Jul 17, 2014
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank Second Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the conference over to Mr. Don MacLeod, Director of Investor Relations.
Sir, you may begin your conference.
Donald J. MacLeod
Thank you, Paula, and good morning everyone. This is Don MacLeod.
I'd like to thank everybody for participating in M&T's second quarter 2014 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our 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'd like to introduce our Chief Financial Officer, Rene Jones.
Rene F. Jones
Thank you, Don, and good morning everyone, and thank you for joining us on the call. Our results for this quarter were strong and relatively straightforward.
As we noted in the press release, we experienced an uptick in customer activity during the second quarter from what had been an unusually slow first quarter. In addition to an uptick in loan growth, the improvement was reflected in our Wilmington Trust fee businesses and mortgage banking as well as deposit service charges.
Credit metrics remained solid and M&T's balance sheet measures continue to strengthen. Operating expenses remained elevated as we continue to make significant progress on our regulatory initiatives including BSA/AML compliance and our overall risk management activities.
As we usually do, I'll start by reviewing a few of the highlights from M&T's second quarter results, after which Don and I will be happy to take your questions. Looking at the numbers, diluted GAAP earnings per common share were $1.98 for the second quarter of 2014, improved from $1.61 in the first quarter but down from $2.55 in the second quarter of 2013.
Net income for the recent period was $284 million, increased from $229 million in the prior quarter. Net income was $348 million in the year ago quarter.
Noteworthy items included in the second quarter's results were an $8 million reduction in M&T's accrual for income taxes, which followed resolution with the taxing authorities of previously uncertain tax position, and a $12 million addition to M&T's litigation reserve which amounts to $7 million after tax. Prior to M&T's acquisition of Wilmington Trust Corporation, the SEC commenced a civil investigation of Wilmington Trust financial reporting and securities filing.
The addition to the reserve reflects our belief that we are nearing resolution of this matter. We have worked diligently to resolve some of the legacy issues while we continue to build on Wilmington Trust's historic strength, both in the Delaware community and in the wealth and investment services space.
Recall that results for the second quarter of 2013 included securities gains and reversal of a contingent compensation accrual that in aggregate increased net income by $49 million and diluted earnings per share by $0.38. Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis, from which we exclude the after-tax effect of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions when they occur.
After-tax expense from the amortization of intangible assets was $6 million or $0.04 per common share in the recent quarter compared with $6 million and $0.05 per share in the prior quarter. M&T's net operating income for the second quarter, which excludes intangible amortization, was $290 million, up from $235 million in the linked quarter.
Diluted net operating earnings per share were $2.02 for the recent quarter, up from $1.66 in the linked quarter. Net operating income yielded annualized rates of return on average tangible asset and average tangible common equity of 1.35% and 14.92% for the recent quarter.
The comparable returns were 1.15% and 12.76% in the first quarter of 2014. In accordance with SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.
Turning to the balance sheet and the income statement, taxable equivalent net interest income was $675 million for the second quarter of 2014, an increase of $13 million from the linked quarter. The increase was attributable to higher levels of loans and investment securities as well as an additional day in the quarter.
The net interest margin was 3.40% during the quarter, down 12 basis points, compared with 3.52% in the first quarter. During the period, we had a particularly high level of short-term trust demand deposit, primarily related to our institutional trust business which we had held at the Federal Reserve.
On an average basis, the deposit of excess funds at the Fed was some $1 billion higher in the second quarter than in the first. This temporary elevation of excess funds diluted the margin by an estimated 4 basis points during the quarter.
We estimate that the impact from a higher level of investment securities combined with higher level of borrowings reduced the margin by about 5 basis points, and finally the remaining 3 basis points of margin compression represents our estimated core margin pressure which includes the impact of new loans coming on at rates lower than those that are maturing. Average loans increased 579 million or 4% annualized during the quarter.
Average commercial industrial loans or those loans to support business operations grew a healthy 11% annualized – at a healthy 11% annualized rate. We saw a strong double-digit growth in greater New York City, in Pennsylvania and in the Mid-Atlantic region.
Average commercial real estate loans were essentially flat to the first three months of this year. As has been the case for the past several quarters, origination activity remained steady or perhaps a little better than steady, while high levels of paydowns particularly in our New York City region have offset new originations.
The elevated level of paydowns reflects the availability of long-term low cost permanent financing from both bank and non-bank competitors at terms we were unwilling to match. Residential mortgage loan volume declined an annualized 4%.
Average consumer loans grew an annualized 7% with good growth in indirect auto and recreation finance loans, being partially offset by declines in home equity loan. The $1.7 billion increase in investment securities that I mentioned represents the continuation of our program to build a liquid asset buffer in preparation for the implementation of the liquidity coverage ratio.
Average core customer deposits, which excludes deposits received in M&T's Cayman Islands office and CDs over $250,000, grew at an annualized rate of 14% from the first quarter, reflecting the elevated level of trust demand deposits I referred to earlier. Those deposits were lower again at the end of the quarter.
Turning to noninterest income, noninterest income totaled $456 million in the second quarter, improved from $420 million in the prior quarter. There were no securities gains or losses in either period.
Mortgage banking revenues were $96 million in the recent quarter, up 20% from $80 million in the prior quarter. The higher revenues in comparison to the linked quarter reflect improved origination activity as well as the sale of re-performing government guaranteed loan.
Commitments to originate residential mortgage loans for sale increased 24%, applications were up 27%, closings were up 31%, and the pipeline which is a reflection of as we move into future quarters was up 18%. Now recall that the first quarter's results reflected lower-than-expected levels of activity.
The stronger trend seen during the recent quarter likely includes some level of pent-up demand from the first quarter, and given that we expect mortgage banking revenues over the remainder of 2014 will be somewhat lower. Commercial gain on sale revenues in the mortgage space improved by $3 million compared with the first quarter, reflecting higher volumes of commercial mortgage loans originated for sale.
Fee income from deposit service charges provided were $107 million in the second quarter compared with $104 million in the linked quarter, reflecting higher levels of customer activity. Trust and investment revenues which include fees from wealth management and institutional trust services were $130 million, up from $120 million in the prior quarter.
Net new business and seasonal tax preparation fees were the primary drivers of the increase. Turning to operating expenses, operating expenses for the second quarter which exclude expenses from the amortization of intangible assets was $672 million, down by $20 million from the $692 million in the prior quarter.
Salaries and benefits declined to $340 million, down $32 million, reflecting a return to normal levels of spending from the seasonally high levels incurred during the first quarter. This decline was moderated by the impact from an additional compensation day in the quarter.
Other cost of operations increased by $17 million from the previous quarter. The increase is primarily due to the $12 million addition to the litigation reserve that I mentioned previously.
Expenses arising from our work on BSA/AML compliance initiative remain elevated and I'll discuss our spending outlook in a few minutes. The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and merger-related expenses, was 59.4% for the second quarter compared with 63.9% in the prior quarter.
The improvement reflects the lower spending levels combined with stronger revenue trend. Next let's turn to credit.
Our credit quality remains strong and in line with our expectation. Nonaccrual loans decreased slightly from the end of the first quarter.
The ratio of nonaccrual loans to total loans declined by 3 basis points to 1.36% at the end of the second quarter. When we file our 10-Q in the coming weeks, I expect that we'll report a continued decline in classified loans.
Net charge-offs for the second quarter were $29 million, down from $32 million in the first quarter, and that is an annualized net charge-offs as a percentage of total loans ratio were 18 basis points for the second quarter, improved slightly from 20 basis points in the previous quarter. The provision for credit losses was $30 million for the recent quarter and the allowance for credit losses was $918 million amounting to 1.42% of total loans as of the end of June.
The loan loss allowance as of the June 30 was 7.5 times annualized charge-offs. Loans 90 days past due on which we continue to accrue interest excluding acquired loans that had been marked to fair value at acquisition were $289 million at the end of the quarter.
Of these, 95% are guaranteed by government related entities. Accruing loans 90 days past due were $307 million at the end of the first quarter, of which 95% were also guaranteed by government related entities.
Turning to capital, our Tier 1 common capital ratio was an estimated 9.62% at the end of June, up 17 basis points from 9.45% at the end of March. Our estimated common equity Tier 1 under the recently adopted Basel III capital rules is approximately 9.35%.
Tangible book value per share increased by 4% from the prior quarter to $55.89. Turning to the outlook, as I mentioned at the outset, customer activity picked up quite a bit from the levels we saw in the first quarter for both the balance sheet and most fee income categories.
Regarding loan growth, we're encouraged by the continued or perhaps even improved momentum in C&I lending and we expect continued pressure on pricing and structures in the CRE space. We continue to expect modest ongoing core compression in the net interest margin of 2 to 3 basis points per quarter.
Beyond the core margin, we also expect additional pressure in the printed margin as we take further steps towards reaching our compliance with the liquidity coverage ratio by the end of this year, and we continue to expect growth in net interest income for the remainder of the year. As noted, we expect lower mortgage banking revenues over the second half of the year.
This should be somewhat offset by continued growth in other fee categories. Expenses remain elevated, near current levels, for the next couple of quarters as we continue to make investments on our regulatory and other operational initiatives.
We currently expect to see improvement in spending as we begin to move into 2015, and the outlook for credit remains stable and there are no signs of a turn-in in asset quality metrics. Lastly, on our BSA/AML initiative, we've made significant progress on the series of milestones that are needed to enhance M&T's BSA/AML compliance program.
M&T has substantially improved its governance, training and management reporting board's compliance with BSA/AML laws and regulations. A new 'Know Your Customer' program has been implemented.
All new customers are being brought into the Bank through this new set of Bank-wide procedures, customer due diligence and the risk weighting process. Application of the new 'Know Your Customer' protocol to existing customers continues.
The third-party vendor for a transaction review called for in the written agreement has begun its work, and as of the end of the second quarter, 571 employees are devoting a majority of their time to BSA/AML activity. This does not include part-time or contract employees.
Said another way, we're working diligently to address all of the issues raised by the Federal Reserve in the written agreement. Overall, 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 Paula will briefly review the instructions.
Operator
(Operator Instructions) Your first question comes from the line of Bob Ramsey of FBR Capital.
Bob Ramsey
You talked about the expenses as we head to the next several quarters and hen said that you expect some improvements in spending as we head into 2015. Could you just help us think about to what extent expenses will actually improve or to what extent sort of will you be able to leverage the expense base where it is or how you're thinking about the expense trajectory just for the M&T piece excluding any Hudson City impact?
Rene F. Jones
At a very high level, I think what I said was what we expect, that I don't expect to see any significant improvement in the level of expenses that we're running at in the next quarter or so. We may begin to see some as we get into the fourth quarter but I think most of the benefit – as we talked last quarter, we said we try to position ourselves for 2015.
I do see sort of a natural progression of lower expenses that would come through throughout 2015. And the way to think about that is in a couple of buckets that a whole group of people that are just sort of thinking about outside of the risk management and compliance base, how we can do things more efficiently, I talked about that last time.
So that's beginning to get some traction but will take some time to produce result. I think about – separate from all of the other risk management and all of the other technology type initiatives we're doing, if you just focus in on the BSA/AML process for a minute, what we've done there is that we have taken some time to build up our core infrastructure, I talked about the components of governance and infrastructure that we're going.
So that is all in place and up and running, but at the same time we've kept all of the ramped up professional services and contract employees and all of the external stuff that are not part of necessarily an ongoing process but more related to the remediation and getting up to speed. And to put that into perspective, I mean I think now the number has been creeping up a little bit but as I look at where I forecast where we'll be just on BSA/AML spending alone, I think I'm pretty comfortable that we'll probably spend over $150 million in 2014 on that number.
So that gives you some sense of how much effort we're putting into the process. So naturally, we are going to do that for as long as it takes to get our work done, but clearly we are well above a sustainable level that you would see on an ongoing basis, and so that's what gives me comfort that as we get more towards and into 2015, then we get through the bulk of our work in a satisfactory way, that you have downward pressure.
Bob Ramsey
And so if you spend $150 million in 2014, once you're all up and running and you've been able to let go some of the external services, what do you think that number is in 2016, I mean taking it further out?
Rene F. Jones
I don't know, I really don't know. I think that's extraordinary amount of money.
I think we begin to think about all of our risk management spending in total, I think that's how we have to think about it. But what I do know is if you think about the numbers we've been giving you, last quarter I think we said 425 employees we had on there, we have 571 employees, we're just going to have to figure out what that happy space is.
Part of that space is dictated by what we find in terms of the risk profile of the Company or more so in the risk profile of the customers and then we'll decide from there, but what I do know is that we have ramped up the portion of the spending that's coming from the outside to help us get through the work.
Donald J. MacLeod
We'll know more as we go.
Bob Ramsey
And how much of that 150 is internal versus external?
Donald J. MacLeod
I don't have it at the top of my head. I probably have it somewhere around here but – I mean you look at the professional services, huge amounts are in professional services, and I think as you think over that's where you should see the improvement.
Bob Ramsey
Okay great. One other question, shifting gears, if you think about the efforts prepare for the LCR requirements, where are you guys in terms of where you want the balance sheet to be and how much more do you expect to add in terms of high quality Ginnie Mae securities to meet the requirements?
Rene F. Jones
We have more to do. I think that the way to think about it is I would expect what we saw this quarter, we wish to see similar quarters going forward, we will be done by the end of year, there's no question about that.
We did 1.9 billion of purchases this quarter. I think we did 1.7 billion last quarter.
So we're sort of on track and our thought process is full compliance, we're not looking at the phase-in stuff but we're talking about 100%.
Bob Ramsey
Okay great. And so I guess so we can expect a similar impact to margin, obviously goes from how will be the impact on net interest income, but on margin from the security purchase over the next several quarters?
Rene F. Jones
Yes, I think that's very logical, very logical.
Operator
Your next question comes from the line of Keith Murray of ISI.
Keith Murray
Can you just touch on some of the balance sheet positioning that you've done, obviously some of which LCR related, but is there anything you've done, I looked at the decline let's say in one-to-four family loans this quarter in preparation for the pending Hudson City deal?
Rene F. Jones
No, no, we're not doing – we didn't undertake any activities that we don't normally do, and you're mostly seeing a runoff in that portfolio and it doesn't make any sense to begin to obtain more mortgages because of Hudson City, but there's nothing unusual there.
Keith Murray
Okay. And then just focusing on New Jersey, can you give us a sense of if you're losing money there right now, how much are you losing and how much easier would your life be or will it be if you have branches and how you've been able to be successful so far without them?
Rene F. Jones
I love your question, I like it in reverse better. Let me start by saying that on its own, the novel approach is not one where you're going to make money in the outset.
It's just you got to build up an infrastructure, you have to have enough identity because you've got all of the infrastructure that you need to put in place but you don't have the customer base, and that takes some time, and our thinking was that we probably would never really bench it out there doing that on our own without Hudson, but we now have gone through that experiment. First, it's really, it's been just a pleasant surprise.
The team has worked really, really well together, it's way ahead of what we would've thought the profitability would have been today, and so we've learned some stuff, and we're getting traction and being received really well with the customer base. So, I think I may have mentioned it at some point in time, we probably have I don't know $802 billion balance sheet in New Jersey, and not only that, it's very well-rounded with a wealth team and a securities team.
So, I think we're off to a better-than-expected start there and I guess if you were thinking about it, as changing your mind about the novel, you probably would have lower expenses, but I don't think that's – that's not where we're going. We like what we see there.
So the one thing I would talk about in terms of the way we modelled Hudson City is when we talked about expense days. Those expense days were net of all those hires that we've already made, right.
So just keep that in mind, right. So I think you're kind of getting there that the weight of bringing on all those staff is already in our numbers and it's already there.
Operator
Your next question comes from the line of Eric Wasserstrom of SunTrust Robinson Humphrey.
Eric Wasserstrom
Rene, just to follow up on sort of the medium term expense reduction, I just want to understand – to make sure I understand the source, is that coming from just lesser outside consultants and technology and that kind of thing or is it coming from the fact that that 571 number of individuals committed to that today will ultimately be a much lesser number?
Rene F. Jones
I think the space that I'm focused on given what I do is I clearly see the professional services with the people who are here helping us learn the process or doing the third-party reviews, right. So that's very clear to me.
I think on the staffing side, we have to kind of think about that because beyond – remember the way I discussed the people that we have, in addition to that we have all those contract folks. So, there's a lot more people actually working on than all those 571 individuals.
We'll just have to wait and see, I mean I don't want to – I don't know that we know enough to know what's required to sustain the program but our focus is going to be on sustaining a very strong program.
Eric Wasserstrom
And if you were to sort of categorize which inning you were with respect to fulfilling the terms laid out in the written agreement, where would you say, are we sixth inning or later or earlier?
Rene F. Jones
I'm not a keeper of that. The way I think about it is, I think that there are a bunch of steps but there are four that I think about.
One is the governance and the infrastructure, and since you've known about this, that's what we've been building that in place now and we've done that work. Two is the 'Know Your Customer' and the risk rating model, and I mentioned that last time and you might have thought of that as sort of, okay, we've put it in place so we're done.
That's not the way I think about it. Now we actually have another full quarter of processing in that way, and as we get through that and as we get through the third piece that I look at which is the amount of customers that we remediated in our existing base, the more of that that we get through, what we do is that as we've begun to make that progress, it allows the Federal Reserve to have enough result so to speak to begin to examine our progress.
And then when you think about that process, that sort of build, examine, reframe process, it's an iterative process and we learn from it. And so, it's really almost impossible to kind of give you a date, it doesn't work that way.
But what I feel good about is we've hit our target schedules, we're doing a fair amount of work, we're providing a lot of information for the regulatory folks to be able to see what we're doing and test and look at it, and that's what I feel good about. The fourth piece is the look-back, and that is being done by an independent party.
From everything we see, they are on track but that's their work that they have to get through, and then similarly the Federal Reserve has to have time to begin to look at their work.
Eric Wasserstrom
Alright, great, and I appreciate that answer. And just lastly on the margin, all of the three or four components that you laid out as contributing to the compression in this period, it sounds like they all more or less remain in similar magnitudes at least over the next period, is that fair?
Rene F. Jones
Yes, I have thought about that a lot myself. It's been a long time and it's all been around two or three, but I think that's because the rate environment just hasn't changed, there hasn't been a lot of dynamic changes in our balance sheet and there's been no change in the rate environment.
So I think it is moving along. Don always reminds me that embedded in that is of course the fact that our acquired loan portfolio is getting smaller, but that's embedded in the two or three points.
So I think it's just that there's not been a lot of change.
Operator
Your next question comes from Brian Klock of Keefe, Bruyette & Woods.
Brian Klock
I guess a couple of quick follow-ups, Rene. On the margin side, you did mention the acquired portfolio shrinking, you still have the accretable yield number for the second quarter?
Rene F. Jones
I do. Give me a second.
I never give you the accretable yield, I give you the whole thing. So give me two seconds and I'll find it.
What I will say is, if you look at that today where we sit, if you look at our yields, there's about 8 basis points of lift in our yields of our assets from the acquired portfolio. And then the interest on the acquired portfolio this quarter was $49 million interest income, $49 million, last quarter it was $59 million, quarter before it was $65 million.
Brian Klock
Okay. And as far as, is there typically around this period of time you actually sort of I guess true-up and reanalyze cash flow.
Is it something you might do third and fourth quarter or is that…?
Rene F. Jones
No, we do that every quarter, we do make a very – maybe a little bit of a heightened effort on the anniversary which you're right is here, and we did all that work and now we feel very comfortable with where our cash flows and estimates are, we think those are pretty good.
Brian Klock
And then I guess just thinking about the impact from the LCR efforts for the quarter, the average balances don't totally reflect where the end of period is, so could there be a little bit more carryover of compression into the third quarter before you kind of factor in the new LCR type leveraging you're going to add to in the third quarter? So should we expect a little bit more compression from just what you did during the second quarter?
Rene F. Jones
You're really good. So yes, I mean I think if you go from 1.7 to 1.9, there's probably – the 200 million is going to have a little bit more of an impact.
I don' know how much that is, but yes, that's right. It depends on of course what we do in the third quarter.
Brian Klock
Sure, as far as how fast you lever that in. And then I guess just last question, relative to where you are with BSA/AML, I know you talked about spending $150 million, can you remind us kind of where you are so far or what you've spent in the quarter or anything you can kind of give us as to what you spent in the first half of the year?
Rene F. Jones
I hate forecasting in general. You're asking me to forecast like…
Brian Klock
No, no, I guess maybe just what you've spent already, so actual versus forecast.
Rene F. Jones
I don't know, I'll shy away from that. But I think you kind of get it because we're saying it's going to remain level, alright, and so we've been spending at this rate already.
That's really where my forecast is coming from.
Brian Klock
Got it. And I guess really the question really is, to kind of tack onto that is, with that kind of going pretty smooth like you just answered the previous question, I guess is the expectation still the same as far as timing for closing of Hudson City given that if everything is on track and continues to kind of move forward, do you still expect the closing here in the second half of the year, maybe late summer or fall, or I guess maybe what's your commentary regarding Hudson City closing?
Rene F. Jones
I don't really have any commentary. What I can say is that as we look at the – continue to monitor both portfolios, we still love the transaction and we've got an agreement that's in force until the end of the year.
And other than that, we're just working really hard to make sure we do a good job on what the task at hand is, and if we do that then maybe there's some possibility that we'll be able to move on and do what we intend to do, but nothing's changed, Brian.
Operator
Your next question comes from the line of Ken Usdin of Jefferies.
Ken Usdin
Rene, to your point on the loan growth and activity starting to pickup, previously you had talked about full-year loan growth in the low to mid single digits or mid if you adjusted for last year's securitization, I believe that was on a period end basis. Any updated thoughts on that type of growth pattern or growth rate expectation?
Rene F. Jones
I don't know, I think I wouldn't change it. I mean, so 11% annualized growth in C&I which is an uptick, zero in CRE, and across the board there continues to remain pricing pressure, each quarter is a little bit more structure pressure, and I think if you look at what's driving that, there's no change in the underlying issues.
So I don't think it's going to – I think it's going to be tough, I think I would expect pricing continue to be under pressure, meaning that it's not staying at the same levels, it will come down. I look back at a presentation that our commercial real estate folks did and it reminded me, we had in 2004, 2005 and 2006, our growth in commercial real estate was below the industry, and '07 and '08 it was about the same, and '09, '10, '11 and '12 we outpaced the industry in commercial real estate growth, and in '13 and '14 we're behind.
I think that follows the price of the asset, alright. So we're finding it very difficult in terms of the competitiveness in that space and we're probably making a little bit more progress on the middle market space.
I don't expect that to change.
Ken Usdin
Okay, got you. And then Rene, on the investments that you're making, can you just give us kind of an understanding of where the stuff that you're buying in the portfolio, what that go on yields are versus your three unchanged average yield of the portfolio which the average portfolio has gone to?
Rene F. Jones
Yes, I mean almost everything is big, almost everything is 15 year in terms of maturity duration, and second quarter yield six roughly. I want to say our borrowings are somewhere around [1.4] (ph) from what we've been doing on the wholesale front.
Ken Usdin
Okay. And then just one small one for me, when you're talking about expenses being fairly flat from here for the back half of the year, are you talking of just the all-in reported number or would you be thinking of extra litigation charge?
Rene F. Jones
I guess I'm thinking all-in but I haven't really thought about that. I mean I guess we were a little elevated because of that.
I don't know, you could go either way. It's sort of the trajectory I guess I'm thinking about.
Ken Usdin
Okay, so it's in this zone, with not much change expected from how it came through, okay?
Rene F. Jones
That's what I'm thinking, yes.
Ken Usdin
And then last little one is just, can you quantify for us the magnitude of those government guaranteed loan sales that helped the mortgage line?
Rene F. Jones
I mean the problem with that is, if you're looking at what you're trying to think about where mortgage banking revenue is going to go, I think you had that but I think you also had the pent-up demand. So what we're thinking is that, I mean we wouldn't be surprised to give back half of the improvement that we saw from the first to the second quarter.
I think in combination you're going to see that reduce on the residential mortgage side.
Ken Usdin
Understood, that makes sense. Thanks Rene.
Operator
Your next question comes from Jeffrey Elliott of Autonomous Research.
Jeffrey Elliott
I've got another question on Hudson City. What is the earliest date that could close if everything went perfectly from now onwards, what is the earliest that that could close given you've got the BSA/AML work still ongoing?
Rene F. Jones
I think everything we've said in the past gives you some sense of what we would hope for but that's all we know.
Jeffrey Elliott
And then how easy would it be to push that into 2015?
Rene F. Jones
I think the thing to remember is, to this point that it really apply in this particular case, when we come together obviously we are very – we have a disciplined approach to the financials, but most of our – when we get together with somebody, most of those situations have been partnerships, and we only got to where we are today by each time an issue has come up, we sat down and asked people what they want to do and what was in their best interest, and this is how we got to where we are. So we would just have to do the same thing at the time.
We have a high amount of respect for the managements there and the Board at Hudson City. So whatever they need to do is what we're going to focus on first, and then what we know is that when and if something happens, that's what build a strong partnership.
So we wouldn't even begin to think about that unless we got to that situation.
Operator
Your next question comes from Bill [Kokesch] (ph) of Nomura.
Bill
Rene, can you give a little bit more color around some of the things that you've done upfront to accelerate the integration of Hudson City and make sure that you hit the ground running post close and anything more that you can still do as we look forward from here?
Rene F. Jones
I think one of the things about what we would have to do is that it's very much in line with what they are required to do as well. So you've heard Ron talk about building out things that require the need for commercial lending and the infrastructure there, you've heard him talk about setting up an origination for sale with the Fannie and Freddie programs around that.
So they're doing those things, those things are perfectly aligned with where we would go anyway. And then we have obviously the balance sheet and the balance sheet issues of sort of taking maybe off the leverage there.
What's interesting is that's naturally happening as we move forward, and so we understand the balance sheet, we monitor the balance sheet and we look at changes in those. As an example, we'll all be under liquidity coverage ratio.
So as those types of things affect that balance sheet, we're both under the same steps. Because it's such a large, a big part of this merger is repositioning our balance sheet, there are very financial type things to do.
All of the stuff that we have to do or I should say a big portion of the things that we have to do outside of the branches are actually being done, right, and then we would have to begin to think about how we go back and ramp up, workaround branches and making sure the controls and things are in place there, but that stuff we know how to do and we really have not been focused on that because there's not a long runway to do that type of work should the opportunity avail itself. So there's not a lot of unique things that you've got to do in this type of a transaction.
Bill
Okay. And following up on some of the comments you made now and what you said earlier about branch density, are you happy with where you'll be post close, in particular maybe relative to where you are in your other key markets and strategically how you think about that?
Rene F. Jones
I mean to think of it, let me go back, so we have about the same number of branches today as we did say five years ago and we've grown a lot. So we're always looking at our branch network and we're looking at sort of where the locations are and then more recently look how they are staffed and the technology that we're using.
And so I got to believe that as we get to that space in New Jersey where we have branches, what we're thinking about is very much the same way, the number hasn't – I don't know that the number would be significantly different, we never plan to have fewer locations. I don't know if that helps but it's kind of what you do, you optimize in both, not just from an expense perspective but from a location and opportunity perspective.
Bill
That's really helpful. Maybe just finally, if you could touch on a bit more of a macro question, would love to hear your thoughts on the whole notion of deposits leaving the system as the Fed drains liquidity, some have suggested that the regional banks face greater pressure to deposit outflows than those with more of a national presence given that deposits that get withdrawn for investment as the economy grows are less likely to find their way back to the same regional bank while the national players perhaps have a greater chance of seeing those deposits come back, can you talk about that dynamic and how you guys are thinking about the eventual kind of liquidity drain and what that means for you?
Rene F. Jones
First of all, we think about it a lot. I think that the way I would frame the model is, there's a portion of the model that hasn't changed and then there's a portion of the model that might have changed.
So the portion that hasn't changed is that the way you build your deposits base is what dictates how sticky it is when rates rise. So if you were paying low rate relative to everybody else, your customers probably came to you for a different reason.
In that space, we have probably I would say, I think it's 100 up or 200 up, but we have significant runoff in our commercial space because that's just the behavior that we've seen in past cycles but it was higher on the ramp-up here so we expect it to be higher on the way down. I think we probably have higher rate scenario going up 100, maybe $6 billion of runoff which mostly comes out of the commercial space.
So we're thinking about it quite a bit. The only unknown to me is this issue of whether people are going to remain more conservative because it was so painful when they didn't have cash before, which is a positive.
We're not really taking that into account but it's sort of, I think that's the other thing that's sort of on the back of our mind. So really big issue, in our numbers we assume a lot of runoff but I don't know about that theory.
I think it depends on why the customer came to you over the years in the first place and if you were buying deposits, I would be more cautious than if you were very conservative in how you got them.
Operator
Your next question comes from Erika Najarian of Bank of America.
Erika Najarian
My questions have been asked and answered. Thanks Rene.
Operator
Your next question comes from Matt Burnell of Wells Fargo Securities.
Matt Burnell
Just a quick question, with all of your increase in the securities portfolio over the last couple of quarters, can you update us relative to the first quarter on sort of what net interest income impact from a 100 basis points higher rates would be, and/or update us on the portfolio duration if that's changed materially from the first quarter?
Rene F. Jones
I don't think it's changed materially from the first quarter, I think it's about a little shy of 4.3 is the duration of the securities book, which is up from years ago obviously because of the size and the [indiscernible]. And then in up scenario we gain I think 4%, up 100.
Down 100, I want to say it's like about 2.5% down, and that of course is very unlikely scenario given where we are.
Matt Burnell
Let's hope so. And then a question, you've mentioned several times how strong the C&I loan growth has been.
Many of your regional bank competitors have pointed to higher utilization rates in the second quarter relative to maybe year-end. I guess I'm curious if you're seeing the same thing, and if you're seeing greater C&I borrowing for expansion rather than just sort of trade finance or other shorter-term purposes?
Rene F. Jones
I think as I sat with the folks, they are talking about usages coming – you're right on its face, a lot of our borrowing is coming from existing customers, I think with both operating needs and M&A, but there is more of an M&A transaction bend to it that more people are getting involved for that reason. And then we keep ticking up a little, it's sort of a steady increase in the usage.
So I mean we're on 52.2, actually last quarter it was 52.5. So it's actually been relatively flat, but if you look at it over the course of the year, it's up 2% to 3% over the course of 12 months.
It's kind of like the C&I balances, we've seen a little bit more usage slowly every quarter, alright, a little bit more growth every quarter, very, very steady but nothing big in one given quarter.
Matt Burnell
Okay, that's helpful color. And then for my last question, at least just going back to the Hudson City transaction, it sounds from your comments that even though you have an agreement at this point through December 31 of this year, that doesn't preclude that agreement being extended if for any reason you're not able to get the BSA/AML bedded down as rapidly as you might hope?
Rene F. Jones
I don't know that you're factually – I assume you're probably factually correct but I don't really think about it that way, I just think about putting my head down and making sure we do our part of the whole thing and then making sure that we put our best foot forward, and then if we ever get to a situation like that then we'll ask Ron and company what they'd like to do, but I'm not thinking about it that way.
Operator
Your next question comes from Sameer Gokhale of Janney Capital.
Sameer Gokhale
Rene, just to go back to that theme of deposits and deposit behaviour, a lot of folks have talked about deposit beta as in really thinking about their own deposit beta is in kind of that 50% range, 50%, 55% deposit beta range and kind of using the '04-'05 period as a baseline. Now from your commentary, it sounds like there's some offsets, I mean you were talking about that $6 billion runoff in deposits, but the uncertainty also comes from the fact that if rates rise and people and companies and corporate clients start behaving more conservatively and want to maintain deposits, maybe you see less of a runoff.
So, have you talked about this, I can't remember in terms of a deposit beta and what you've kind of factored in, in terms of a deposit beta explicitly into your planning?
Rene F. Jones
I'm not going to attempt it by numbers, but I mean as I hear you say those numbers of 50%, it doesn't sound unreasonable over a long period of time, but initially it's probably less than that early on. So it's a dynamic between the first three, six months in what you're doing and how you're looking at it and where you eventually end up, and I think it's very much driven by what the customer behavior is and their elasticity around pricing.
So, I think the only thing that's really different is, we assume our models make a lot of sense but the rates have been long for so long and we're coming out of that crisis that the elasticity models are untested almost, right. So this is why it's an area of focus.
So a good question, a great framework to think about it. We have one but we have to kind of test the boundaries around it because it's so much uncertainty there.
Sameer Gokhale
Okay. And then you talked about the Hudson City acquisition, you've talked about it quite a lot, but you also said one of the things you need to look at is Hudson City's balance sheet and how that comes over and things you need to do as you look at their balance sheet versus yours, and what I was really trying to drill down a little bit more on was your preparation for the LCR requirements.
It strikes me that clearly you're planning for the acquisition to occur, but on the other hand you have to be prepared in case it doesn't go through. So how do you think about that, do you think you have enough runway as you get closer and closer to closing on that deal that if in fact there's a last minute change that's unexpected that you are prepared to meet the LCR requirements, so how are you thinking about that, that'd just be helpful?
Rene F. Jones
So we've thought about it a lot, and the thing that's most important is, step one, everybody has tons of securities on it. So, it's all manageable within their own balance sheet, it's not an issue of bringing it together with M&T's.
And so, how you deal with the leverage would change from not having the liquidity coverage ratio to having one and then the severity of the final rules, right, you've got all the flexibility built into that balance sheet already. So it just changes how you do the delevering and what you have to keep, you have to mark the portfolios to market but that's a different thing unless whether you actually have to exit and sell the security.
So the answer is embedded in their own balance sheet today. That takes that uncertainty away.
Sameer Gokhale
Okay, but how about the positioning of your own securities portfolio, I mean how are you thinking about that vis-a-vis the securities you would get post acquisition? I mean it sounds like you've maintained or you're going to a liquidity portfolio so it's almost like you're trying to keep a base case where you protect yourself but the expectation is of course the deal goes through, I mean you're being conservative in that regard, is that the way to think about it or are you kind of really saying, okay, the deal is going to go through and so the securities come onboard and so that's really not something that you're that worried about, so I'm just trying to frame how you think about your own liquidity portfolio in that context?
Rene F. Jones
Your questions are great questions. The answer is, those are two separate portfolios.
So M&T is doing with its balance sheet exactly what it needs to do to meet the requirement, because that balance sheet is going to be here no matter what, alright. So no thought about somebody else's balance sheet.
As I begin to think about another balance sheet that we and myself and Scott and others have to manage, we look at that balance sheet separately, and what's unique about that balance sheet is it's very, very different from M&T, it's got a tremendous amount of liquidity in it. So the only question is, how much of it do you keep.
You see what I'm saying?
Sameer Gokhale
No, that makes sense, I mean you just answered my question in that you look at it separately because of that point – no, I mean it's fair, that was exactly where I was trying to get at, they do have a lot of liquidity so do you kind of assume that you're going to get that, so you don't need to manage or maintain as much, but you said that you kind of look at the two things separately. So that really answered my question.
So thank you very much.
Rene F. Jones
I appreciate that. The piece that I didn't give you is that, in our assumption, we anticipated that the whole thing was going to go away.
So we've got the capacity and the way we thought about it in our framework, but thanks for your question.
Operator
Your final question comes from Sachin Shah of Albert Fried.
Sachin Shah
So I just want to understand, there's a lot of questions about Hudson City, is there anything else aside from these issues that you guys are dealing with that you kind of envision or having or foreseeing for you to potentially close the transaction essentially delaying the completion of this work that you guys need to do?
Rene F. Jones
With respect to Hudson City, that requires a merger application, the same process that you have. So while we're focusing on the issue at hand, which is BSA/AML, you have to have a very buttoned-down shop across the board, you have to have a good risk management structure, just the same things that you would go through with an [acquisition] (ph), so nothing unusual.
Sachin Shah
Okay. And just to clarify, you mentioned in earlier remark that if and when that time, if you buttoned-down the hatches, you're trying to complete this transaction, do the work, that's necessary, but for whatever reason it's getting close to the end of the year, you're going to have that conversation with Hudson City, your intention is to have that conversation with their CEO and the management team to move forward, you did mention earlier on that you still love the transaction, that is your intent if and when that scenario does come to play, is that fair?
Rene F. Jones
I've answered that. There's no more I can provide you to that question which I've been asked three, maybe four times.
Sachin Shah
Okay, alright, so that is the case, your intention is a question of when rather than if, how about that, it's a question of when rather than if?
Rene F. Jones
You're talking hypothetical, I'm just dealing with reality.
Sachin Shah
Okay, fair enough. Thank you.
Operator
This concludes the question-and-answer session of today's program. I would now like to turn the floor back over to Mr.
MacLeod for any closing remarks.
Donald J. MacLeod
Again, thank you all for participating today, and as always, if clarification of any of the items on the call or press release is necessary, please contact our Investor Relations department at 716-842-5462.
Operator
Thank you. This concludes your conference.
You may now disconnect.