M & T Bank (MTB) Earnings Report: Q Conference Call Transcript

Transcription

1 M & T Bank (MTB) Earnings Report: Q Conference Transcript The following M & T Bank conference call took place on April 18, 2016, 11:00 AM ET. This is a transcript of that earnings call: Company Participants Don MacLeod; M&T Bank Corporation; Director of IR Rene Jones; M&T Bank Corporation; CFO Mike Spychala; M&T Bank Corporation; Senior VP, Controller Other Participants Brian Klock; Keefe, Bruyette & Woods; Analyst Ken Z erbe; Morgan Stanley; Analyst John Pancari; Evercore ISI; Analyst Bob Ramsey; FBR; Analyst David Eads; UBS; Analyst Matt O'Connor; Deutsche Bank; Analyst Marty Mosby; Vining Sparks; Analyst Matt Burnell; Wells Fargo Securities; Analyst Ken Usdin; Jefferies; Analyst Gerard Cassidy; RBC; Analyst Steven Alexopoulos; JPMorgan; Analyst Matthew Kelley; Piper Jaffray; Analyst Jill Shea; Credit Suisse; Analyst Peter Winter; Sterne Agee; Analyst Geoffrey Elliott; Autonomous Research; Analyst Bill Carcache; Nomura; Analyst Frank Schiraldi; Sandler O'Neill; Analyst MANAGEMENT DISCUSSIO N SECTIO N Welcome to the M&T Bank first-quarter 2016 earnings conference call. It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations. Please go ahead, sir. Don MacLeod (Director of IR): Thank you, (Laurie). Good morning, everyone. This is Don MacLeod. I'd like to thank you all for participating on M&T's first-quarter 2016 earnings conference call both by telephone and through the 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 Web Site, and by clicking on the investor relations link TheStr eet, Inc. Al l R i ghts R eser ved Page 1 of 26

2 Also, before we start, I'd like to mention that comments made during this call might contain forwardlooking statements relating to the banking industry and 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 O fficer, Rene Jones. Thank you, Don, and good morning, everyone. As noted in this morning's press release, M&T's results for the first quarter reflected strong growth and net interest income, which was driven by an expansion of the net interest margin and solid loan growth, controlled operating expenses, and stable credit performance. All these contributed to an 11% growth and diluted net operating earnings per share over last year's first quarter. As we noted on the January call, we closed the merger with Hudson City and restructured its balance sheet in last year's fourth quarter. In the first quarter, we completed the migration of Hudson City's customers to M&T's products and services as well as the conversion of its branches, systems, and operations on to M&T's platform. Hudson City's risk management framework has been fully integrated into M&T's risk governance structure, and our task now is to continue to evolve the Hudson City -- continue the evolution of Hudson City from what was essentially a monoline thrift into a real commercial bank, which will, of course, take some time. O verall, we feel the first quarter was a productive one. As we usually do, I'll start by reviewing a few of the highlights from M&T's first-quarter results, after which Don and I will be happy to take your question. Turning to the results, diluted GAAP earnings per common share were $1.73 for the first quarter of 2016, improved from $1.65 in both the first quarter and the fourth quarter of Net income for the quarter was $299 million, up 10% from $271 million in the linked quarter and up 24% from $242 million in the yearago quarter. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets as well as expenses associated with mergers and acquisitions. After-tax expense from the amortization of intangible assets was $7 million or $0.05 per common share in the recent quarter compared with $4 million or $0.03 per share in last year's first quarter, and $6 million or $0.04 per share in the fourth quarter. Also included in the first-quarter results were $23 million of pre-tax merger-related charges in the form of noninterest expense incurred in connection with the Hudson City acquisition. This equates to $14 million after tax or $0.09 per common share. Merger-related charges in the fourth quarter included $76 million of noninterest expense and $21 million of loan-loss provision. Combined, those amounted to $61 million after tax or $0.40 per common share. There were no such charges in the first quarter of M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $320 million compared with $246 million in last year's first quarter and $338 million in the linked quarter. Diluted net operating earnings per common share were $1.87 for the recent quarter, up 11% from $1.68 in the year-ago quarter. That figure was $2.09 in last year's fourth quarter TheStr eet, Inc. Al l R i ghts R eser ved Page 2 of 26

3 Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.09% and 11.62% for the recent quarter. The comparable returns were 1.21% and 13.26% in the fourth quarter of And in accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP to non-gaap results, including tangible assets and equity. Turning to the balance sheet and the income statement, taxable equivalent net interest income was $878 million for the first quarter of 2016, improved by $65 million or approximately 8% from the linked quarter. About $45 million or some 70% of that increase reflects the full quarter of Hudson City's results compared with two months in last year's fourth quarter. Contributing to the growth in net interest income was a 6 basis point expansion of the net interest margin to 3.18%, up from 312 basis points in the fourth quarter. The primary driver of that increase was the fullquarter effective from the Fed's mid-december action: the increased short-term interest rates. While the benefit from the day count in the shorter quarter was largely offset by the dilutive impact from a higher level of deposits placed at the Fed. Average loans increased by 8% or $6.5 billion compared to the linked quarter. This included a 27% or $5.5 billion increase in residential mortgage loans, which primarily reflects the impact from the full quarter of Hudson City results. Looking at the other loan categories on an average basis compared with the linked quarter, commercial and industrial loans increased $497 million or an annualized 10%. Commercial real estate loans increased $452 million or about 6% annualized. Consumer loans grew at an annualized 1%, with growth in indirect auto loans offset by a decline in other consumer loan categories. The loan growth was broad-based. Including the impact of -- excluding the impact from Hudson City mortgage loans, we saw a 6% annualized growth in upstate New York, 5% annualized growth in our metro region, which includes New York City and New Jersey, 9% annualized growth in Pennsylvania, and 4% annualized growth in Baltimore-Washington-Delaware region. I'd note that end-of-period loans grew by 2% annualized, with a 15% annualized decline in residential mortgages, more than offset by 9% annualized growth in other loan categories. Average core customer deposits, which exclude deposits received in M&T's Cayman Islands office and CDs over $250,000, increased by an annualized 32% from the fourth quarter, also reflecting the impact from Hudson City. Turning to noninterest income, noninterest income totaled $421 million in the first quarter compared with $448 million in the prior quarter. Mortgage banking revenues were $82 million in the first quarter compared with $88 million in the prior quarter, largely the result of a $5 million decline in commercial mortgage banking revenues to about $22 million, down from $27 million in what was a solid fourth quarter. Similarly, credit-related fees were lower by $14 million, coming off what was also a very strong fourth quarter. That decline is largely related to fees that are often event-driven, such as a syndication fee, and can carry somewhat -- can vary somewhat from quarter to quarter. Several fee categories were impacted by the typical seasonal factors that we see. For example, fee income from deposit service charges provided was $102 million during the first quarter compared with $106 million in the linked quarter. Trust income was also down modestly. Turning to expenses, operating expenses for the first quarter, which exclude merger-related expenses and the amortization of intangible assets, were $741 million compared with $701 million in the prior 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 3 of 26

4 quarter. We continue to be pleased that we've kept expenses relatively stable while absorbing Hudson City as well as funding our technology and other initiatives. This is reflected in our efficiency ratio, which was 57.0% for the first quarter, improved by 450 basis points from 61.5% in the year-ago quarter. We estimate that approximately 280 basis points of that improvement is attributable to the merger and 170 basis points is from M&T's legacy operation, the result of our ability to grow revenues at a faster pace than expenses following several years of strengthening our infrastructure. The efficiency ratio was 55.5% in last year's fourth quarter. As usual, the first-quarter comparison with the fourth quarter reflects our normal seasonal increase in salaries and benefits relating to accelerated recognition of equity compensation expense for certain retirement-eligible employees, the 401(k) match, and the annual reset in Social Security or FICA payments and similar items. Those items accounted for an approximate $40 million increase in salaries and benefits from the fourth quarter, similar to last year. As usual, those seasonal factors will decline by some $30 million to $35 million as we enter the second quarter. One item worth noting is the increase in FDIC assessment to $25 million in the first quarter from $20 million in the fourth. This reflects in part the fact that one component of the FDIC's assessment calculator looks back at Hudson City's earnings and treats them as if the Hudson City merger had been in place for the entire year instead of just the final two months of And notwithstanding the fact that Hudson City paid its own FDIC assessment as an independent company through the first three quarters of This factor will normalize as we move later into the year. Also, as you know, the FDIC has imposed a surcharge on large banks to recapitalize the deposit insurance fund more quickly, likely starting in the third quarter. We estimate that this will add about $5 million per quarter to our assessment expense, starting, as I said, in the third quarter. Next, let's turn to credit. O ur credit quality remains in line with our expectations, which is to say strong, with continued low levels of nonaccrual loans and net charge-offs. Nonaccrual loans increased to $877 million and the ratio of nonaccrual loans to total loans was 1% at the end of the recent quarter. The $77 million increase from the end of the fourth quarter is primarily attributable to Hudson City mortgages. As you know, loans obtained from Hudson City that were 90 days past due as of the acquisition date were recorded as purchased impaired loans. And in accordance with GAAP, interest continues to accrue on those loans despite their delinquency status. Appropriately, those specific acquired loans were not in the nonaccrual balances as of either March 31, 2016, or December 31, The higher level of nonaccrual loans at the end of the first quarter reflects the normal migration of approximately $80 million of previously performing loans that became more than 90 days past due during the recent quarter and which could not be deemed as impaired at the acquisition date because they were paying at the time of the merger. As a result, we should continue to see a migration of the Hudson City loans acquired at a premium into and eventually out of nonaccrual status as this process normalizes to a more steady-state through the passage of time. Net charge-offs for the first quarter were $42 million compared with $36 million in the fourth quarter. During the first quarter of 2016, M&T charged off loans associated with consumers who were either deceased or filed for bankruptcy. That, in accordance with GAAP, had previously been considered when determining the level of allowance for credit loss. Such charge-offs totaled $14 million in the recent quarter and included $11 million of loan balances with a current payment status. Annualized net charge-offs as a percentage of total loans were 19 basis points for the first quarter, up slightly from 18 basis points in the previous quarter and matching the figure we reported for each of the 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 4 of 26

5 past two calendar years. The provision for credit losses was $49 million for the recent quarter, exceeding net charge-offs by $7 million. And the allowance for credit losses was $963 million, amounting to 1.10% of total loans at the end of March. Loans 90 days past due, which continue to accrue interest, including acquired loans that have been marked to fair value at -- excuse me, excluding the acquired loans that have been marked to a fair value at the acquisition were $336 million at the end of the recent quarter. Of these loans, $279 million or 83% are guaranteed by a government-related entity. Turning to capital. M&T's common equity Tier 1 ratio under the current transitional Basel III capital rules was an estimated 11.06%, little change from 11.08% at the end of Recall that the capital plan M&T submitted in connection with the 2015 CCAR process and which received no objection from the Federal Reserve included the repurchase of $200 million of common stock over the first half of We began execution of that buyback program in January and expect to complete it by the end of the second quarter. In addition, because the completion of the Hudson City merger occurred later than contemplated in the capital plan submission, we did not pay all of the projected dividends associated with the M&T common stock that was issued as merger consideration. As disclosed previously, the distribution of that capital, some $54 million, is being redirected into the repurchase program for the second quarter of Now turning to the outlook. As is our usual practice, without giving specific earnings guidance, we'd like to offer our thoughts as to how we are tracking against the outlook for the full year that we gave to you on the January call. Loan growth this past quarter was largely in line with or slightly better than our expectations, with solid growth in commercial loans in both commercial and industrial and commercial real estate loans, partially offset by slower growth in consumer loans and the expected decline in residential real estate loan. We were pleased with the strong performance of our net interest margin. O ur outlook on the January call for stable net interest margin was predicated on two increases in the Fed's funds target in the calendar year More recently, the forward curve is implying one increase in midyear, which would still be a benefit. To some extent, the margin is dampened by our decision to maintain pricing on Hudson City's time deposits, which we will revisit over time. Fee revenues are in line with our expectations, given the normal seasonal effects that we talked about. As is normally the case, we would expect the seasonal increase in salaries and benefits during the first quarter to reverse itself again to the tune of some $30 million to $35 million in the second quarter. And we remain track with realizing our expected cost savings from the merger. O verall, our basic outlook for expenses is unchanged. We remain focused on producing modest positive operating leverage on a year-over-year basis. O ur outlook for credit is little changed over the short term. While we've had little or no impact from the energy-related credit headwinds that others are seeing, the current low level of losses has persisted for over two years. O verall, our areas of focus for 2016 are fairly straightforward and relatively consistent with what we've talked about in the past. To continue to improve the efficiency of our balance sheet, with an emphasis on building out our commercial banking profile in New Jersey; to manage the revenue expense dynamic to produce positive operating leverage; to capitalize on the M&A-driven disruptions within our footprint; and to optimize our capital structure while conforming with both regulatory capital thresholds as well as the annual stress test. O f course, as you're aware, our projections are subject to a number of uncertainties and various 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 5 of 26

6 assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors, which may differ materially from what actually unfolds in the future. So now let's open up the call to questions, before which Lori will briefly review the instruction. Q UESTIO NS & ANSWERS (O perator Instructions) Brian Klock, Keefe, Bruyette & Woods. Brian Klo ck (Analyst - Keefe, Bruyette & Woods): Rene, with the loan growth -- end-of-period loan growth was very strong in the C&I book. So interesting; it seems like the -- Gary Keith's survey that he did in February seemed to be directionally down, sort of like the NFIB survey that just came out a week ago that seemed to be more negative. But it seemed like the loan growth maybe later in the quarter picked up on the C&I side. So maybe can you talk about what you guys saw? And was it in certain regions that you saw stronger C&I growth than others? Not really. I think, Brian, I tried to give those total loan growth numbers, which were driven mostly by, obviously, commercial. And you know, it was pretty strong across the board. Maybe slightly more leaning towards commercial real estate in Western New York. But other than that, C&I growth was strong across the board. I think the thing that impressed me the most was -- we get our results and we look at them. But then in preparing for the call, we tend to look at the quality. So what is the quality of loans book; what is the pricing. And we were able to get the growth without seeing any deterioration in the margins and the total returns that we were getting on that population of loans. And one of the other things that I think was interesting is that in some of our markets -- Philadelphia, Pennsylvania, New Jersey, upstate New York, and to some extent in Washington DC and New York City -- we saw the margins actually -- you know, new deals come up maybe 20 to 25 basis points. Which we I guess estimate that that had to do with the widening spreads that we saw in the capital markets and the slowdown in the CMBS market. It had some small effect. So I was very encouraged by what we saw. I thought the pace was pretty even and I think our pipelines continue to remain fairly robust. Brian Klo ck (Analyst - Keefe, Bruyette & Woods): Okay. So again, so the outlook is for overall loan growth to still be muted by the resi mortgage runoff coming out of Hudson. But you think the C&I and commercial real estate would be as strong as it was in the first quarter? Well, I'd say this: we are going to stick with our outlook for January. We are really pleased with this quarter. It may get a little lumpy here and there, but I don't see anything that suggests that -- things feel 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 6 of 26

7 a little better than they did for the whole of last year when we started out. Brian Klo ck (Analyst - Keefe, Bruyette & Woods): O kay, and then one last question. Can you break out of the residential mortgage decline linked quarter how much of that was Hudson City versus core M&T? There wouldn't be any other decline. Remember almost all of the decline, Brian, is on the commercial side. And that's coming off a pretty strong first quarter. We had about a 10% increase in our quarter-end pipeline for residential mortgages. So we started off slow, we kind of made up for it, and as we went into April here, the volume still remains pretty decent. And then Hudson City -- I don't have the exact numbers, but we do have production -- the first quarter of production that we would have seen in doing the normal agency stuff that we sell into the market. Brian Klo ck (Analyst - Keefe, Bruyette & Woods): Okay. Thanks for your time, Rene. Ken Z erbe, Morgan Stanley. Ken Zerbe (Analyst - Morgan Stanley): First question -- just in terms of the Hudson City loans that went nonaccrual, the $80 million. Just so I have a sense of magnitude, is that a normal-sized quarter? Was it a little heavier, a little weaker? Just trying to get a sense of how much we should be expecting going forward. Yes, it's a normal pace. So we were seeing probably -- and I'll just do this roughly -- $25 million a month roll into the delinquency status. But had we not done the acquisition accounting, you would see a similar amount roll out. So I'm sitting next to Mike Spychala, so he's always going to kick me when I say this. But as a rough proxy this quarter, if you go in the press release and you look at page 11, you'll see there's a -- we disclose purchased impaired loans. You'll see that those came down $80 million. So those would be the ones that are still in accrual status. And so you'll get a normal migration in and normal migration out. So I think what that means is as a percentage -- nonperforming as a percentage of that book, it will continue to rise. I would expect at about the same pace that it is -- that you saw this quarter. Ken Zerbe (Analyst - Morgan Stanley): Got it. O kay, that helps. And then just with expenses, the $30 million, $35 million seasonal that comes out in second quarter, just want to make sure that we are using the right base. The $753 million that you reported this quarter, I know there's just a lot of moving parts with Hudson City. But is that the right base to use so you're sort of in a $720 million range next quarter? Or is there any other moving pieces? I'm using -- which you might not be able to see, but I'm using $741 million as a (multiple speakers) TheStr eet, Inc. Al l R i ghts R eser ved Page 7 of 26

8 Ken Zerbe (Analyst - Morgan Stanley): Ex-amortization? Yes. Because you remember, you've got -- you also have in the numbers, you have stuff like you can't see the one-time expense that are in the salaries, right. So if you take out the merger-related expenses and you take out the amort, you're at $741 million. And when I say $30 million to $35 million, I mean off of that number. Ken Zerbe (Analyst - Morgan Stanley): Okay. But off of that number, that is the right base to use? Yes. Ken Zerbe (Analyst - Morgan Stanley): Okay. All right, perfect. Thank you. John Pancari, Evercore ISI. Jo hn Pancari (Analyst - Evercore ISI): Just wanted to ask on the fee income side again around service charges. I know you gave us a little bit of color around seasonality. I know on a year-over-year basis, service charges were flat. How should we think about what's going on there? And how to think about the growth as we model out? I don't -- I'll start by saying I don't see anything unusual in those numbers. We know that commercial mortgage origination fee income tends to be lumpy. You saw that. We talked last quarter about the fact that the third and fourth quarters in commercial loan fees was very, very strong. So that bounced back down. I would expect that to come back at some point and continue to be little bit lumpy. You just can't predict exactly how it's going to work. So there was nothing there that really concerned me. I didn't change my outlook or view of what's going to happen for the year based on what I saw this quarter. Jo hn Pancari (Analyst - Evercore ISI): O kay. And you would say the same thing around the trust income. O bviously, that was impacted by the markets, et cetera, but nothing really changing your view there? No. Let me explain that a little bit. I think to me, there's maybe three factors there. The market, which you mentioned, was probably a third of that, so $1 million. And then we do have income from affiliate managers and we also offer collective funds to other relationships that we have. And essentially, you remember both of those are down. A little seasonal, a little bit about the actual 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 8 of 26

9 balances just being lower because of the market participation. O n the collective funds, you get almost an equal offset on the expenses because you're just passing that through. So that was probably a third. And then I think the last piece is probably just a bit of seasonal stuff for tax reporting, and those types of things you should see bounce back in the second quarter. Jo hn Pancari (Analyst - Evercore ISI): Okay. All right. And then lastly, just wanted to get a little bit more color on the efficiency ratio, kind of a follow-up to Ken's question. But at the current level, what are your expectations for full-year efficiency, how we think about that? Thanks. O kay. I think what I've been doing is I just simply look at the first-quarter results relative to the last year's first quarter and then I superimpose that performance over on the full year. And I think, as I said, obviously we got benefit from Hudson City, but we've got a substantial benefit right now from the core M&T operations. And I think our job is to sort of maintain that. And again, we're just looking for over a long period of time some modest spread between the two. So I don't have the number top of my head, but I think if you do that, you probably get somewhere around 54.5% or somewhere in the 54% range. But you can do that. Jo hn Pancari (Analyst - Evercore ISI): Yes, got it. Thanks, Rene. Bob Ramsey, FBR. Bob Ramsey (Analyst - FBR): Hoping you could elaborate a little bit. I know you mentioned that you all are maintaining CD pricing on the Hudson City deposit base. And just kind of curious sort of what the timeline looks for that, how you've -- I guess what the interactions have been like with Hudson City customers so far,. When you think you'll be able to start to migrate that deposit base? Well, I think the first thing I would say, Bob, is that we are sort of set up because we spent the whole quarter getting ourselves on the same platforms and system. And we spent also the whole quarter with our folks from legacy M&T in the retail bank sitting side by side with the new Hudson City employees. And so that training has been ongoing. And I think we'll need more time some part of this year to make sure that those balances stick around and that we have the opportunity to interact with those customers over time. One of the things that you are seeing is that we are getting about -- our prepayment speeds on the mortgage book are 15%, so say $300 million a month. But we haven't really seen a similar runoff in the time deposit book because we are maintaining those prices in an effort to reach out to contact those customers through the course of the year. When we talk about some diminishment of our margin, that's embedded in our margin at the top of the house. So I mean, while we're calling for a stable margin for the full year, I wouldn't be surprised to see a 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 9 of 26

10 couple of basis point decline next quarter. And you'll see that'll be solely the effect of maintaining those - - that sort of higher time account balances and pricing. But that's totally in our control. So at some point as we target the customers that we are very focused on getting and that there's a high probability that we can convert, the rest of the book will just revert that process to normal rational pricing that we want to do in New Jersey, and that should give us some benefit. But we're not in a rush. We've got the ability to introduce ourselves to those clients. So we're going to make sure we do that. Bob Ramsey (Analyst - FBR): O kay, that's helpful. And could you remind me, when you talk about a stable margin for the year, are you sort of talking about stable to this 318 level or stable to the 314 for the full year last year? Or was it somehow an adjusted number that included Hudson City? Don MacLeod (Director of IR): We were talking about stable to last year's 4Q, which was indicative of the post merger, so 312. Bob Ramsey (Analyst - FBR): So 312 is still sort of full year where you guys expect to shake out? Don MacLeod (Director of IR): Yes. Bob Ramsey (Analyst - FBR): Give or take? I don't think I expect significant change during the course of the year. And if we were to keep our position where we are offering the current rates in New Jersey and in the metro market, my sense is that any Fed rate hike of 25 basis points more than offsets it and we'll manage those two. So somewhere between what Don said and where we were this quarter is probably the right answer, but it's stable is the way to think about it. Bob Ramsey (Analyst - FBR): Okay, great. And then last question and I'll hop out, but nice to see the uptick in loan yields. I know you mentioned that reflected the Fed increase. Just curious if from where we sit today is that fully factored in or is there any sort of lagged follow-on benefit that you should see the second quarter from what the Fed has already done? No, I think it's fully factored in right now. Bob Ramsey (Analyst - FBR): Got it, thank you TheStreet, Inc. All Rights Reserved Page 10 of 26

11 David Eads, UBS. David Eads (Analyst - UBS): Maybe if we could -- on the -- you talked a little bit about the FDIC [extends]. Just want to kind of confirm - - is it fair to think about, you got a little bit of improvement from the assessment based on Hudson City kind of rolling off and then you got a step-up in 3Q. So basically it's kind of flattish the rest of the year. Is that a reasonable way to think about it? Yes, directionally, that's right. We should see that increase we saw now roll off by the end of the year, but then we're going to add the $5 million per quarter for the assessment. So it's a fair way to look at it. David Eads (Analyst - UBS): All right. It was helpful to talk about the 170 basis points of core efficiency improvement. Is that kind of in the fairway of when you talk about your kind of modest efficiency improvement? Or if you -- or is that kind of on the upper end where if you continued there, you might want to frontload some of the technology expenses, you'd feel like you have more ability to do that? Well, two things. Remember what you're seeing in this quarter is the work from last year. And that is a lot to do with -- you know, we talked about a lot of professional services that were in place that came down over the course of the year. We've only begun to really ramp up our technology spend. So to give you some sense, our technology spend this quarter was about $20 million higher than it was a year-ago first quarter. And my sense is that that will continue to ramp up to the third and fourth quarters before it hits a run rate level. And that's why when we get the additional savings from the Hudson City, that should dampen that somewhat. So you won't really see a big change is my guess overall. David Eads (Analyst - UBS): O kay, that makes sense and is good baseline to go from. All right, well, thanks for taking the question. Matt O'Connor, Deutsche Bank. Matt O'Connor (Analyst - Deutsche Bank): Can you remind us the money market waivers within the trust fees, how much they were in the fourth quarter? I assume you got some improvement there this quarter. And then how much is left if short-term rates go up further? Well, I think -- I'm going to answer your first question in a minute. But I think, yes, you're right. The full impact is in the quarter unless we were to see another rate increase. And I'm just not -- I don't have the amount off the top of my head. Don MacLeod (Director of IR): 2014 TheStreet, Inc. All Rights Reserved Page 11 of 26

12 We got back the proverbial couple of million. So the waivers we previously disclosed would be just less that. $6 million to $12 million a year? Don MacLeod (Director of IR): No, it's more like $30 million-ish. It's a run rate. I'm sorry. So it's $6 million in the quarter? Don MacLeod (Director of IR): I don't think we got that much. Somewhere around there should be the full effect of a quarter. It would be about I think is about $6 million, but I'm just doing that off the top of my head. Don MacLeod (Director of IR): But just to expand on that a little bit, the guys are a little worried about our ability to fully recoup all the waivers, given the fundamental changes that are happening in the money market industry. For example, the migration of settlement accounts from prime funds into government funds. And how will corporate customers take the redemption restrictions on prime funds and will they choose to go to other alternatives. Yes. And I think our view on that is that where we'd be more conservative. So less income in the near term, but over time maybe more later. But not this year. Matt O'Connor (Analyst - Deutsche Bank): And I guess just more broadly speaking, I mean, if you like, there have been some changes in the trust business. Maybe it was back half of last year. How are you thinking about outside of market movement impacting that line? How are you thinking about the business and is there expense rightsizing you need to do? Maybe, for example, for things like not getting the money market fee waivers back over time? O r just kind of more broadly how do you think about the business? Yes. Thanks, Matt. I'm glad you started that way. Because we spent, I don't know, a good 18 months at essentially getting rid of parts of the business that we didn't really think we had a strategic focus on. And so you saw that year over year with the retirement business, portion of the retirement business that we got rid of. We've also gotten rid of a number of affiliated managers or those balances have run down. So I think you're starting to get to sort of the core of what we would keep going forward. And you know, underneath, things are going very, very well, both in the global capital markets portion of the 2014 TheStreet, Inc. All Rights Reserved Page 12 of 26

13 institutional client service business and as well on the wealth side. My sense is that that still has an underlying growth of 4% or 5% in the revenue space. But more importantly, it's a heavy expense business. And so what we've been focused on and I believe we're starting to make really good traction on is sort of streamlining the back office, which comes in a couple of forms. It's sort of now that we've got all of our controls in place, we're beginning to change our statementing process. We're beginning to change our onboarding process, which has an impact of freeing up expenses, but it also improves the service quality. And so I think we'll be at that for at least another year or so, and it should from a bottom-line perspective continue to grow. The bottom line of both of those businesses have grown every year since we brought them onboard. So we're pretty pleased with where they are going. Matt O'Connor (Analyst - Deutsche Bank): And then just lastly, sticking on this topic here. I mean, holding the markets constant, do you think you can grow revenues in this segment? And then on the expense side, how much costs actually do come out as you streamline the back office you were just talking about? Yes, no, I do think -- I'm absolutely positive that we can continue to grow revenues in the space. Remember, one of the things I guess I would share with you is think about this: in many place, we're getting it paid in balances, right. So be careful just looking at that trust line because in the global capital markets business, we were making a choice either as we sign up new business, sometimes we're getting paid in fees. Sometimes we're getting paid in balances. So it's hard for you to see that total picture. And I would look, Matt, at don't look for a number because we're investing in that business. And so I would say widening margins is really what we are focused on. And so you might not see an expense decline somewhere in there, but you should expect to see the whole business grow and the margins to the bottom line widen. Matt O'Connor (Analyst - Deutsche Bank): O kay. If I might make a suggestion, more detail on that business overall might be helpful. Because I just feel like it's been in a decline from a revenue point of view as you've been changing the mix. And it may be helpful to show kind of the broader business, how it's performing longer term, if you want to consider. Let us think about it. Thank you. Matt O'Connor (Analyst - Deutsche Bank): Thank you. Marty Mosby, Vining Sparks. Marty Mosby (Analyst - Vining Sparks): I wanted to ask you one quick one. Restructure charges: are we getting towards the end of that with the integration of Hudson City or do we have a couple more quarters to go there? 2014 TheStreet, Inc. All Rights Reserved Page 13 of 26

14 I think we're thinking maybe $10 million, maybe $14 million, somewhere in there, more, most of which should be next quarter. Marty Mosby (Analyst - Vining Sparks): And then with the transition of mortgage banking from Hudson City coming onboard, are you kind of seeing now what is kind of shifting out in a sense of what is going to go on the balance sheet and portfolio? And what really is going to be securitized in just an origination capacity? Yes. I mean, the large majority of what we produce there I think you'll get a better up-and-running view maybe next quarter and the quarter after of what that volume looks like. But all of that, the majority is going to be sold. And where it's not and what it's done for our balance sheet, it'll be specifically either retaining certain target customers that are with us already in balances. Maybe because they happen to own a business or have a profile that we would like to see if we could bank them. But I think that will be harder to see as a segment. I would tend to think -- focus on that governmentrelated type business that we're putting into the securitization market. Marty Mosby (Analyst - Vining Sparks): And then when you talked about the servicing income being down, was that the $5 million from the commercial side? O r was there any write-downs in servicing income related to the drop in long-term rates towards the end of the quarter? No write-downs. And if I use the word servicing, I might have missed spoke. It's commercial mortgage origination income that was down. Marty Mosby (Analyst - Vining Sparks): Yes, that's what you had highlighted. Just in the press release, there was something about servicing income. So that helps. Thanks. Don MacLeod (Director of IR): A little bit of the pressure on the commercial side was servicing, but more of it was lower originations. Marty Mosby (Analyst - Vining Sparks): Okay, thanks. Matt Burnell, Wells Fargo Securities. Mat t Burne ll (Analyst - Wells Fargo Securities): Thanks for taking my question. Rene, maybe a question for you related to deposit pricing. It looks like that was -- held pretty stable, despite the Fed's action in December. And you give us some good 2014 TheStreet, Inc. All Rights Reserved Page 14 of 26

15 information in terms of the loan growth by market. I guess I'm curious if you're seeing any deposit pricing competition. And I guess I'm specifically focusing on upstate New York, given some of the upheaval in that market that's been announced over the last few months. No, not yet. Not seeing anything in any of our markets. We are all seeing a little bit more on the advertising front and those types of things. But nothing that really has affected our book at this point in time. But it's early. Mat t Burne ll (Analyst - Wells Fargo Securities): Fair enough. And then just as a second question, you mentioned it would take a little bit of time to train the Hudson City team to be more of a true commercial bank. How long do you think that that will take? The folks are fantastic, as are ours. So I think that the pure training will be done over the course of the summer. I think we'll be well on our way. The thing that takes a long time is converting a thrift platform into a commercial bank. And quite frankly, it may be a better description that you actually are creating a commercial bank while you're rightsizing a thrift. It's probably better way to think about it. And you know, we've done it before. We did it in Syracuse. It just takes time. But on an incremental basis, I hear a lot of folks are writing about well, maybe M&T's balance sheet won't grow that fast. But the growth is never how we think about it. We think about transforming the quality of that book. And so if we can make New Jersey look more like a full-service commercial bank with also retail capabilities, each year or so, you will see a difference and it will improve the overall profitability profile. So it just takes time. Mat t Burne ll (Analyst - Wells Fargo Securities): And then just finally, Rene, you've got a reserve to loans ratio at 110 basis points. That's obviously down year over year due to Hudson City, but you did build the reserve a little bit this quarter. I guess I'm curious how you're thinking about that trend over the course of 2016? Similar to what you saw from the fourth to the first. And then if I broaden your question to over time, I would expect that to migrate back up. As again, similarly as we end up with a book that looks more like a commercial book and not residential mortgages, we'd tend to have a very favorable low loss rate. I would guess that the history of the Hudson City charge-off, annualized charge-offs, are less than 25 basis points to 25 basis points, right? So that's what's dampening that. And as that book runs down, you'll see the allowance of the loan ratio move up. Mat t Burne ll (Analyst - Wells Fargo Securities): O kay. Thanks, Rene. I appreciate your color TheStreet, Inc. All Rights Reserved Page 15 of 26

16 Ken Usdin, Jefferies. Ke n Usdin (Analyst - Jefferies): Rene, just on that last point. So now that we've gotten to see a full quarter of Hudson City, is there kind of rundown in the mortgage book and that migration towards the faster commercial growth, is this about the pace that we should kind of see that rundown and remix? It looked like mortgage was down about $1 billion sequentially. Yes, I think the short answer is the random walk answer is yes. The longer answer as you think towards the end of the year is to think about what mix do we want to have of runoff in the mortgage book and the time book? And right now, they are mismatched. O ne is running off; the assets are running off at $300 million a month, whereas the time is being held up. Both of those might normalize little bit so that they are moving in sync is the way to think about it. And that will help us with any pressure on the margin. And then we'll have to think about how long we deal with that, because those two trades are very low margin trade. Ke n Usdin (Analyst - Jefferies): Yes. And in that regard, do you have an idea yet of how big you want the mortgage book to be as a percentage of either your loan book or your earning asset mix? Because I'm sure that's got a securities component to it as well, right. Just from a total rate trade perspective. So in the near term, all we're going to do, we'll sit around the table and we'll look at statistics. Are we able to convert folks? What's the offer that we have? Are they bringing over checking accounts? And we'll go through that whole thing. But really, if you think about it in a simple way, go way out, you've got 130 branches. You know deposits per branch that you think would be healthy in our markets in Upstate New York. $50 million would be big and sometimes in a place like Jersey or New York, $100 million would be more like it. So if you sort of take some average in there, you can actually see that you're building a $10 billion bank in that space. Ke n Usdin (Analyst - Jefferies): Yes. Over a long period of time. And if we view it as looking like a typical M&T footprint, you kind of get there. But over long period of time. Ke n Usdin (Analyst - Jefferies): Right, okay. And then last just quick one: you mentioned that you're on track as far as the conversions. Do you have a sense of when you'll get to kind of your run rate savings on that convergence front? What quarter we kind of get there terms of the cost saves? Yes. So Hudson, right? 2014 TheStreet, Inc. All Rights Reserved Page 16 of 26

17 Ke n Usdin (Analyst - Jefferies): Yes. This is the way we're thinking about it. So prior to our acquisition, their annualized expenses were about $280 million a year. We think if we look at the first quarter and you were to annualize those expenses, it would be about $230 million. So there's $50 million of savings that have taken place. We think that as we get to the end of the year, maybe that's $190 million, $200 million, somewhere in that range. And then it stays there until we build the bank and grow the bank. So it will take some time, but again, I don't know that you'll see those remaining things because we expect an uptick to be offset by the things that we're trying to do on the technology side. Ke n Usdin (Analyst - Jefferies): Right, the other investments. Okay, got it. Thanks a lot, Rene. Gerard Cassidy, RBC. Ge rard Cassidy (Analyst - RBC): Can you give us some color on the automobile lending business? Clearly, you've been in the business for quite some time, and we've been reading different stories about the subprime aspects of it having some distress, particularly in the Southwest. How are you guys looking at the automobile lending business? Well, we haven't changed much. You know, our volume that we've been doing in that business has been running -- I think we're doing something like $130 million a month of volume. In the low point of that business, when we were kind of shying away because we were uncertain if maybe five years ago, it would be something like $80 million or $90 million. And then at the high point, we maybe were doing $200 million when that business was really robust. Keep in mind that we sort of stay in the prime space. So for example, this quarter, we averaged 729, our average score, which is pretty consistent. You know, if you go back over four or five quarters, it's all around 725 or so is our average. So with that said, we are seeing growth because of our opportunity because it was a record year. But pricing is really, really competitive. And so that's what's kept us in that $130 million a month. Because that's what's sort of hitting our standards. Within that, most of that volume we are trying to direct towards the dealers that we also supply them -- we finance their floor plan loan. So it's trying to run it more and more like a relationship business. The one thing that you seeing, which is we're in lockstep with, although in a higher credit -- a better credit profile is that delinquencies are moving. It's a one portfolio where you see an increase in delinquencies. And to give you some sense -- these are rough numbers, but if we were at December of 2014, I think 30- days-plus was 1.97%. And this quarter, at the end of the quarter, it was 2.32% or 2.36%, right? So similar migration that we're seeing. And what I think is interesting about it is you don't see it anywhere else in 2014 TheStreet, Inc. All Rights Reserved Page 17 of 26

18 any other portfolio, which is same nationally. Ge rard Cassidy (Analyst - RBC): And what your view on what's going on with the dealer reserves with the Consumer Financial Protection Bureau? Will you guys move to a flat fee, as a few banks have done, or what's your view on that? We'll watch. We'll watch what happens with the industry. I think from the intelligence that I have, people that have taken that move have seen an immediate decrease in business. Ge rard Cassidy (Analyst - RBC): Correct. But having said that, a number have folks have told me that subsequently over time, that's rebounded as the customer base gets used to it and they get a slightly different makeup of the customer base. But a rebound. So we'll watch that over time, but no decisions to change anything that we're doing right now. Ge rard Cassidy (Analyst - RBC): O kay. And then you touched on the integration of Hudson City obviously being a thrift. You've got experience with doing these types of integrations. Was there any benefit from all the money you had spent over the years in upgrading your internal systems? Was this integration easier than what you've done in the past or did it go smoother because of the money you had spent? O kay, so two things. I'll answer that two ways. The reason it went smoothly is because Hudson City was relatively uncomplicated. We had a lot of time to think about it, right? And a lot of time to watch the portfolio. So our team is, you know -- I shouldn't say, but I'll say it: our team is really good. They've done a really good job over the years at these integrations. And so the lack of complexity was what made this go so smoothly, I think. Having said that, we did have a much more robust approach to sort of beyond the due diligence to looking at the integration area by area and monitoring the potential areas for risk and closing them down. So for example, as we went into this conversion, specifically focused on exactly 70 different places where risk could exist and where that risk would exist between the date we acquired it, the portfolio, and the date we integrated it. So -- and then we were able to go through and close all of those down by the time we got to sitting here today. So you know, I think one of the shifts is that because of the way the process works now, the idea of anybody doing simultaneous merger conversions is long gone. We are sad about that from the standpoint that it limits your risk. So you need a much more robust process now that you're going to -- if you're going to own the institution and not convert it right away. And that was something that we added this time, which I think went very, very smoothly. Ge rard Cassidy (Analyst - RBC): O kay, thank you. And then recognizing you have a dominant market share in Buffalo, can you give us 2014 TheStreet, Inc. All Rights Reserved Page 18 of 26