructure as well making sure that as you sort of back up our risk management infrastructure it's sort of second to none including the banks that are much larger than us.

So, you'll begin to see the impact of some of that. Obviously under compliance, the BSA/AML investments that are underway which starts off with a number of external consultants that help us out in designing a model that again is similar to what you're seeing at some of the larger institutions. I mentioned on the call we had hired 53 individuals in our BSA/AML area. That number is now 184. It's probably more than we had in the group in the first place, so it's more than doubled.

And so, I give you those things. All those things sort of give you some sense of the magnitude of the investment we're making. And the way we think about it as a management team is that to the extent that a bank is able to sort of make sure that they have the infrastructure that's sort of second to none in most spaces, we'll be able to continue to run the bank in the way that we've always done and we'll be prepared for opportunities that are likely to come.

So, we're fortunate because we tend to view things in a very long-term manner, but clearly we think that this is a time where investment sort of trumps anything on the expense-cutting side. If you think about where you typically would be in this cycle of mortgage banking, we'd see this decline maybe a little bit slower because the ramp up in the mortgage banking boom for the banking industry was really big, but we would then see that combine with a decline in expenses.

You won't see that at M&T. I mean most of all that benefit is being redirected into these types of projects, so I think we wanted to just sort of – we've talked about it for some time, but we wanted to make that a little bit more clear. In terms of our rate position, our rate position hasn't changed much but we thought we'd talk about it a little bit. You see in our Q for a 100 basis point gradual increase in the rates. We're asset sensitive so NII goes up by about 4%.

Having said that, when you look at the 100 basis point rise that we just saw, it was mostly on the long end so most of our benefit is tied to – this benefit is tied to short-end rates. We've got a lot of variable rate loans that are priced off the one-month LIBOR.

The other point I'd make is many of the initiatives that we've done in the second quarter or that we've talked about doing, the sales loans are all reflected in those numbers. And I think when you look at it overall, we continue to think that the benefit or the impact of our net interest margin if rates are stable is to see that 3 basis points of decline.

We continue to bring in cash. We have cash balances at the Fed in the second quarter. We continue to invest in liquid securities, but we continue to bring in a lot of cash. It's one of the things that surprises me the most is that on the deposit side, deposit growth has not stopped. I would have expected by now that that would have tapered off.

So, in summary, mortgage banking, gain on sale margin is declining, commercial side is also down. We think the costs of the risk management infrastructure build and staffing for the sub-servicing contracts will – you'll see the growth in the expense start to materialize. We continue to build our capital and liquidity positions. We think there's only modest loan growth, but if you kind of look at the total earnings assets, a lot of that is, if you look together, combined earnings assets should see growth. And then, the 3 basis points of margin compression.

When we look at M&T sort of over the long run, I thought this slide was relatively important. And it kind of gives you some sense of how we are positioned against our peer group. The peer group is – sorry for the small writing, but it's our standard peer group. You see it down on the bottom, which would be BB&T, Comerica, Fifth Third, Huntington, Key, PNC, Regions, US Bancorp, Wells, Zions, and SunTrust.

What you see on this slide is that there is not one sort of measure that you can look to that explains our performance over time. And in fact, we're rarely ever the best person in any one of these, but what our successes come from is our ability to sort of be above average in all of these measures at the same time.

So, as we've talked about for some time, people have asked us what are we going to do on the liquidity front, what are we going to do on the capital front?

The way we think about it is it all sort of kind of comes together, and as we then think about it and roll it out, our objective is to be just a little bit better, a little bit better on the cost side, a little better on the cost allocation side, and as we add those things up, it's tended to give us an advantage over long periods of time.

And that sort of gets you to this issue to the capital allocation. And if you think about this slide, this is sort of the second time we've shared this slide. And if you look in the middle it shows where our capital has gone over the last 30 years. And basically it's a third, a third, a third.

A third has been retained for the business, a third has been through dividends, and a third has been given back through share buybacks. And if you look at the five years 2003-2007 in the green shade, there really wasn't much opportunity for us to make investments. So 20% of that capital was provided to grow the firm and the rest was redistributed out.

If you look at the last five, which of course covers the crisis, much more of that has been retained for growth in the business or for increasing the strength of the balance sheet. And I won't go through it but you know the transactions we did and the things that we've done. If you think about that over time, we went through a growth period between 1987 and 1990 where the market had tanked, we were strong, and we went through a growth period. Then we were relatively quiet for a very long time. We made a lot of investment. We had an investment called Future Solutions. We were investing heavily in technology and in people.

And then, we went through another growth spurt in 2000 with KeyBank going to Pennsylvania. We went into the Hudson Valley. And then, we did Allfirst. And then, we were relatively quiet for about four years and we were building our infrastructure. In fact, we were building out BSA/AML, the pre-existing system we had and building our management infrastructure out.

In essence, we're kind of going through the same thing as we sit here today. We've gone through a big growth spurt. We still have and are working on depending – Hudson City transaction. But regardless of that transaction, where we are today is making sure that we build out our structure and our infrastructure so that we can be ready for whatever happens going forward. It's a little clearer today because of all the regulatory change and expectations that are out there, but really as we kind of look at it, it's sort of business as usual and there's a lot of investment that we need to make. We think if we make those investments, we'll be well positioned for the future.

Jason referenced these. It's that thinking that has sort of got us to produce these types of results over time. We – and I'll sort of end. Won't cover every one of these slides, but I'll sort of end with the idea that we think our job is to sort of understand the financial system that we operate in and to the extent that we can be slightly above average in each of the individual areas, the question is whether or not we can sort of post returns that are above average in the industry. And we still feel pretty good about that operating model, but we've got a lot of work to do here still. So those are my comments.

Happy to take any questions either for myself or Don.

Question-and-Answer Session

Jason Goldberg – Barclays

Yes. Why don't we do some of the ARS questions before we take questions from the audience. Do we have the ARS questions?

Rene Jones

What's an ARS question?

Jason Goldberg – Barclays

You'll find out. Christ. These are for the audience, Rene, but then we may ask you to comment.

Rene Jones


Jason Goldberg – Barclays

If you currently don't own any shares of M&T or underweight the stock, which one of these would be most influential in making you change your mind?

One, successful closing of the HCBK acquisition. Two, less of an acquisition strategy. Three, a succession plan. Four, improved capital. Five, a pick up in loan growth. And six, valuation.


Valuation and which I would highlight that M&T has never been a cheap stock and actually if you look at its relative valuation it's probably more of a discount today than it has been historically.

And then, number two was on the HCBK deal. And so Rene, that's not something you really addressed in your formal remarks. Maybe can you just talk about where we are in terms of the – one, getting you up to speed on BSA/AML. And then two, where we are on the approval process?

Rene Jones

Yes, yes. I mean it's not really possible for me to talk about the approval process. And I'll say it again, I mean it's always been – the regulatory process has always been uncertain, and that's never been more true than it is today.

So, our focus is on the BSA/AML issue, and internally we think we're in good shape. We've hit the dates that we've hit to date. There's quite a bit of work that has to go through that process, and as we get through it we'll then – it's hard for us to share a lot of information. So, we can give you some sense that things are going well and today we think we've hit all our milestones. So, that's where all our energy is focused on.

We're focused heavily on sort of redesigning our systems, but we also have to train our people in how to interact with the customer base to go collect that information that's needed and to how to open up new accounts. So we're sort of in on all fronts.

We're making good progress. I think when we're done our intention is to have a system that, as I said in the opening remarks, is really send to none. It's hard to go into these things and try to sort of just cross some hurdle, so you tend to put all your resources towards them. And as we get through that, then we can then begin to think about the Hudson City front. But until we do that, there's really no news to update on in terms of Hudson City.

Jason Goldberg – Barclays

It's interesting. We asked this question last year and we had the foresight to ask approval and success proposing of HCBK acquisition at that point also, and everyone thought it'd get closed without a hitch. Only 8% of the people thought it was an issue: interestingly on the valuation, yet while 42% saw it as a hurdle this year, that's down from 56% last year.

I'll go to the next question. When do you think the acquisition will close? If we can get a consensus view on that. Why don't you just start the countdown? I think that would be it.

Rene Jones

Does someone have a trademark on the Jeopardy music?


Jason Goldberg – Barclays

And see, consensus is 1Q '14. I know, Rene, you kind of extended the agreement to January 2014. Any particular reason you picked January 2014? And what happens if we get to that point and it's not necessarily consummated?

Rene Jones

No. I mean you work…

Jason Goldberg – Barclays

On trying here.

Rene Jones

If you work back in the time when you do a transaction, you work on what makes sense for both parties, and there's a lot of give and take but there's no magic behind all those dates.

Jason Goldberg – Barclays

Fair enough. Next question.

Why don't we go to the next one in the interest of time? Skip that.

That's the last one?

All right, we'll go with this one.

How do you view M&T capital ratios? One, adequate even if it doesn't close the HCBK deal. Two, adequate only if it closes the HCBK deal. Three, less than desired. And four, wait for the final Basel III rules.


So, the majority thinks it's adequate, which we'd agree with. And with that why don't we open it up to the audience for questions.

That's your next acquisition target.

Rene Jones

There’s –I could…

Jason Goldberg – Barclays

Just for…


Rene Jones

So, it’s your turn next.

Jason Goldberg – Barclays

Questions from the audience?

Unidentified Speaker

Just from a big-picture view, if you'd just remind us what does the Hudson City transaction do for you strategically?

Rene Jones

Well – but you know, I think it's interesting. So, if you kind of understand there are – if we have an acquisition strategy it's one that I would characterize as opportunistic.

So, we own a fair percentage of the firm so we tend to be relatively conservative. And if you think back to the transactions that have happened, they've really happened to us. They’ve sort of a footprint need or they have sort of come at a time when we were very healthy and the other institution might have been having difficulty. And this morning I was giving the example of we've always wanted to be a bigger franchise in the Albany area, but we've never seen anything that sort of hit the metrics or that provided the opportunity.

If you look at our Board today, I mean our Board is made up of people who have decided to join M&T, and you kind of look through that, you can see the membership is not necessarily people who have sold their institutions but people who have sort of decided to merge their institution into M&T and continue in the banking industry.

Really with the Hudson City transaction, we've always wanted to be in New Jersey, we have customer contact in New Jersey. But over the last 30 years we've never found a place that we could get into economically that had a good sizable enough franchise but at the same time happened at a place where we could add some strategic value, in essence which means that you could have some decent size returns.

So, I think really what I think about that is that Hudson City had a goal of transforming itself into a commercial bank. We actually could make that happen much, much faster. And so essentially what it does it gives us a free option on New Jersey, but it does it in an economical way. And I think without it would be very, very hard for us to sort of establish a strong enough market share position to operate a bank very effectively and efficiently over time.

So, that's what we saw when we went in and we think we structured a deal that was good for both sides. That's clearly – I think that's really actually clearly been evident. So, that's our thought process. We have a bit to do on the building out of our sales force, but actually that part of the process was way ahead and is way ahead, so I think we'll try to work our way through, see if we can get regulatory approval, and I think if we do it'll probably be another nice strong transaction in the classic sense that you've seen from M&T before.

Any follow up there? And…

Jason Goldberg – Barclays

I guess, Rene, you touched on loan growth and you kind of mentioned the HCA (ph) data. And if we look at the commercial real estate portion of the HCA (ph) data, it's actually been doing pretty good lately. I think the balance has been stable to up in eight of the last ten weeks. Can you talk to kind of that in particular in terms of growth opportunities and any impact of potential new entrants in the New York marketplace?

Rene Jones

You know if you look at our portfolio, there's a lot of portions of our portfolio that are sort of steady as you go. I mean Upstate New York has actually been very strong and continues to be strong overall on all sides, but including the real estate side.

But we've seen, if you go to the other end of the franchise in the Mid Atlantic, we've seen just a fair amount of pre-pays and refinancings. Some of that refinancing has come at rates that are not really – we're not capable in our management information way of thinking of really capturing, so insurance companies have come in and offered pretty low pricing.

And then, I think quite frankly that the New York City market in our minds has probably been on the real estate side one of the more rational markets. Our loan growth has been fine. It's not been booming, but it's probably where we'd like it to be. But I think the biggest factor there is that there are three, four players, five players, and all of them seem to be behaving in a very, very rational space.

So for us taking that consistent mid-single-digit loan growth that you're getting in those markets is nice, but what's really nice is we're not having to stretch to do it. That is different in Baltimore. That is different in Washington D.C. Markedly different.

Unidentified Speaker

If Fed funds doesn't increase say in 2014/2015, it looks like you've had 3 basis point margin bleed on a core basis. Again, assuming that Fed funds does not increase over the next two to three years, would you – when would you anticipate your margin to actually stabilizing?

Rene Jones

Oh. Through 2015, I mean it would be – I think it would continue to go down. And the way I think about it is obviously we'd have to look at all of the other metrics, but we'd be relying less. I think our balance sheet is not all that different than everybody else's with the exception of what we roll on probably has limits as to how low we would go in pricing. So, we would probably begin to see slower growth on a relative basis.

You know we have a very low appetite for the securities other than what we need to put in, so to date that drag has been lower. But that actually, if you're carrying a larger securities book, I think actually that probably stays as a benefit because we didn't put them on when rates were high.

So, I think for us, the way we think about it is what's the relative advantage? I think the industry as a whole would continue to see very, very low margins. And if that's what we're delivered, that's what we get. I think it would really begin to shift our focus probably to the expense side of the balance sheet. And it's one of the reasons why we're so focused on making the investment today.

We hear a lot about expense programs and so forth, and for us, we just can't sort of see past trying to make sure before we get into that type of an environment that we've got the infrastructure built exactly as we want it where all the new rules and sort of the new environment. So, I think as you get yourself out that far you'd probably be talking about a lot of efficiency type issues.

Jason Goldberg – Barclays

Great. We're short on time. Let's do the rest of the questions in the breakout session.

With that, please join me in thanking Rene for his presentation.

Rene Jones

Thank you, Jason.

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