Apr 20, 2015
Operator
Good morning. My name is Christy, and I will be your conference operator today.
At this time, I would like to welcome everyone to the M&T Bank Q1 2015 Earnings Call. all lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answers session. [Operator Instructions].
Thank you. I will now turn the call over to Don MacLeod, Director, Investor Relations.
Please go ahead.
Don MacLeod
Thank you, Christy. This is Don MacLeod.
I'd like to thank everyone for participating in M&T's first quarter 2015 earnings conference call, both by telephone and through the web cast. 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, 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 would like to introduce our Chief Financial Officer, René Jones.
René Jones
Thank you, Don, and good morning everyone. As I noted in this morning's press release, M&T reported a 6% increase in net income, and diluted earnings per share growth of 2% from the first quarter of last year.
We were able to eke out modest growth in revenue in a difficult environment, which combined with continued favorable credit performance and disciplined expense management to produce positive operating leverage, even while we made investments to improve the franchise, and to more efficiently server our stakeholders. A higher share count accounted for the lower pace of growth in earnings per share, as our capital levels continue to grow.
We have a lot to talk about today, our results, progress on our initiatives and some recent announcements, as we usually do, I will start by reviewing a few of the highlights from the first quarter results, after which Don and I will be happy to take your questions. Remember, that you can reenter the queue if you have additional questions that haven't been answered.
Turning to the results, diluted GAAP earnings per common share were $1.65 for the first quarter of 2015, up from $1.61 in the first quarter of 2014, that figure was $1.92 in the fourth quarter of last year. Net income for the quarter was $242 million, up 6% from $229 million in the year ago quarter, and $278 million in the linked quarter.
As you are all aware, since 1998, M&T has consistently provided supplemental recording of its results on 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 $4 billion or $0.03 per common share in the recent quarter, relatively unchanged from the prior quarter.
M&T's net operating income for the first quarter, which excludes intangible amortization was $246 million, up from $235 million in last year's first quarter, but down from $282 million in the linked quarter. Net operating earnings per common share were $1.68 for the recent quarter, compared with $1.66 in the year ago quarter, and $1.95 in the previous quarter.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.08% and 11.90% for the recent quarter. The comparable returns were 1.18% and 13.55% in the fourth quarter of 2014.
In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP, non-GAAP results, including tangible assets and equity. Before we get to the specifics, note that effective January 1, 2015, M&T adopted amended guidance from the financial accounting standards board, for investments in qualified affordable housing project.
The adoption of this accounting guidance did not have a significant affect on M&T's financial position, or results of operation, but did result in the restatement of the consolidated financial statements for 2014, and earlier years, to remove the net costs associated with qualified affordable housing projects from the non-interest expense, and include the amortization of the investment in income tax expense. Turning to the balance sheet and the income statement, taxable equivalent net interest income was $665 million for the first quarter of 2015, a decline of $22 million from a linked quarter.
Contributing to that decline was the normal impact from two fewer accrual days in the quarter, which reduced interest income by an estimated $10 million. An additional $5 million reduction in interest income was driven primarily by the accelerated amortization of the premium on certain mortgage backed securities.
This follows the reduction in guarantee fees on newly originated FHA mortgage loans, and the resulting uptick in the refinancing of loans backed by some of our Ginnie Mae securities. For our expectations for prepayments speeds to unchanged, we wouldn't expect this to reoccur next quarter.
We took further steps towards reaching LCR compliance during the quarter, by issuing $1.5 billion of unsecured bank notes, and using the proceeds to purchase additional high quality liquid assets, with lower yields than we previously obtained. The combination of those transactions reduced the net interest income by an estimated $4 million, we will discuss our LCR program further, when we get into the outlook.
Finally, there was a $4 billion decline in average deposits from our institutional trust business. Recall, that excess deposit balances reside at the Federal Reserve.
That decline occurred prior to the end of the fourth quarter, and was reflected on the balance sheet at December 31. Although those transactions generated a very narrow spread, the large decline in those balances reduced interest income by an estimated $3 million, but improved the net interest margin.
These average balances are now at what we would consider to be more normal levels. The net interest margin was 317 basis points during the quarter, up 7 basis points from 310 basis points in the fourth quarter.
The components of that change were as follows; the large decline in trust deposits held at the fed, increased reported net interest margin by an estimated 14 basis points. While LCR related investments and associated funding reduced the net interest margin by an estimated five basis points.
The impact from the accelerated MBS premium amortization reduced the margin by an estimated two basis points, and we saw the usual impact from the day count in the shorter quarter, which added an estimated two basis points of the month [ph] [0:04:00] (4). Our estimate of the compression in the core margin, excluding the items I just mentioned, was somewhat less than what we have recently seen over the past several quarters, about one to two basis points.
Average loans increased by $820 million or about 5% annualized compared with the fourth quarter. Looking at each of the portfolio of categories on an average basis compared with the linked quarter, commercial and industrial loans increased an annualized 7%, including continued strong growth in the Auto Floor Plan portfolio.
Commercial real estate loans increased by about 8% annualized. Residential mortgage loans declined an annualized 4% and consumer loans grew an annualized 1%, this category included growth in indirect auto loans, offset by a decline in home equity lines of credit.
Average core consumer deposits, which exclude deposits received at M&T's Cayman Island office and CDs over $250,000, declined an annualized 21% from the fourth quarter, reflecting the decrease in trust deposits I referenced earlier. Turning to non-interest income, non-interest income totaled $440 million in the first quarter, compared with $452 million in the prior quarter.
Mortgage banking revenues were $102 million in the first quarter, up $8 million from the prior quarter. Commitments to originate residential mortgage loans for sale increased about 27%, and we saw a surge in refinancing activity early in the quarter, when rates declined and the momentum continued even after rates rallied.
This led to a $6 million increase in residential gain on-sale. Several fee categories were impacted by typical seasonal factors.
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 fees were $124 million in the recent quarter, compared with $128 million the previous quarter, which included strong results for the institutional client services business.
Similarly, credit related fees were lower by $7 million, coming off what was a strong fourth quarter. That decline largely related to fees that are typically transaction driven, and can vary somewhat from quarter-to-quarter.
Turning to expenses, operating expenses for the first quarter, which exclude expenses from the amortization of intangible assets were $680 million, unchanged from a year ago quarter. The $21 million increase in operating expenses from $659 million in a linked quarter, reflected increased salaries and benefits, partially offset by a decline in other costs of operation.
Salaries and benefits, increased by $45 million for the fourth quarter, 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 and certain other benefit costs, as well as an $8 million rise in pension expense that was previously disclosed in the footnote to the 2014 10-K.
The seasonal factors will decline, as we enter the second quarter, but the higher pension costs should remain throughout the end of the year. Other costs of operations were $203 million, down $28 million from a linked quarter, and down $8 million from a year ago.
Elevated professional service expenses in the fourth quarter of 2014, including higher legal expenses that we noted on the January call, declined to a more normal level this past quarter and other professional services costs were reduced, as certain projects were either completed or reached significant milestones. Overall, we were pleased that we could keep expenses flat year-over-year, while funding our initiatives and meeting our compliance related milestones.
As a result, the efficiency ratio, which excludes intangible amortization was 61.5% for the first quarter, improved from 62.8% in the year ago quarter. Next, let's turn to credit; our credit quality remained strong, non-accrual loans declined further from the end of the fourth quarter.
The ratio of non-accrual loans to total loans climbed by two basis points to 1.18% as of the end of the first quarter. Net charge-offs for the first quarter were $36 million compared with $32 million in the fourth quarter.
Annualized net charge-offs as a percentage of loans were 22 basis points for the first quarter, up slightly from 19 basis points in the previous quarter, but still well below our long term average of 37 basis points. Provision for credit losses was $38 million in the recent quarter, slightly exceeding net charge-offs.
The allowance for credit losses was $921 million, amounting to 1.37% of total loans as of the end of March. The loan loss allowance as of March 31 was 6.3 times 2015's annualized net charge-offs.
Loans 90 days past due, on which we continue to accrue interest, excluding acquired loans that have been marked to fair value at acquisitions were $237 million at the end of the recent quarter. Of these loans, $194 million or 82% are guaranteed by government-related entity.
Turning to capital, the tier-1 common capital ratio is being deemphasized, as the industry moves from Basel-I to the Basel-III capital framework this year; although it will continue to be a variable in the stress testing process. But to give you a basis for comparison, M&T's tier-1 common ratio was an estimated 9.98% at the end of March, up 15 basis points from 9.83% at the end of last year.
Our common equity tier-1 ratio under the current transitional Basel-III capital rules was slightly less, an estimated 9.78% at the end of the recent quarter. Before we turn to our outlook, there are two noteworthy items announced after the end of the recent quarter.
Earlier this month, we completed the divestiture of a trade processing business within the retirement services business that we acquired with Wilmington Trust. Now this business generated annual revenues of $34 million, with a minimal impact, the net income and earnings per share in 2014.
From that, you should be able to estimate the quarterly impact on revenues and expenses going forward. Last week, on April 15, we completed the redemption of $310 million of high cost fixed rate TROPs [ph], as contemplated in our capital plans.
The three issues had a weighted average coupon of 8.445%. So now turning to the outlook; as is our usual practice, without giving specific earnings guidance, we'd like to revisit our thoughts from the January call regarding the full year of 2015.
Although our loan growth this past quarter was slightly stronger than the 4% that we gave in our outlook, in the January earnings call, we are not going to increase our outlook at this point in time, given some of the mixed signals that we see in the economy, so we feel that we are relatively on track with the trend that you saw this quarter. Our guidance on the net interest margin, is a little changed from our previous outlook.
Although, the compression in the core margin was somewhat less than it has been in the first quarter, we still believe its reasonable to expect about three basis points of core margin pressure per quarter. If short term rates start to rise, the impact will tend to offset those pressures.
We expect modest progression in the net interest income over the coming quarters, and still expect to grow net interest income on a year-over-year basis. We still need to acquire additional high quality liquid assets to reach full compliance for the liquidity coverage ratio over the remainder of the year.
Timing will be opportunistic, but we expect to be done well before the end of the year, and perhaps by the end of the third quarter. We are still looking for low single digit growth in fee revenues, as is normally the case, we expect seasonal increases in salaries and benefits during the first quarter to reverse itself.
However as I noted, the increase in pension expense will persist for the full year. We would expect the decline in the second quarter to be in the neighborhood of $30 million.
And as many of you know, in its message to the shareholders in the annual report, Bob Wilmers discussed in detail, the investments that we have made in 2014, and our continuing investments in BSA/AML, clients, capital planning, stress testing, risk management and infrastructure and client technology platforms to optimize the franchise. While we still have more work to do, professional service expenses, incurred in connection with our BSA/AML work are starting to trend downward, as some of the workstreams reach completion.
Over the remainder of 2015, infrastructure, data and other initiatives that we are working on, will absorb some of those savings. We do expect to see some net benefit beginning next quarter, with most of the improvement in the second half of the year.
All that said, our basic outlook for expenses is unchanged. We continue to expect lower overall spending in 2015 compared to last year, and we remain focused on producing positive operating leverage on a year-over-year basis.
The first quarter got us off to a good start. Overall, our areas of focus for 2015 are fairly straight-forward; to continue to improve the efficiency of our balance sheet; manage the revenue expense dynamics to produce operating leverage; to optimize our capital structure, while conforming with both the regulatory capital thresholds, as well as the annual stress tests.
I will conclude my prepared remarks with the topic that I am sure you are all closely focused on, the merger with Hudson City Bancorp. In connection with the merger, we announced last Friday, that M&T and Hudson City have agreed to an extension of the merger agreement to October 31st, 2015.
We think this will provide our regulators, sufficient time to review our merger application, which the Federal Reserve has indicated, it will be in a position to act on by September 30. No assurance can be given, as to whether or when the necessary approvals of the mergers will be received.
We see no material change in the deal economics from what we have conveyed previously, and we remain strongly committed to the merger, and to our prospective partners at Hudson City. Of course, as you are 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 the operator will briefly review the instructions.
Operator
[Operator Instructions]. And your first question comes from Matt Burnell of Wells Fargo Securities.
René Jones
Hi Matt.
Matt Burnell
Good morning René. Thanks for taking my call.
Just a couple of questions, just on the HCBK transaction. You mentioned that there is no material -- you don't believe there is a material change to the deal economics at this point.
Is there any change in sort of the pace of the accretion, relative to the pace that you originally announced in 2012?
René Jones
So if you go back to what we announced in 2012, I will start by saying, we are still in line with that guidance. Just straight-forward what the accretion would be, we are still in-line with that guidance.
Having said that, remember what's happening with the shrinking balance sheet over time; had we done the deal earlier, the accretion probably would have been a little bit larger. But all of that is now captured in the equity of the firm, right; so that's how the economics are sort of held intact, and don't change the deal.
Matt Burnell
Okay. And does the delay, relative to what you thought the timing was going to be, when you submitted your CCAR at the beginning of this year.
Does that have any effect on the potential timing of the buybacks that you are scheduled to do in early 2016?
René Jones
In our governance process, when we looked at those levels of buyback, we didn't assume anything about whether or not we would have to deal; we sort of just looked at what M&T on its own could handle, as sort of a first step of returning to buyback.
Matt Burnell
Okay. And just finally for me, any change in the tax rate, given the new accounting treatment going forward?
René Jones
No. There is no change to the tax rate.
But what I'd urge you to do, is take a look at the quarterly trend, because all those are restated. So the number might be higher than what's in your models, but the tax rate is going to be consistent, with what you're seeing across the quarters there in the press release [ph] [0:02:56] (7).
Matt Burnell
Okay. Thanks for taking my questions.
René Jones
You're welcome.
Operator
Thank you. Your next question comes from Brian Klock of Keefe, Bruyette & Woods.
Brian Klock
Hey, good morning René, good morning Don. So just wanted to follow-up on the question on the guidance related to the merger and the NII.
So René, you talked about typical three basis points of quarterly compression and NIM. It looks like the HQLA was added late in the quarter, and had a five basis point impact.
So is that three basis points not including the impact of those HQLA purchases into the second quarter? Maybe give us a little extra color around what the HQLA impact could have on 2Q's NIM?
René Jones
Yeah. That two, three basis points is, is without the HQLA, and if you think about what happened in the first quarter, we went out and did a $1.5 billion issuance of debt.
And in fact, we did 5s and 10s, which is sort of the first time we did that, because we thought that the spread between treasuries and net debt were at historic lows, I think 47 basis points for the 10. So we took the opportunity to go out and grab some of that efficiency to length out the maturity structure of the debt.
So there was a bit of an extra cost this quarter than you would normally see. My thinking is that, our thought is that we might be quite a bit lighter in the second quarter, and then finish up in the second half of the year.
So second quarter, I don't expect a similar impact, and third quarter, will depend a little bit about on what we do with the term structure, instead of what's available at that time. So I think going forward for the remainder of the three quarters, I don't think there is a big material effect from finishing up what we have to do on the dollar amount of NII.
Brian Klock
Okay. So guess just on the NIM, the percentage NIM -- now the five basis point impact in the first quarter, there was about a third of an impact it seems on average balances.
Should we think that there is another 10 basis points that come out of the NIM in the second quarter, or the full impact of what you did in the first?
René Jones
There might be some impact, but I don't see much of an impact.
Brian Klock
Okay. And again, the three basis points doesn't include the benefit from the TROP [ph] reduction either then?
René Jones
No, it does not.
Brian Klock
Right okay. All right, thanks for taking my questions.
Appreciate it.
René Jones
Sure Brian.
Operator
Thank you. Your next question comes from Ken Usdin of Jefferies.
Ken Usdin
Hi, good morning. René, I was wondering if you could talk a little bit more about the trajectory of other expenses, and your comments about having lower expenses in 2015 versus 2014?
Can you help us understand, how this mix shift happens from the professional consulting fees into the core and how much netting down you think that could have, especially on that other expense line?
René Jones
Yeah. I think I know what you mean, but just to be clear, in terms of where we were at the end of last year, we had built up our infrastructure to have all of our permanent resources in place, a lot of which were in salaries and benefits, but we still had running the full content of the professional services, and temporary staffing that helped us get accelerate the pace of the work.
And so as we reach our milestones, that will come down, and it will produce lower expenses and -- from where we are now, and also on a year-over-year basis point, as you look at each quarter. But we don't think that you will see the full benefit of that, because we need to continue to make some investments, particularly on the technology side that we like to do.
So I think the way to think about it is, we are going to try to shoot for positive operating leverage every quarter this year, and that -- go ahead?
Ken Usdin
I just wanted to say, on a year-over-year basis positive operating leverage?
René Jones
Yeah. And I am thinking about it, I am looking at every quarter; and that's why I said, I feel good about the fact that we started off positively in the first quarter, and if we can continue to do that by utilizing some of the lower professional services, I think we feel pretty good about it.
Ken Usdin
Okay. My second question is just about the Trust business; it has been kind of moving along at a low single digit rate of growth.
And I am just wondering, what's that growth rate being burdened by, and at what point do you think we can start to see an acceleration in the Trust income growth line item?
René Jones
I think this year-over-year, we are looking at 2% in the past year, since we did the merger, we have been running at about five. And if you look at the two most important business that underlie that, that's the Institutional Client services and the Wealth businesses, those are still growing at about that pace.
We still have investments in some of the affiliated managers, and as you know, with sort of the market performance on active managers that you're seeing across the industry, those balances and fees are down. But the two core businesses are still doing very-very well.
So I would expect, if we could get 3% to 5% growth every year in that business, I think that's a real plus, because we are cross-selling that into the existing customer base, and then we have to do that -- we have to work on our efficiency and our ability to deliver that -- those services in a more streamlined fashion. If we can do that, that would be a homerun for the economics around those business.
Ken Usdin
And just a quick one on the end there, do you know the amount of quarterly fee waivers that you're waiving in that business?
René Jones
No. Fee waivers in the money funds -- Ken, we had sorted --
Don MacLeod
Ken, we had previously disclosed 15 to 20 a quarter, but I need to get that updated and we will have to get back to you.
Ken Usdin
Okay. Thank you guys.
Operator
Thank you. Your next question comes from Bob Ramsey of FBR Capital Markets.
Bob Ramsey
Hey, good morning guys. Just maybe touch on loan growth; I know you pointed out, the first quarter was a bit ahead of what you all had guided for, but you didn't feel comfortable enough to take up the full year outlook.
What sort of drove the strength this quarter relative to expectations and what gives you caution on a look forward basis?
René Jones
I mean I think, you saw from the comments Bob, that we had pretty decent growth in C&I and real estate, consumer was slower; and then geographically, we still continue to see very nice growth at 5% growth annualized in upstate Western New York. And then New York, Philadelphia, New Jersey, that was 8% annualized.
Baltimore, which has been running negative for several quarters, was up 2%. So it's sort of across the board with strength in New York, I guess is what I would say.
And why we are so concerned with it though, in terms of thinking that we'd be higher, because we really have seen a lot of competitive pressure. Mostly, we believe, because of the substantial market liquidity and the number of participants that are actually out there, lending or competing for the same strong credit.
So we have got banks, we have got insurance companies, CMBS originations have peaked, and we also now have PE firms. And what we are seeing, is that we are starting to routinely see sub-200 over cost of funds over LIBOR deals.
A number of them are now situated around 150 basis points, on the 150 basis point range. And we are also seeing -- loosening deal structures.
So the way we think about that is, when you start seeing terms that get extended so that deal terms are that low in pricing and -- I am sorry, the pricing is low and the deal terms are seven to 10 years, the economics are in the mid-single digits on tangible capital. And so, the idea that you can ramp up growth and actually produce any economic results, it doesn't seem to make much sense in this competitive environment.
So that would keep us somewhat subdued. I think, to the extent that you see somebody have significant loan growth, I think you'd have to question the structure and the pricing of the deals.
Bob Ramsey
Okay. That's helpful.
Then one other question sort of shifting gears, the mortgage line obviously very strong; what is the split there of service and versus origination income this quarter?
René Jones
I can give you that, I may shuffle around a little bit to do it. So $68 million in servicing would be outstanding, and then the residential gain on sale was around $21 million.
I think you may figure out the rest from that, the rest would be commercial.
Bob Ramsey
Okay. And where the pipelines in that business is looking like heading into the second quarter?
René Jones
Pipelines look pretty strong. I think, if I look at the mortgage funds line, which is sort of application that we received during the quarter, minus those that denied or withdrawn or for loans closed, that was up high.
That was up 50%. So to give you some sense, the pipeline at the end of the quarter, was $869 million, where the last time it was about that high was second quarter 2014.
Bob Ramsey
Okay. Great.
Thank you very much.
Operator
Thank you. Your next question comes from David Eads of UBS.
David Eads
Hello. Thanks for taking the question.
I guess just following real quickly on the mortgage question there; you guys had previously talked about expecting mortgage revenues to be down for the year, after the strong 1Q and kind of the strong pipeline. Should we think about maybe having potentially, [0:33:41], the upside there?
René Jones
I feel good about the first quarter, its in the bag. The momentum in the second is great, but mortgage is all about rates.
So it really depends what happens with the rate environment.
David Eads
Okay. That makes sense.
I guess, maybe on -- when it comes to mortgage loans on the balance sheet, that dipped after a couple of quarters of being kind of stable. Was that -- was it just more due to seasonal factors, or anything else?
René Jones
You mean the residential mortgage book that we have?
David Eads
Yeah, on the balance sheet.
René Jones
Yeah. Well the balance sheet, I think that's -- I wouldn't characterize that as sort of normal run-off in the held-to-maturity portfolio.
And it wouldn't make much sense for us to be adding mortgages pending the Hudson City thing, where you'd be bringing on $20 billion plus of mortgages. So that's just sort of naturally -- natural run-off that you see there.
David Eads
Okay. It just seemed that number would stabilize a little bit over the last couple of quarters, but that makes sense.
Then just a last one for me, you talked about cash balances stabilize here, should we sort of think about this level of cash balances as a good run-rate for the near term, rather than kind of investing any of that in securities or elsewhere?
René Jones
We think that's right. I think for now, we are thinking about that as separate businesses, because those cash balances are high, but they tend not to be individual -- individual transactions aren't around for long periods of time, right?
So I think the level that we'd see today is what we kind of expect, and I don't think we have any plans to really use a lot of that for the LCR.
David Eads
All right. Great, thanks.
Operator
Thank you. Our next question comes from Sameer Gokhale of Janney Montgomery Scott.
Sameer Gokhale
Hi, thank you. Just a couple of questions; the first one was in terms of C&I growth René; you talked a little bit about your growth relative to others and some of the competition in the industry.
But I was curious, if you could just help us delve a little deeper into where exactly your growth is coming from now, within C&I, relative to maybe where you had seen growth, say 12 months or so ago. So basically I am asking, if the mix of where you're generating C&I loan growth has changed any, relative to what you had seen say a year ago?
René Jones
I don't think so. I mean, I am just -- I will do a bit of a scan.
For a long period of time, the C&I growth was sort of strongest in Upstate New York and in New York City and Philadelphia. Fairly strong in PA, and weaker in Baltimore and Washington; that still holds true.
I think its pretty consistent with what we have seen over time.
Sameer Gokhale
Okay. And --
René Jones
We just don't know, [ph] what's going on in those economies.
Sameer Gokhale
But is there anything, any underlying loan category specifically within C&I that's growing more any -- if you have comments in terms of geography, as far as specific loan categories that you can think of, where they might be more pronounced sort of mix shift?
René Jones
No. You remember each of the markets are different.
So there has been -- now you've got me out of the C&I category in a sense, but if I just think of the markets overall; in Buffalo, there is a lot of construction going on, and the number of hotels that have been put up and that could be transitioned into permanent financing, versus in Washington DC, one of the reasons why we think things are so slow, is because the economy there around the government services seems to be relatively weak, in terms of job growth. So we are seeing -- in Washington, we are seeing a slowdown in job growth, we are seeing tepid office space demand, especially in the general services, administration and defense contractors.
So we have got a fair bit of a diversity, so it depends on which market you're in, so there maybe themes in markets, but there is no big theme overall.
Sameer Gokhale
Okay. And then you know, there was one other bank that reported on Friday; they, I think have a significantly higher amount of exposure to the energy sector, and yet, they were talking about how they had reduced commitments.
But it seemed like at the same time, those same borrowers were able to get funding elsewhere in the capital markets. So while they were de-risking, it seems like somebody else in the capital markets is willing to take on that risk.
Now in terms of your customer base and your sort of tight underwriting through cycles, it seems like your customer base would be even more receptive and able to get funding in the capital markets. So when I listen to your commentary about C&I loan growth and loan growth overall, shouldn't we expect in this sort of environment, that you see a more pronounced slowdown, relative to maybe what your peers are seeing from that perspective.
Just more competition, more loans going away funded by the capital markets relative to your peers?
René Jones
You should. I mean, I think -- first, let me start off by saying, I think we talked about this last time.
We don't have very much exposure to the energy sector at all. So we don't -- we have some, but its secondary, as you think about shale and things like that.
And people for example, trucking companies supplying water to those facilities. So its very limited.
But having said that, one of the things you're seeing, whether it'd be unhealthy deals or on things coming out of the classified portfolio, there is plenty of people to take those deals out. And I will give you an example, I mean, one of the things, as I go through all the deals, I look -- one of them in New York state, where we lost a particular deal.
It was a $30 million credit. It was a 10-year fixed rate pricing of 2.14%.
We just did the $750 million of 10-year fixed, at 2.90%, which is not possible for us to make that loan. So you start wonder, where is that going?
Is that going to the capital markets, right in our people stretching in those venues. So this is one of the things that makes us very increasingly cautious, as we kind of move forward.
Most of our credits, for example, the majority of the lending is being done with the existing customers that are out there.
Sameer Gokhale
Okay. Thank you.
And then just my last question was -- I am just trying to get a sense for, in this current environment, what leverage you can pull from a revenue growth standpoint? I mean, clearly, looking at new products, etcetera, would be one place where you might try to drive additional revenue growth incrementally.
But if you look at the penetration of your commercial lending customer base, and if you look at cash management or other types of services you could offer those customers, do you feel that there is more room there, where you can improve penetration? Or at this point, do you feel like you are at a level, where there are limited opportunities for you to sell additional products to that specific customer base?
René Jones
I think that, as you focus on, particularly folks on the commercial space, I think we are very fortunate. So well yes, I think there is probably more that we could do in certain parts of the commercial segment around cash management and different types of cash management services.
I also think, that will light in a number of other areas that we do. So relative to our peers, we are probably light on the insurance side.
There is a number of areas. And then don't forget, that we have got a big part of what the wealth business in Wilmington is, its serving businesses.
And that has actually provided tremendous -- I hate to use the word -- you used the word cross-sell. It has provided tremendous capabilities for us to supplement sort of a natural life-cycle of those business owners.
And so that's going pretty well. So I feel kind of fortunate.
We have got areas where we know we could improve and we have some that we actually are improving. And so I think that will be our focus.
I will just say it, I know we are off with some folks expectations for the quarter in terms of revenue, but at the end of the day, I was pretty impressed that we had growth in revenue year-over-year at 2%, and we are not seeing much of that. And I think, I talked in my comments about efficiency, and one of the places where you have to look at efficiencies, is to look at efficiency of your balance sheet.
And if we do that, and we continue to look for opportunities there, then that will have a positive impact on revenue, like the TROP [ph] redemptions we just did. So those types of things are going to be really important to us.
Sameer Gokhale
Okay. Terrific.
Thank you.
Operator
Thank you. Your next question comes from Erika Najarian of Bank of America.
Erika Najarian
Yes, good morning. My first question is just a follow-up to Brian's question on HQLA.
René, could you give us a sense of what you think the end of period balances would be in your investment securities portfolio? And also, what you're going to be funding that growth with for the duration of the year?
René Jones
What they are now, the end of period?
Erika Najarian
What you expect the securities balances to be by the end of the year, taking into account the HQLA purchases that you're going to be embark upon, and what you're going to fund that incremental purchases with?
René Jones
We are somewhere around $14 billion. I think we have got to do a little more than what we did recently.
In the last quarter we did $1.8 billion. So we have a little bit more than that to do, to get ourselves [indiscernible].
And remember, I think we are being relatively conservative there. So as someone mentioned, are we using the $5 billion in cash, that counts in liquidity coverage ratio, but we are not using it.
So we are probably technically further along, and have some leeway from there, but we tend not to count those assets, as we manage them internally.
Erika Najarian
And is that $1.8 billion more than the $1.8 billion for the rest of the year, or is that more than $1.8 billion quarter-to-quarter?
René Jones
More than $1.8 billion for the rest of the year. The pure [ph] median, we are at 16% of our securities or 16% of our balance sheet and the peers are at about 19%.
Erika Najarian
Okay. And then just one last quarter if you could, if the deal with Hudson City does close or gets floated on, on October 31.
Is fourth quarter -- end of fourth quarter, too soon of a close to assume just for our modeling purposes?
René Jones
We have been trying to get the deal done for a very long time, and should we get approval, we will work very swiftly.
Erika Najarian
Got it. Thank you.
Operator
Thank you. Our next question comes from Marty Mosby of Vining Sparks.
Marty Mosby
Hey, I just wanted to ask about the cross-sell efforts down in New Jersey, and twofold; one is, kind of how much in run rate expenses are already there, because that wasn't netted out against your synergies in the original deal, when its already in the expenses. And then two, what kind of revenue have you been able to see, with your efforts so far, as you have got that fully operational now?
René Jones
You know Marty, I think things are on track, maybe a little better than we would have expected, when we first laid out our plan. We have got over $1 billion -- we may have put these notes in our -- the best place to look, [ph] it involves letter, I think we did a paragraph on it.
So one of the keys is, that we have over $1 billion of loans to-date, that we seem to be engaged in all fronts, except those where we really can't, because we -- also in retail, we don't have any engagement. So we feel pretty good.
That seems to be on track as we thought [0:46:32]. And I think, for the level of activity that we have going on today, in those non-branch business lines, I'd say we probably are fully staffed from the level of activity that we have today, and to see more hires, we would have to see more growth in a bigger portfolio.
Marty Mosby
And just curious, how much you were netting out of the original expense synergies that you have already incurred?
René Jones
I don't know if I have ever disclosed it, but quite frankly, I can't remember. You know the number we hired, right?
I think we talked about, on the ground we have 129 people there, so you can do something there. But in totality, I think when you count people back here at M&T, it was more like 170 people that we hired, and so you can get some sense of what the cost of that would be on an annual basis, if you throw in a little bit of extra occupancy and so forth.
Marty Mosby
And then, just one last follow-up, if you look at the seasonality -- you have seasonality in really big buckets, you had fewer days, $10 million, you mentioned on NII, and you got fees, which if you look at mortgage, kind of already starting to kick in, maybe you saw from that. But that's generally about $30 million, and then you highlighted another $30 million on expenses.
Typically, you have a little bit more than the rest of the regional banks and the seasonality. Is there anything that would soften that, if you kind of look in total, about $75 million from first quarter to second quarter in normal progression?
René Jones
I am glad you mentioned that. So a year ago, from the fourth quarter of 2013 to the first quarter of 2014, I think in total, we saw revenues decline about $36 million.
This time, we saw them drop about $33 million. So pretty much, while it may be some different categories here and there, there is nothing that's atypical about the seasonality that we are seeing, and everybody's well familiar with what happens on the expense side.
So again, that's why I spent a lot of time focusing on the year-over-year space, because for us to do all the things that we have been doing and actually produce 6% growth in net income, I felt pretty good about it. And if we can keep doing that, and we can keep producing operating leverage, I think that's pretty good.
I think what we are going to have to begin to do, as we get into the next year, is start working on capital efficiency and those things, as our capital ratios have -- we have passed two stress tests, and our capital ratios continue to rise, and so I think it’s a good time to begin to think about what our capital structure is, and how we rationalize that as well.
Marty Mosby
Thanks.
Operator
Thank you. Your next question comes from Ken Zerbe of Morgan Stanley.
Ken Zerbe
Great, thanks. You guys mentioned that you have seasonality in the trust business, but it doesn’t seem like a business that should have seasonality.
Can you just remind us, why that's a seasonal level of revenue?
René Jones
Yeah. Two reasons off the top of my head, one is, we get paid in different ways, sometimes we get paid on a monthly basis, some fee arrangements are quarterly.
But there is also a significant portion, where we are on an annual fee basis. So you would see that at the end of the year, and then as you get back up, you lose that source.
So that whole collection of people that pay you on an annual basis, you wouldn't see in the first quarter. And then taxes, so for example, you should see an uptick in the revenue next time, because all of -- the substantial portion of our tax fees are paid in the second quarter.
Ken Zerbe
Got it. That means fourth quarter is higher, given the annual payment, and sorry, your comments mean that fourth quarter was lower or second quarter is higher than first?
René Jones
First quarter would be lower than the fourth or the annual fee reason.
Ken Zerbe
Okay. And then second quarter is higher than the first, because of taxes?
René Jones
Because of taxes? So there is some of it -- as we go back, its pretty consistent.
I think at year ago, if we do the same thing -- a year ago, fourth to first, we were down $4.7 million. This time we were down $4.6 million.
Ken Zerbe
Okay. Great.
Thank you.
Operator
Thank you. Our next question comes from Jill Shea with Credit Suisse.
Jill Glaser Shea
Hi. Good morning.
So with the merger close date extended to October 31st, could you note for us any potential differences in certain expense line items, relative to your initial estimates for a potential April 30th close? And so, to just keep some expense line items higher over the near term, and then does this factor into your thought process in terms of timing of additional investments in the business, in order to manage just the [indiscernible] year-over-year?
René Jones
No. So all my comments about the financials to-date have been M&T standalone, and all the comments that we make about Hudson city, think of it as time zero out 12 months of the first year.
So there is nothing we can do, until we all bring those franchise together and start working on it. So the start date, both of when we pay for the franchise, and both when we get to operate and it just moves.
But I think that's the best way to answer your question, am I getting that right?
Jill Glaser Shea
That's helpful. Thank you.
Operator
Thank you. Your next question is from Gerard Cassidy of RBC.
Gerard Cassidy
Hi René.
René Jones
Hi Gerard.
Gerard Cassidy
Question on your common equity tier-1 ratio that you pointed out at the end of March is 9.78% under the transitional capital rules. Do you have an estimate for what that ratio would be at the end of March, if you had to fully implement the rules applied?
René Jones
Yes I do. It's just slightly less, its 9.71.
Gerard Cassidy
Okay. You've touched on more than once on this call, on having to focus on optimizing your capital levels, especially after the Hudson City deal closes this year.
Where do you see optimal common equity tier-1 ratio from your guys eyes? Where do you think that could settle out at, every couple years, let's say one everything settles then?
René Jones
So we have sort of been searching for that, right. So a year ago, two stress tests ago, we entered the stress test with a tier-1 common of 9.48 and we fared pretty well in the stress test.
And we entered with something like 9.76 or something like that this past time, and we fared pretty well. So now that we have had our internal models for some time, but we are getting to -- get a chance to see the third party's view of that.
So we are kind of zoning in on that, and I think that sort of starts to frame the idea of where our target ratios might come out, and what I know, that to be on a comparable basis, you have to use the other measure, which is 9.98. So clearly, as we start pushing up above 10, you're starting to get into the space of excess capital.
So at some point, we will probably start disclosing target capital ratios. But again, I think, we haven't really done that in particular, because of the sort of uncertainty with the transaction, because that transaction will give us even more capital, all right, and we need to sort of think about what the difference is between our target ratios, and what we practically can and actually get to.
So that's sort of what our thinking is, but hopefully that frames for you, what we are zoning or beginning to zone in on.
Gerard Cassidy
Great. And coming back to your comments about the loan portfolio; we have heard from a number of banks this quarter about the pressure on spreads due to increased competition.
You're one of the few that have talked about maybe underwriting standards now, are starting to weaken if you will? Is this relatively new, the spread pressures seem to have been talked about a quarter or two before from others as well?
But the weakening of underwriting [indiscernible], is that something new that you guys are seeing, or am I being too harsh in saying that?
René Jones
No, you're not being too harsh in saying that. I think what I'd characterize is, it has been slightly increasing for a long period of time, and that sort of increasing trend has not cone unabated.
So when we look at our own numbers, I look at some of the things that in for a long term client, that we are doing for them. And I say to myself, wow, we are now getting into a space where, if you're going to see any kind of loan growth, you're probably -- it would be tough to generate high single digit loan growth in this environment, when you compete with the capital markets.
I would expect, in the real estate space, the multifamily space, the CMBS issuance will be up 20% this year. So that's pretty natural for us not to be able to compete with those guys, in the level of both structure and price.
Gerard Cassidy
Do you think it will be more challenging for M&T in this environment? In the past, you guys have done a very good job in managing capital, and when markets became aggressive in underwriting, your numbers would show that you would pull back, have better credit growing through the down cycle.
But then, take that excess capital that you weren't using, and you weren't the best at giving it back to shareholders. Now that you have this new regulatory control on returning capital, could it be more challenging for M&T going forward, if you decide to pull back; because the underwriting is way too aggressive, but you are in it now, and you may have to sit on the capital longer?
René Jones
It’s a great question Gerard. I hope not.
I mean, we have got a large organization with lots of people. And so, we have a strong culture of not chasing revenue, and I think that culture is still intact.
And at the same time, we are investing very heavily in sort of modernizing our risk management infrastructure, and make sure that doesn't happen. All we can do is, continue to talk about it and be very transparent about it.
Having said that, when I look back at the cycles, I think -- this is just me, but I think that, when we look back, we will be talking about how -- when a lot of the standards were weakening and deal economics were lighter, we were making investments in our risk management infrastructure and we were focused on efficiency. And that's sort been this way, the cycle has been -- has carried out over a number of decades for us, and I think as long as we have that good work to do, it makes us less antique [ph] about the fact that revenue growth is slow, and our clients need to be very loyal to us, and our focus will be on maintaining those relationships, and making sure that we take some of the excess capital invested in our franchise, in our infrastructure.
Gerard Cassidy
My last question -- last one is, obviously it has been a tough go with this Hudson City acquisition. After it is completed, has your view or Bob's view or the board's view on acquisitions in the future changed because of what you had to go through in this process with HCBK?
René Jones
I will try to answer that question if you promise to ask me again, what's the deal?
Gerard Cassidy
Okay.
René Jones
I think the way I think about it is, this might be the largest transaction since Dodd-Frank. There is a lot of uncertainty out there, but clearly the standards are high.
And I feel good about the fact, while it may seem counterintuitive that we are in there, working on finding out first-hand what those standards are. And I think that, as we get to a place, our investments should be leverageable; and I never heard anything to suggest that the regulatory environment doesn't want deals to happen ever again.
So I try to be somewhat optimistic. Having said that, I will tell you, that clearly the standards are high, and I look at all the work that we have done, and the way I think about it is, we have done a tremendous amount of work.
I won't recite it all, but we have done a tremendous amount of work, in a relatively short period of time, and it kind of makes sense, that the Federal Reserve, would want to take an appropriate amount of time in this environment, to sort of -- to sort of get their arms around those improvements we have made, to get comfortable with it, as part of the application process. I try not to think too much beyond that, but I don't see any reason why -- with the infrastructure we have in place, that we shouldn't be able to do deals in the future.
Gerard Cassidy
Thank you for all your time.
René Jones
Sure. Thank you.
Operator
Thank you. Your final question is coming from Frank Schiraldi of Sandler O'Neill.
Frank Schiraldi
Good morning. René, I think in the past you have talked about a 50% to 55% efficiency ratio of getting back to that level over time.
Assuming Hudson City closes, is that a range you think you can get to in the current revenue environment, or do you foresee needing some help from rates to get there?
René Jones
I think you -- there are cycles, and I think that revenues are very-very depressed, because of the rate environment. So you see how asset sensitive we are, its significant and you also have -- Don touched on the fact that on the mutual fund space, where we have $9 million to $10 million of mutual funds that are earning zero to negative, those would gain back -- go all the way back up to 40.
So this is -- we think of it, in terms of the revenue and expense spread, I think that clearly, you could get to those levels with a different rate environments, and not being where it is today.
Frank Schiraldi
Okay. So those levels ensure of a more normalized environment then, is that a fair statement?
René Jones
I think so. But can you make improvements in the current environment?
Yeah, we definitely have the ability to do that, because we have been spending a lot of money. And if you look at the peers, they have been reducing expenses, we had not -- over the last two years, we have increased expenses, and there is a big spread between what we have invested in the period.
So we have opportunity to improve without a turnaround in rate.
Frank Schiraldi
Okay. And then just finally on modeling, I just want to make sure I heard you correctly.
In terms of the accounting change, given the effective tax rate in the quarter, that's a decent run rate going forward, just using that tax rate from 1Q?
René Jones
Yeah. 36-ish somewhere in that range is what you see there is probably pretty good.
Frank Schiraldi
Okay, great. Thank you.
René Jones
You're welcome.
Operator
Thank you. I will now turn the floor back over to Don MacLeod for any final closing remarks.
Don MacLeod
Again, thank you all for participating today. And as always, if clarification of any of the items on the call or news release is necessary, please contact our Investor Relations Department at area code 716-842-5138.
Thank you and good bye.
Operator
Thank you. That does conclude today's conference call.
You may now disconnect.