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M&T Bank (NYSE:MTB)

Q1 2014 Earnings Call

April 14, 2014 10:00 am ET

Executives

Donald J. MacLeod - Vice President and Assistant Secretary

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

Analysts

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

Dan DelMoro - Deutsche Bank AG, Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Brian Foran - Autonomous Research LLP

Erika Najarian - BofA Merrill Lynch, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Keith Murray - ISI Group Inc., Research Division

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

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Kenneth M. Usdin - Jefferies LLC, Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Jennifer A. Thompson - Portales Partners, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.

Donald J. MacLeod

Thank you, Lori, and good morning, everyone. This is Don MacLeod. I'd like to thank everyone for participating in M&T's First Quarter 2014 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.

Rene F. Jones

Thank you, Don, and good morning, everyone. Thank you for joining us today. As I noted in the press release, we got off to a bit of a slow start in 2014 with lower-than-normal levels of client activity in January and February, followed by a rebound in March. This was the case for both the balance sheet, as well as some of the fee income categories. Nonetheless, the quarter was a productive one. We received a non-objection to our capital plan from the Federal Reserve, access to debt markets and financed one of our trough issues with perpetual preferred stock, plus eliminating the need for additional amounts of preferred for the foreseeable future. And we continue to make progress on our BSA/AML compliance, risk management and capital planning and stress-testing capabilities.

I'll have further thoughts on some of these topics later in the call, but first, let me review a few of the highlights from our first quarter results, after which Don and I will be happy to take your questions.

Turning to the specific numbers. Diluted GAAP earnings per common share were $1.61 for the first quarter, compared with $1.56 in last year's fourth quarter and $1.98 in the first quarter of 2013.

Net income for the recent period was $229 million, compared with $221 million in the prior quarter. Net income was $274 million in the year-ago quarter.

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 effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions when they occur.

After-tax expense from the amortization of intangible assets was $6 million or $0.05 per common share in both the first quarter of 2014 and the fourth quarter of 2013.

M&T's net operating income for the first quarter, which excludes intangible amortization, was $235 million, up from $228 million in the linked quarter.

Diluted net operating earnings per common share were $1.66 for the recent quarter, up from $1.61 in the linked quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.15% and 12.76% for the recent quarter. The comparable returns were 1.11% and 12.67% in the fourth quarter of 2013.

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

Turning to the balance sheet and the income statement. Taxable-equivalent net interest income was $662 million for the first quarter of 2014, down by $10 million from the linked quarter. The decline was attributable to 90 days in the quarter compared with 92 days in the prior quarter. The net interest margin was 3.52% during the quarter, down by 4 basis points compared with 3.56% in the fourth quarter.

Although the reduced day count in the quarter had the effect of reducing net interest income, it added 2 basis points to the reported margins.

We'd estimate that the actions taken during the quarter to further build our liquidity asset buffer in connection with the liquidity coverage ratio reduced the reported net interest margin by about 4 basis points.

During the quarter, we issued $1.5 billion of senior banknotes and began to deploy the proceeds of that issuance into LCR qualifying investments. Finally, the remaining 2 basis points of margin compression represents our estimated core margin pressure, which includes the impact of new loans coming on at rates lower than those maturing and which is partially offset by a lower cost of funds.

The average interest-earning assets increased by $1.2 billion or 7% annualized as compared with the prior quarter. The increase included an $911 million increase in the average investment securities, as well as the $213 million or 1% annualized increase in average loans.

Average commercial and industrial loans or those loans to support business operations grew at a healthy 9% annualized rate. We saw strong double-digit growth in both Pennsylvania and in our New York City Metropolitan region, as well as continued growth in auto floor plan loans.

Average commercial real estate loans declined slightly at an annualized rate of 1%. While the origination activity remained steady, we experienced the higher level of paydowns, a high proportion of which were refinanced by CMBS conduits or life insurance companies at lower rates or longer terms.

The industry-wide slowdown in the residential mortgage loan volumes has resulted in a smaller portfolio of loans being held in the pipeline for eventual sale and that was the primary factor driving an annualized 7% decline in residential real estate loans.

Average consumer loans grew at an annualized rate of 3%, with strong growth in indirect auto loans being partially offset by continued declines in home equity lines of credit, as well as seasonal softness in recreation finance lending.

Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, grew at an annualized rate of 2% from the fourth quarter. On an end-of-period basis, core deposits grew at a much stronger annualized rate of 11%.

Turning to noninterest income. Noninterest income totaled $420 million in the first quarter compared with $446 million in the prior quarter. There were no securities gains or losses in either period.

Mortgage banking revenues were $80 million in the recent quarter, down $2 million from the prior quarter. Commercial gain on sale revenues declined by $6 million compared with the fourth quarter, reflecting lower volumes of commercial mortgage loans originated for sale. The impact from those was partially offset by higher residential mortgage servicing revenues.

Fee income from deposit services provided were $104 million during the first quarter compared with $110 million in the linked quarter, primarily due to lower levels of NSF volumes, as well as lower customer debit card activity.

Trust and investment revenues were $121 million compared with $126 million in the prior quarter. Some portion of this decline is seasonal and we would expect to see a rebound in the coming quarters in addition to the seasonally strong tax-preparation fees we typically realize in the second quarter.

Turning to expenses. We continue to make investments in our risk management and compliance framework. As a result, our operating expenses are still elevated from what we think of as our normal ongoing expense level.

Operating expenses for the first quarter, which exclude expense from the amortization of intangible assets, were $692 million, down by $41 million from $733 million in the prior quarter. Recall that the fourth quarter's results included a $40 million addition to our litigation reserve.

In the first quarter, salaries and benefits increased by $35 million, reflecting in part the normal seasonal increase that comes from the accelerated recognition of equity compensation expense for certain retirement-eligible employees, higher FICA expense, higher unemployment insurance expense and expenses related to the 401(k) match. As in prior years, as these items return to more normal levels, we would expect the comparable decline in this year's second quarter.

The other noteworthy change from the linked quarter was a $34 million decline in professional services expense. As we noted on the January call, those expenses likely peaked in the fourth quarter, reflecting the front-end spending tied to our BSA/AML, capital planning and stress testing and other initiatives. Bob Wilmers offered additional details on our risk management and other investment priorities in his message to shareholders published with the 2013 Annual Report.

That said, we would expect our spending in these categories to remain elevated, possibly through the third quarter, before beginning to show improvement.

The efficiency ratio, which excludes securities, gains and losses, as well as intangible amortization and merger-related expenses, was 63.9% for the first quarter compared with 65.5% in the prior quarter.

Next, let's spend some time on credit. Our credit quality remains strong and in line with our expectations. Non-accrual loans increased slightly from the end of the fourth quarter. The ratio of non-accrual loans to total loans increased by 3 basis points to 1.39% as of the end of the first quarter. Notwithstanding that slight increase, when we file our 10-Q in the coming weeks, I would expect that we'll report another decline in classified loans.

Net charge-offs for the first quarter were $32 million, down from $42 million in the fourth quarter and annualized net charge-offs as a percentage of total loans were 20 basis points for the first quarter, improved slightly from 26 basis points in the fourth quarter.

The provision for credit losses was $32 million in the first quarter. The allowance for credit losses was $917 million, amounting to 1.43% of total loans at the end of March. The allowance for -- the loan loss allowance as of March 31, 2014 was 7.1x annualized net charge-offs.

Loans 90 days past due on which we accrue -- continue to accrue interest, excluding acquired loans that have been marked a fair value at acquisition, were $307 million at the end of the recent quarter. Of these loans, $291 million or 95% are guaranteed by government-related entities.

Accruing loans 90 days past due were $369 million at the end of the fourth quarter, of which 81% were guaranteed by government-related entities.

Turning to capital. M&T's Tier 1 common capital ratio was an estimated 9.45% at the end of March, up 23 basis points from 9.22% at the end of 2013. Our estimated common equity Tier 1 ratio under the recently adopted Basel III capital rules is approximately 9.22%. And tangible book value per share increased by 3% from the prior quarter to $53.92 per share.

We were very pleased to have received the non-objection from the Federal Reserve's CCAR stress test on both the quantitative and qualitative basis.

As we noted last month, our capital plan for the coming 12 months includes maintaining our common dividend at its $2.80 a share annual rate, as well as continued payments of dividends and interest on other regulatory capital instruments.

Turning to our outlook. As I mentioned at the outset, client activity was very slow across the board for both the balance sheet and some of the fee categories in January and February and then picked up significantly in March. Our sense is that the slowdown was likely a temporary issue.

Regarding loan growth, we were pleased with the momentum we had in C&I lending. We expect continued pressure on pricing and structures in the CRE space. At this point in time, we're maintaining our outlook for mid-single digit loan growth through -- in 2014.

We continue to expect modest ongoing core compression and a net interest margin of about 2 basis points per quarter. As we've discussed, we will see a continued decline in the printed margin as we take further steps towards reaching full compliance with the liquidity coverage ratio by the end of this year. However, those actions will have little to no impact, no negative impact on net interest income.

We expect some improvement in fee-based revenue going into the second quarter despite the slow start. Our outlook for fee revenue growth in 2014 remains in the mid-single digit area. And as noted earlier, expenses will be elevated as our pace of investment will remain high over the next couple of quarters before we begin to see some improvement. Our goal is to be well-positioned for 2015.

The outlook for credit is stable. There are no signs of any turn in asset quality metrics. With respect to our work on BSA/AML compliance, we continue to make considerable progress, achieving several important milestones by the end of this first quarter. However, we have much more work to do and we're working closely with the Federal Reserve to implement a strong and sustainable BSA program.

I would also note that despite passing the CCAR stress test this year, we're also focused on continued improvement in our capital planning and stress-testing capabilities in anticipation of CCAR 2015.

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

Now let's open up the call to questions, before which, Lori will briefly review the instructions.

Question-and-Answer Session

Operator

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

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

So I'm not sure, maybe you can kind of let us know on the expense side, things came in better than I was expecting, I think better than the Street was expecting. And you talked about achieving many significant BSA-related milestones. So, I mean, is there a way you can kind of gauge for us or say, is there a -- are you through the fourth inning or fifth inning? Or maybe kind of let us know, I guess, how much progress or how far along the way you guys are with the BSA/AML process?

Rene F. Jones

Yes. As I said a few minutes ago, I think we've made very significant progress. We do have a lot of steps left to do. And so to give you to sort of some sense, what we're really attempting to do and we've been doing since the last year is we're trying to do a complete overhaul of our program. What we've done most recently is we've implemented -- we've launched the new enterprise-wide know-your-customer program. And if you think of that, what we're doing, what that involves is having -- putting in place your process to identify all the customers' accounts and to collect a more comprehensive view of all the information at account opening and then to begin to use that to go through a new, enhanced rescoring process. And so one of the steps that we've made a progress on to date is we -- as of March 31, all new customers are going through that process and it's a much, much enhanced process. And obviously, if you just take that one step, we'll need time for -- to see that work and to make sure it's working properly and for all of the regulatory parties to get comfortable with that, but that's an example of one of the things we've done. We still have got a lot more work to do. We've got work to do on transaction monitoring. We've got work to do to take a look at our overall policies and procedures. But we're making really significant progress. As a -- by way of example, in all of our new procedures, we've trained over 7,800 employees on the new program in those procedures. We've increased our staffing. We are now, at the end of the quarter, up to 425 individuals, FTEs working in the BSA/AML compliance area. And then one of the biggest things that we've got to do is that once we get comfortable with our new process and how it's working, including the risk scoring, we've got to go take a look back at our customer base, our existing customer base, and sort of understand whether our new process would have come out with any different answer and whether there's anything in that book that we would uncover now that we have a new enhanced process. So it's a lot of work. We're really pleased that we made the progress we've had to date, but we still have a fair bit of work to do. And so we ask you to kind of stick with us. We'll keep updating you.

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

That's a -- I appreciate the color. And I guess, maybe thinking just one other question on the expense and then I'll get back in the queue. You did talk about the highly compensated seasonal spike that you have. The professional services were down $34 million, linked quarter. But remind be, isn't there usually in the second quarter that the other miscellaneous expenses usually have sort of a -- sort of catch-up after the sort of lower first quarter? Should we expect that same sort of ramp that we've seen in the last second to first quarter changes in that other expense line?

Rene F. Jones

I'm not sure -- well, one, if you look back, pick a period 5, 6 years, yes, you do see the decline in salaries and benefits and you should see a slight uptick in the -- in those categories. I'm not so sure whether that would be the case of not, Brian. I don't -- I haven't thought about it that much, but that would be typical, if that helps.

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

Okay. And I guess, just with that, can you actually -- can you give us the actual amount of the stock-based compensation expense here in the first quarter and the FICA food and insurance expense items?

Rene F. Jones

How do I say this? The best I can do is, because what you have is we've also got other things that are in there, as well as sort of health savings account, things that are funded upfront. My sense is somewhere between $35 million to $40 million for all the items because -- somewhere in there. It doesn't all reverse itself right away because it gets smoothed out over the course of the rest of the year, right? But you should see somewhere in there would be the drop, I would expect.

Operator

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

Dan DelMoro - Deutsche Bank AG, Research Division

You actually have Dan DelMoro on the call. Matt is not able to hop on. A couple of questions. I just want to clarify on the NIM. NIM should have benefited this quarter from the troughs redemption. So as we look forward in the printed NIM, are you still expecting about the same decline outside of the core -- 2-bit core NIM compression?

Rene F. Jones

Yes, nothing has changed, if I get that right. I mean, to your specific item, we did that halfway through the quarter, right? So I guess there's still some benefit there. But I think all of that is really included in our thought that if we weren't adding unsecured debt and liquid securities, we'd be seeing about 2 basis points every quarter in compression.

Dan DelMoro - Deutsche Bank AG, Research Division

All right. Great. And just moving onto the fee income, you mentioned that most of your businesses bounced back in March after a slow January and February, which I'd assume is partly due to some of the extreme weather. Was there anything else to note that attributed to the weaker activity? And also, what's your overall rebound in March as we try to look forward?

Rene F. Jones

So that's a good question. I mean, it was very unusual in that almost everywhere you look, things were slow. So whether it'd be in our residential mortgage business, things were slow until we got the March, then we saw a pickup. If you go to loan volume in terms of pipeline, the same is true. If you look at our lock box volume, which is centered in upstate New York in the Mid-Atlantic, they would -- lock box in the first quarter volumes were significantly down, which is customer behavior, right? If you look at wires, handled out of our Western New York wire office, those were down significantly in January and February, picked up in March. If you look at debit card transactions, those were down, I think, 17% quarter-over-quarter but had an uptick in March. So almost every topic you looked at was affected. So my sense is, although I've not seen that before, that -- that it was something about the economy as a whole as opposed to something specific to M&T.

Operator

The next question comes from the line of Ryan Nash of Goldman Sachs.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Just first, another follow-up on the expenses. You talked about the $34 million decline in the professional fees. Can you just give us a sense of what really drove the decline this quarter? Was it the completion of CCAR? A milestone in the systems? And then when you think out, you're saying that we're going to see a decline post 3Q. What is the milestone that we're going to reach that will allow them to come down once you reach that point?

Rene F. Jones

Okay. Yes, sure, Brian. I mean, I guess, the best example I -- or logic I can give for the fourth quarter was that -- think about this. In order to be able to get to where we were at March 31 with the new program and onboarding all of our customers, most of the significant technology work on aggregating customers and focusing on gathering new information and putting those processes in, a lot of technology work is going to happen upfront because you can't begin those people-intensive process until you have your structure built. On top of that, all of the design of the program, using the outside consultants and ramping -- the ramp-up of the process, what I would suggest, one, it costs a lot, but then you become more efficient at the processes, as well. As you look through and remediate accounts, you become more efficient at that over time. So that's really what was behind -- a big part of what was behind the fourth quarter expenses being so high. It also -- to your point, a lot of what we've been doing over the course of last year on CCAR, I think was probably higher than it will be this year. Even though we'll continue to spend this year, that upfront engagement of what we're trying to do to meet the first test was pretty high. So I don't know if that helps, but that's kind of what we saw. And then I guess as we kind of move forward there, as -- we get the bulk of all of our processes in place and we're able to go back and look at how that new process affects our existing customer base, you begin, at some point, to start to move much more towards a normal process of rescreening your accounts and screening new accounts that are coming on, which is a much-less-costly process than kind of starting from where we are and looking at your existing book of, I think we've got 3.5 million customers and 5 million accounts, right? So you have to get through that whole process.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Got it. Just a follow-up on the LCR. And when you think about the additions that you've done over the past couple of quarters, securities book is up almost up 100%. And I know you're saying that you'll likely be where you need to be by the end of the year. But can you give us a sense of the magnitude of how far you think you are in terms of the securities additions? Will we have another step up from here or would you expect to continue at a pace somewhere to what we've seen in the past couple of quarters?

Rene F. Jones

I'd say we have got more work to do. I would say I was very pleased that we got a significant portion of what we need to do done in the first quarter. So more to do. And then I guess beyond there, it's hard to comment because we've got to see the rule, right? So and I think it's hard to suggest. But I think we're ahead of plan. And I think with that, you'll see a noticeable amount of new volume. But I think we're ahead of where we thought we would be.

Operator

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

Brian Foran - Autonomous Research LLP

Just following up on the January and February comments. Does it feel like all that activity was just lost and March is returning to kind of the run rate you had budgeted on these various metrics? Or are there some line items that could have a doubling-up affect in 2Q, for lack of a better term? So stuff that would have normally happened in 1Q getting pushed into 2Q, plus than normal volume that you would've expected in 2Q?

Rene F. Jones

I'd say, I don't know, Brian. I don't know. All I know is that March looked more normal. And if -- had February and January looked like March, we would have been happy. But it's hard to predict the customer behavior from here.

Brian Foran - Autonomous Research LLP

Fair enough. And then going back to the annual letter. There were a couple of stats on the New Jersey build-out with 171 employees, $878 million in loans. I was wondering if you could just kind of give us a general update. How's that going, how are those lenders progressing and how's the business volume in New Jersey coming in this kind of interim period before Hudson City comes onboard?

Rene F. Jones

Yes. Thanks for the question. It's going very, very well. About a month-or-so ago, Kevin Pearson and I went down and we had a grand opening of our new New Jersey office, which means the majority of those folks that Bob listed, the 171 people, are all located in one particular office. And they have been generating business and working really well together. What's nice about it is that but for the fact that we don't have the branches, you've got every single M&T business division in that same office working together around leads. Both loans and deposits have been growing. I think Bob covered that in his stats in the message. So we've got a wealth management team set up there. So things look like it's going pretty well. And at some point in time, if we can get ourselves with a nice branch network behind us, it'll be a bonus on top of that. It kind of reminds me of -- if you've known M&T for a while, over the years, we've done -- we've been able to do a great deal of work at building a franchise or a community bank in places like Albany or the Hudson Valley before we were able -- ever able to have the benefit of a branch network. And I think there's something special about that. It builds a lot of character. So...

Operator

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

Erika Najarian - BofA Merrill Lynch, Research Division

Just the umpteenth follow-up question on expenses, Rene, if I could. You mentioned that the expense base will remain elevated through 3Q, '14. So I guess, 2 follow-up questions from there. First, is it too optimistic to assume or project that the fourth quarter expense base could go down to the mid-$600 million level? And two, because of the staffing additions that you mentioned when you answered Brian's question, does the definition of a normal expense base for M&T, has it shifted from here, and how much has it shifted?

Rene F. Jones

Okay, so couple of things. So I guess, we were at $692 million in the first quarter and we've got some elevated salaries expense. But if you start there, you're already in the mid-600s, right? And then from there, you've got to think to the reasons why the expenses are elevated. So beyond BSA/AML, we are making improvements to our overall risk management structure because we're a larger institution. So while that spending is not as great, it'll probably last a little longer. And we talked about the build-out in the -- of our web banking platform and then investments we're making in that space and in the mobile space. So I think those will continue for a while. And then I think we've got one more -- another year of making sure that our capital planning process is really stable. So my sense is that it's not like a cliff. There's sort of a process we're going through, some of which will slow down at the end of this summer, but other things, which will continue and will reap the benefits over time. I think I said on the call last quarter that something -- that the idea that we would be the mid-55s and 50s number and an efficiency ratio was not unreasonable and it was in the long-term that a bank with this added infrastructure, because it's all leverageable, could operate in 50% to 55% space. And so that's how I would think about it in terms of long-term and maybe long-term efficiency ratio in those ranges.

Erika Najarian - BofA Merrill Lynch, Research Division

Okay, that's very helpful. And just a quick follow-up question on the LCR. As I think about the full year, should earning asset growth continue to outpace the mid-single digit loan growth that you mentioned?

Rene F. Jones

Well, with the liquidity coverage ratio, that's just going to be the case, yes, until we get to where we need to be. So, yes. Which is the sort of issue of what will drive the non-core margin compression, but the cost of that is -- there's no negative impact on the dollar amount of NII.

Operator

Your next question comes from the line of Todd Hagerman of Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

René, just a couple of questions going back to the CCAR program. Number one, as you referred to in your remarks, I think that you're pretty much done on the preferred side, but I'd like to get a little bit more insight, if you could, just in terms of the net new capital issuance, if you will. With the Hudson City deal theoretically, the equity component moved up to 70% from 60%. I'm just wondering how we should think about that net new capital issue. And with the Fed's calculation on capital actions, your number went from 62 to 67. I'm just wondering if you could just provide a little bit more perspective behind that.

Rene F. Jones

Yes, the last one is easy. I don't know. 62, 67. Not my test, so I don't know. I was happy about it. The way to think about it, Todd, I guess, is that we were going into the test for the first time. And so that's one degree of uncertainty where all of the data that we've been submitted was going to run through to the Federal Reserves model. And then the other uncertainty is that we were doing just, I think, the only large bank transaction included in the stress test. So there was an amount of uncertainty there. And how do I think of uncertainty? I think we are very buttoned-down in terms of understanding the risks associated with Hudson City. We've looked at it a lot and we've looked at it for a long time now. But when you're taking something that -- an institution that's below $50 billion and you're running information on their mortgages and their data through a centralized stress test, again, there's uncertainty. So we just thought it was prudent to -- going into that situation, to assume that of the purchase price, we would assume that we would finance 70% of it. There's been no change in the agreement with the Hudson City and the Hudson City shareholders. That sort of brings me to sort of looking back at the economics. I mean, I think the way that we think about transactions whenever we talk to you about -- we announced that we're going to do a transaction and it makes economic sense. We are always starting with an internal rate of return that assumes 100% equity financing. And then we may choose to do 60% in the end or 70% or some other number, but what that means is that the return is that we told you upon announcement haven't changed. There's still 18-plus in terms of returns on IRR. And then to the extent that we -- we use less equity fine, that's a financing benefit. When we look at -- if we were to go through and use 70% in the transaction, as we look at the numbers, we still see a high-single digit accretion -- EPS accretion from the deal, high-single digit to low double-digit accretion, so not much has changed there. I think the one thing that we've noticed is that credit quality has improved at Hudson and -- which affects the marks in a positive way. And the other thing is that prepayment fees -- speeds have slowed, so it means that there's more net interest income than when we had originally announced the transaction and initial projections, right? So everything is held up well. I think our thought process was to try to be conservative and sort of help eliminate some of the uncertainties associated with putting that kind of a pro forma together and the test for the first time.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay. So just to be clear, as you mentioned, this is not unusual, that you would go into the deal with 100% equity assumption, if you will. But then with that incremental 10%, you're talking more about -- or you still haven't figured out necessarily that incremental kind of 10% financing in terms of the structure that, that might take, if you will?

Rene F. Jones

No. I think the way I think about it is, at the time we get down to -- if and when we get down to that point, what we're committed to doing is making sure that our capital ratios are consistent with what we say in our stress test. And actually, for many, many years, we've made -- we've been very proud to do that with you folks. We're also doing that with our various regulatory bodies and that's how we're going to manage it to try to make sure we hit what we put in. I'll note, today, even today, if you look at the pace at which we generated capital in just the first 3 months, it's already higher than what we had in our base forecast ending up at 945. So we're generating capital quickly. As we get closer to a potential transaction there, we'll kind of make some decisions and decide what we need to do.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, great. And then just if I could, on the mortgage side, you mentioned a couple of the items related to the mortgage this quarter. I was just wondering, again, just with the volumes coming down in the quarter, you guys have actually been able to keep your numbers high relative to the industry in terms of both year-over-year, as well as sequentially. Was there any change in the MSR this quarter? Was there any other color that you could add in terms of just, like, for example, the margin, the gain on sale, I think you said that it was a gain, I think, on the commercial side was relatively stable. But I'm just interested, kind of how the MSR was treated this quarter and the margin on the gain on sale, or anything else that kind of contributed kind of to a more stable mortgage line relative to the industry?

Rene F. Jones

Yes, yes. I mean, so in terms of the -- stick to the residential side for a minute. On the residential side, I mean, the gain on sale was relatively flat. We saw about a 10% decline in locked volume. We saw a 7% decline in application volume. It matters that it's lower, it's a lower decline. But then if you go to the applications, the applications were up, right? So that kind of gives you some sense that the activity was weighted towards the end of the quarter, but no change really in the gain on sale margins and I don't really expect one. I think the residential business has been relatively stable. It's taken a couple of quarters to come down to a normalized level, we seem to be there. What else did I miss in your question? Is there anything else?

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

In the MSR?

Rene F. Jones

No change in the MSR. We didn't have any material change in MSR this quarter.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

So with the application's up, if the pipeline has actually improved from year end going into April, it sounds like?

Rene F. Jones

Yes, slightly. It's up as opposed to what you saw in all of the lagging indicators.

Operator

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

Ken A. Zerbe - Morgan Stanley, Research Division

René, it seems like you were pretty negative on the CRE competition this quarter from the -- I think you said the conduit and the life insurers. What gives that to change? And do you expect it to change and also do you need it to change to get to your, I think it was mid-single digit loan growth or is most of that being pulled by C&I?

Rene F. Jones

No. I mean, I don't think we needed to change. I think this quarter -- I'm doing this off the top of my head, but in the last couple of quarters, our CRE growth has been about 2%. It was negative 1 annualized this quarter, so I don't know. Maybe that will bounce up and down. I don't expect us to see significant growth in CRE because of what you're saying in terms of the competition. And I think there are really 3 things, 3 broad things that are happening. One is what I mentioned and that's people looking for yields, so that's why you get the conduits where things are going into securities, you get the insurance companies who are also looking for yields. And so the low rate environment is driving that portion. Unless any of us expect that to change soon, my sense is that it will be around for a while. I think the second thing is that there's a whole another subset of folks, for example, who seem to be more aggressive in the multifamily space and I would assume it's because of the risk weighting on the assets. But relative to 1 year ago or so, we see more and more people interested in that multifamily space. And so I wouldn't expect that to change as well. I do anecdotally think that it has a lot to do with a favorable risk weighting, which in our mind, it tends to create risk in some way. So in those cases, we would tend to back away from those things, if the pricing and structure starts to fall outside of what we're normally comfortable with. And then finally, the third space is that we get a lot of competition from the smaller institutions, institutions that are smaller than us around in the community banking space. And I'm not sure, anecdotally, I know that, for example, as the FDIC rules change and as capital changes, we're building those into our models as RMs are making decisions every day. And it often wonders to me whether the smaller institutions are doing that as quickly and/or whether or not they've got a reprieve from some of the rules that's having an effect. So how you look at all of those things, I can't imagine that we're going to see any change in the pace there. And so when I think about mid-single digit, I'm really thinking about the commercial bank as a whole. I'm throwing out the resi real estate because that's just really held-for-sale stuff. And I think we're probably pretty close -- we're probably like 3% growth even with the down quarter in CRE this quarter when you combine C&I and CRE.

Operator

The next question comes from the line of Keith Murray of ISI.

Keith Murray - ISI Group Inc., Research Division

Just on the fee side, you mentioned the mid-single digits fee income growth outlook. What's the base that you're starting that from, the dollar amount?

Rene F. Jones

Last year.

Keith Murray - ISI Group Inc., Research Division

So full year '13.

Rene F. Jones

Yes, yes. You got to throw out the security gains and the nonsense there. But just those regular categories, I think, without the securities gains, that's what we're looking at.

Keith Murray - ISI Group Inc., Research Division

The core fees. Okay. And then within the trust fees, just curious given the market backdrop, what's holding it back there? Is it fee waivers on the money market fund side? What's the right way to think about that line item going forward?

Rene F. Jones

Well, definitely, fee waivers are there, but that's in the base. I mean, that's been for a very long time so you've got upside there as rates turn around. But I think for us, we've had year-over-year, I think the trust number first quarter was flat. I think from time to time, we have -- what we refer to is nonrecurring fees, but I don't think that's the right term. So for state fees and lumpiness and so forth. And we were on the downside this quarter. And so that was sort of led to our comments that we wouldn't be surprised to see it be a little stronger as we move into the rest of the year.

Keith Murray - ISI Group Inc., Research Division

Okay. And then back on loan pricing, you're just talking it. Given Basel III, LCR, et cetera, are you guys feel like you're pricing loans today for the current regulatory environment, meaning do you feel like you're ahead of the industry? And how much catch-up do you think the industry has to play and how long will that take?

Rene F. Jones

Well, I think -- I think, if I look at our statistics over many, many quarters, our pricing has been relatively consistent and we're reflecting the changes in the cost structure in a way that says the returns are a little lower than they used to be. But the pricing is relatively consistent. And the way I would characterize it is we're in there with the competition so we don't set the price, per se, but we compete. So that's driven mostly by the market. I think the way to look at it is there are certain triggers that we just don't like to go through in terms of what we're generating in terms of pricing and ROEs. Having said that, the other part of it is structure. And when I mentioned the commercial real estate process, there's been some structural issues, people are willing to go 10 years on things that we might go 5. So I think what's going to slow us down is probably if that continues to change and hit sort of a lower-level triggers. It's not broad-based, but we've seen, here and there, we could get -- beat out on the price on the CRE deal by 100 basis points. So if that continues and the number of times that continues goes up, I think you're going to see us be relatively slow. But if you go back to 2004, that's what was going on with us as well. We had almost no growth, particularly in New York City. And we couldn't quite understand it. We just felt the pricing was irrational. And lo and behold, you could kind of see that in the aftermath, that it was.

Keith Murray - ISI Group Inc., Research Division

And just last one, I don't know if you had much back-and-forth with the Fed, post the CCAR results, but just curious if you've got any color on the RWA difference between your [indiscernible] forecast and what the Fed had in their numbers?

Rene F. Jones

No, I don't know. But I would sort of just -- I don't know that I would work too much into it and especially given that we were in the middle of our CCAR submission, we're combining 2 banks and all of that, there's a lot of moving parts. But I don't have insight into what drove the change.

Operator

The next question comes from the line of Bob Ramsey of FBR Capital Markets.

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

Really almost everything has been asked, but I'm just curious, on the trading account and FX gains line, that seemed particularly light this quarter. Was there anything unusual? And on a go-forward basis, when you talk about your full year fee income guidance, does that kind bump back into an $8 million to $10 million a quarter range?

Rene F. Jones

Yes, it was down, I think there's 2 things that are in there. One in particular is just movements with the market because it's the other side of some of our postretirement benefits that are there. But the other thing that's in there is our customer swap business. And so there was a lot of activity in the fourth quarter. That activity was just quiet, just like everything else, right? So my sense is that's very dependent upon rates. And if you were to see the rates come back down, then you get more activity going on there where people try to lock in to fix. And so that, if you look at what's happened recently, that would -- either your account would be right. I don't know about the exact dollar amount, but that's what the movement is.

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

Okay. And on the deposit service fees, they were obviously down year-over-year. I know you mentioned NSF. Is it -- as you sort of billed to the mid-single digit growth and all fee income year-over-year, is the expectation deposit service fees are lighter this year than last, as this quarter was lighter than last? Or did you get some sort of bounce back on that line?

Rene F. Jones

Yes, I do think so. I think that is definitely the case. I mean, if you get away from M&T and you look at national trends, there's a change in behavior that people are seeing, which is that there are fewer and fewer NSF-eligible type transactions, which I guess at the end of the day is a good thing. Customers said they're really understanding how the process works and they're adjusting their behavior, which is probably what you want to have happen.

Operator

Your next question comes from the line of Gerard Cassidy of RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Bob mentioned in his letter to shareholders that the regulatory costs now represents just over 10% of your total operating expenses. Is that a number that we should kind of keep in mind going forward, that it will remain that elevated into the indefinite future?

Rene F. Jones

I know we'll spend -- my gut is that we'll spend more this year than we did last year. And then the question will become, how do we -- look, what's happened is that the regulation has come very fast. And so we had to -- we and other institutions have had to react to that change very rapidly. So you have existing processes in the bank and so really what you're doing is you're adding onto them and not necessarily with the time it takes to rethink everything. So my sense is, just pure numbers, it will be higher this year in 2014, but then we'll begin to start looking at -- we'll begin to start looking at how we are able to achieve those things in a more efficient manner and maybe it means that stuff starts to level off or come down a little bit. But there's still a lot of regulation that needs to get put in place, right? So I don't know if that helps. That's why we actually put it out there. We track it. It tells us a lot about what's going on in the industry. We'll continue to do it.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Sure. Yes, you also pointed out, I think there are still hundreds of regulations, part of Dodd-Frank, that still need to be implemented. Can you share with us, you mentioned how the securities book increased, obviously, for LCR, what's the duration of your total investment portfolio today?

Rene F. Jones

Yes. If you would ask me that a couple of years ago, I think it was about 2.5 and now it's something like 4.7, 4.8. So if you look at that, in one sense, you could get alarmed by it. But I think the thing to think about is, as we moved from that 2.5 to 4, whatever, what we've been doing is we've been -- to the best of our ability, as we add those securities, we're trying to match it. So you saw the $1.5 billion, which was 5s and 3s, right? So that's sort of right in that space. So I think from a risk management perspective, we're probably about the same risk profile. But cosmetically, that number looks a little worse or a little longer.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Do you guys do stress testing of that portfolio should long term rates rise by 100 basis point, how they -- what the duration extension would be, and what it does to the value of the portfolio?

Rene F. Jones

We do -- I don't know if I have that exact number because we tend to look at the whole balance sheet as a whole, right? So we're looking at -- I don't think you're asking, so I won't give it to you, but it's 100 up and 100 down on NII. So yes, again, I don't know, Gerard. I mean, we can look at that, but I don't know that we would probably publish that because, at the end of the day, it's sort of about managing the whole balance sheet, right?

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Oh, yes. No, no, I agree. Unfortunately, all the banks are going to -- have to mark that securities portfolio through capital should rates ever rise, but that was really the question, so -- but I understand looking at the whole balance sheet, absolutely.

Rene F. Jones

Yes. We do, do that in our stress test, regardless of the fact that because we're under $250 million and $1 billion in assets, we have the ability to -- we don't have to do that method. We still actually run through that whole process of understanding what it would be in that situation. But I don't think -- I think the way the rules are written, you're not going to end up being longer than anybody. Everybody is going to be right in about the same place. And it's pretty short, actually, in total, I think.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Okay. M&T over the years has been a very strong manager of their capital. Now we, of course, have Dodd-Frank and you've got to carry a lot more capitals similar to your peers. And with the Tier 1 common ratio today well over 9%, even when you went through your stress test I think you came out with about 6.7% stress ratio. What's the ideal Tier 1 common ratio that you think -- once all of this is behind us, you've got your BSA/AML all taken care of, Hudson City is on board. So if we look out a couple of years, where is the comfortable level on capital?

Rene F. Jones

So the way I think about it, Gerard, is that -- you describe it well, I mean, we spend a lot of time understanding the risk in our balance sheet, the capital, how much it could fluctuate over the years. And we've done a pretty good job of managing it. But now the standards are a little different, right? So the standard is that not only do we have to do that, but on a national level, we have to go through the same exact test as everybody else. And I think the first part of my answer is that we're still going to a place where we want to make sure that those levels are predictable. Not our own internal models, but also the external models. And so we're very pleased about where we came out, going into the test with a 9.1% capital and coming out sort of in the middle of the pack, we think begins to show -- fit the risk profile of the institution. And as we get more comfortable with that, I think what you'll see is that we'll start getting right back into the process of making sure that if we have excess capital because it doesn't make sense to make loans, we'll have to try to figure out ways to give that back. It's just sort of where we are in the maturity of the process that sort of puts us, makes us reluctant to sort of talk about a particular number. And I think you'll learn more about that as we go through this year. And then I think once we go through one more test, it will be very clear and we can talk about it. But you got to -- unless you have transparency there and you're talking about the target ratio, when you give back capital, when you don't have a use for it, it's hard to sort of get -- to be really efficient. The other thing I would mention is that because we've held off on a number of things, we're not exactly very efficient today in the rest of the capital structure that we have. We still have a lot of sub-debt that's sitting around that is probably not necessary now. We have a fair amount of hybrids that are sitting around that are no longer necessary. In the past, we would probably start to begin to fine-tune that, but as you know, the way in which we're able to do that is go through to the next test and then -- right? And then ask for it then. So it takes a little longer to get there. I would hope that as we saw on the test that it's starting to tell us that we're getting right about to where we need to be. And as long as we can continue to perform that way, then I think you'll start to shape out -- that answer will start to round out for you.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

And then, finally, I know you guys touched upon it in your -- Bob did in the shareholder letter about the amount of money you're spending on technology and for customer service, the ATM machines, et cetera, the upgrades there. Can you share with us on the mobile channel that you're using a metric or 2 on how many people are using and some of your competitors, for example, will give us the amount of deposits you're taking through the mobile channel. Do you have a similar number available?

Rene F. Jones

No, I actually don't have, Gerard. And I think today, it would be fair to say that that's not a large number for us. I think the way we're thinking about the use of those types of products and other things, you saw for example that this quarter -- you didn't see, but this quarter, we completed the rollout of our image ATMs in Delaware, which is the last place that we needed to have them across our network. So if you look at all of those things, we're trying to figure out how to use those devices to have a lower cost delivery system on the one hand. And then in places where we do not have a branch network, we're trying to figure out if those types of things can actually help us, right, in the absence of a branch network. So that's the way I would think about it. But we're in the early stages and I don't think sort of just the raw numbers would be maybe significant relative to some of the large national players.

Operator

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

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Just one of the follow-up in some of your commentary on commercial lending. First of all, you mentioned you'd seen some strength both in New York Metro and in Pennsylvania. Just curious if you have any -- if you'd provide some color relative to some of the other markets, both Upstate New York and maybe closer to the D.C. area. And then any update on your commercial lending utilization rate would be appreciated.

Rene F. Jones

Yes, sure. Let me start at the back of that. I think last call, I mentioned something around 57%, 58% utilization. If I go and just focus just on the commercial bank, that number is a little different. That number last quarter would be about 51.7% and then this quarter would be about 52.1%, so just a slight uptick. And that's probably, if you look back over the quarters, you don't see much change quarter-to-quarter, but you've seen a positive trend overall. So that's across the commercial bank network. And then the performance sort of varies by product by region. So we saw, for example in Western New York, while we didn't have double-digit growth, in C&I, we had 4% annualized growth, as well as in commercial real estate. And then if you kind of flip down to Baltimore, Baltimore was soft on the C&I side, it was down 3% annualized, but it was pretty strong in the real estate side, which is 7% annualized growth there. So it's relatively mixed, which I think is good. I think particularly if pricing and competition continues to get frothy, what's nice about our model is we can sort of bounce around and focus on the opportunities that makes sense for us and so you'll see a shift there. So it's pretty varied across the regions.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay. And then we constantly hear, at least media reports, suggesting that mid-sized business and smaller businesses are being a little bit left behind in terms of C&I growth. Are you seeing any greater demand from those types of borrowers across your markets than you saw perhaps 6 to 12 months ago?

Rene F. Jones

No. We're not seeing any change in business banking but -- no, I don't think so. I mean, if you look at the numbers, I guess, we've been creeping up in the larger space, in the middle market companies. But I would suggest is if you take our whole book, we tend to bank smaller companies as a whole, right? And so we're probably a proxy for business banking across the U.S. and we haven't seen much of a change.

Operator

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

Kenneth M. Usdin - Jefferies LLC, Research Division

Just a couple of quick ones. First of all, can you quantify for us what the preferred dividend will look like going forward after this issuance run rates?

Rene F. Jones

I don't know if I can off the top of my head. I'm willing to.

Kenneth M. Usdin - Jefferies LLC, Research Division

I can follow up off-line on that.

Rene F. Jones

Well, no, what I would tell you is that it was light. It was light in the first quarter because we didn't declare the dividend on the new preferred. So I'll give you that. And then we will -- maybe we'll put something in our 10-Q, so that you guys can see that.

Kenneth M. Usdin - Jefferies LLC, Research Division

So importantly, it steps up with this one now starting to pay in the second?

Rene F. Jones

Yes, yes, yes. [indiscernible]

Kenneth M. Usdin - Jefferies LLC, Research Division

And then second question is, René, you've got $3 billion of cash on both an average and period end. And I'm wondering just, how do we think about that cash and then also your securities to earning assets ratio? Where do you think it should level out as you continue the LCR when you think about securities to earning assets and whether or not you're just living with an extra amount of cash that may or may not get invested over time?

Rene F. Jones

On the cash side, a lot of this is driven by our Wilmington business. And when we first came together, that number was about $2 billion of excess cash that Wilmington sort of brought to table. And now that's as high as, maybe $3.9 billion. And I guess, we're still learning about the -- as we go through the cycles on how sticky that is and what's a normal run rate tranche there. Today, we assume it's about $2 billion and we're running higher than that. So we don't do much associated with those funds, we don't really count them in our liquidity profile beyond that. And the -- I mean, you'll see it tick up a little bit and it's just going to stay there. I don't know how to answer it any different. We're just about getting to where we should be in terms of securities to total assets, but then it won't come down because that's how the coverage ratio works, right?

Kenneth M. Usdin - Jefferies LLC, Research Division

Yes. I was just wondering more if there's just -- how much -- I know you're saying you're still building, but you used to have the lowest amount of loans to earning assets, highest amount of loans to earning assets, now we're growing. The follow-up question I just want to ask is, you mentioned a couple basis points of core, of the pricing compression. In this quarter, we had 4 basis points from the LCR. And so, again, if we're presuming we're still similar kind of growing into the LCR, then does that presume that all things equal, we're kind of still seeing the 6 basis points of margin compression until that investments is complete?

Rene F. Jones

Yes. I mean, I'm not sure about the exact number, but you're thinking about it the right way.

Operator

Your next question comes from the line of Sameer Gokhale of Janney Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Most of them have been answered, but just a couple of ones. In terms of commentary, René, about loan growth and competition. And it sounded like you said some competitors were extending loan terms and the like. And it just seemed a little surprising to me in light of the regulatory environment that competitors are able to do that. It seems like regulatory have most banks sort of in a box dictating how much they can grow. So I'd like to get your perspective on that. And also, I know you run your bank pretty conservatively in the past, so I'm assuming you haven't changed LTVs much, particularly in the C&I side, so if you could just talk about that also, that would be helpful.

Rene F. Jones

Yes. I mean, again, I'm going in reverse, we haven't changed anything in terms of loan-to-values. We tend to be relatively conservative. In part, we can do that because we're banking for the most part our customers or clients who we've known for a very, very long time, right, and who know us and sort of know what our standards are. So that's not changing at all. Your question is a fantastic one. I've been thinking about it a lot. I don't really know the answer. I don't know if everybody is under the same pressure or scrutiny. But it is surprising what you see. And quite frankly, I think in general, with the larger players seem to be much more rational, which is consistent with the fact that everybody is going through the same new regulations and oversight and capital testing. I don't know what to think about the smaller folks and maybe some folks that are outside of the banking industry. And I think that's a good topic to follow going forward because you've got to wonder whether the risk is controlled or the risk is moving, right? But I don't know enough to figure -- to have an answer to that.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then, you'd also talked about how conduits and insurance companies seeking yield who were essentially driving some of the price competition in the CRE market. And clearly the conduits are real estate investment conduits of some sort. But is there anything that precludes structurally these insurance companies from being a greater competitive force on the C&I side, or is that something that could happen going forward? Just want to get a sense for -- if it's just a matter of a yield differential. Any color on that?

Rene F. Jones

Well, the way I think about it is, those 2 are proxies for investments, right, and people seeking returns. So that's going to be driven heavily by the level of interest rates. I wouldn't expect to see competition on the C&I side because the loan part of that is just one of the things that we do. All of the ability to do cash management and help them, as I mentioned, lockbox and all those types of services, right, are really the core of what we do for those clients. Lending is just one component. So it will be very hard for an institution without those capabilities to compete with the large commercial bank.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay, that's helpful. And then just my last question. I know you've been asked this question about BSA/AML probably 10 different ways, so I'll go -- I'll ask the 11th time in a different way. But in thinking about your expenses there in light of the fact that you went through the stress test and passed and I know you're saying there's more work to be done there, but the fact that you passed the stress test, doesn't that sort of imply that you're -- not to put a number out there, but I will, does it imply that you're seeing 90% of the way done simply because if you went that far along in the process then that could have been one of the issues that regulators could have balked at on a qualitative front. So why would that be the wrong way to think about it and doesn't it suggest that you're being somewhat conservative when you're thinking about expenses related to BSA/AML, expecting somewhat of a benefit in Q4? Could we see a benefit before that?

Rene F. Jones

Okay. So this is -- thank you for the question. First, the regulatory environment is not going to change in the next couple of years. There's still a lot of regulation that's coming out. And there's been a fast change, so it's going to take a time to really embed those processes into what we do on a day-to-day basis. The other thing is just step back and think about maybe use like asset liability across the seasoned banks, right? So those things are extremely mature. As you see with liquidity coverage ratio, we're going to be running liquidity every -- on a daily basis. We've been there on asset liability for a very long time. The capital planning processes have to mature as well and that systems, people, repeatable process, right? So you've got to imagine that where we're going to get to is not a place where we're running an annual test or biannual test. But at any point in time, that as we're putting on business in our portfolios that change the risk profile, that we're going to be able to see those things real-time. So that is not a short-term test. And as some of my colleagues are telling me here, I guess the phrase is, "The bar is getting higher," and I think that will continue to happen. I think relative to maybe the 18 that have been through this a couple of years before us, we're probably a year behind them in terms of what we need to do. So a lot of work to be done there. And so I wouldn't expect to see any slowdown on that front.

Operator

Your next question comes from the line of Jennifer Thompson of Portales Partners.

Jennifer A. Thompson - Portales Partners, LLC

All of my questions have already been answered.

Operator

At this time, there are no further questions. I will now turn the call to Don MacLeod for any additional or closing remarks.

Donald J. MacLeod

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

Operator

Thank you. That does conclude the M&T Bank First Quarter 2014 Earnings Conference Call. You may now disconnect.

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