Oct 17, 2014
Operator
Ladies and gentlemen, thank you for standing by, and welcome to M&T Bank’s Third Quarter 2014 Earnings Conference Call. At this time all lines have been placed in a listen-only mode.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) It is now pleasure to turn the call over to Mr.
Don MacLeod to begin, please go ahead sir.
Donald J. MacLeod
Thank you, Maria, and good morning. This is Don MacLeod.
I'd like to thank everybody for participating in M&T's third quarter 2014 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link.
Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.
Now I would like to introduce our Chief Financial Officer, René Jones.
René F. Jones
Thank you Don, and good morning everyone. Thank you for joining us on the call today.
As I noted in this morning’s press release our third quarter performance was marked by relatively subdued revenue trends with modest growth in average loans and a slight decline in fee income coming off a strong second quarter. That said, credit continued to trend positively.
We’re also pleased with our continued progress on our BSA/AML compliance, risk management and capital planning initiatives, the progress we made during the quarter. And while maintaining that progress has meant a continuation of an elevated level of operating expenses we firmly believe that those investments will position us well for the future.
As we usually do, I’ll start by reviewing a few of the highlights from M&T's third quarter results after which Don and I will be happy to take your questions. Going to the specific numbers, diluted GAAP earnings per common share were $1.91 for the third quarter of 2014, compared with $1.98 in the second quarter and $2.11 in the third quarter of 2013.
Net income for the recent period was $275 million, compared with $284 million in the prior quarter. Net income was $294 million in the year ago quarter.
There were no noteworthy items impacting M&T's third quarter result. Results for last year's third quarter were benefited by $34 million of after tax securities gains which amounted to $0.26 per share.
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 $5 million or $0.03 per common share in the recent quarter compared with $6 million and $0.04 per share in the prior quarter.
M&T's net operating income for the third quarter, which excludes intangible amortization, was $280 million compared with $290 million in the linked quarter. Diluted net operating earnings per common share were $1.94 for the recent quarter compared with $2.02 in the linked quarter.
Net operating income yielded annualized rates of return on average tangible asset and average tangible common shareholders’ equity of 1.24% and 13.8% for the recent quarter. The comparable returns were 1.35% and 14.92% in the second 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 third quarter of 2014, unchanged from the linked quarter.
The net interest margin was 3.23% during the quarter, down 17 basis points, compared with 3.40% in the second quarter. The margin compression was driven by the following components.
We continue to build out our liquid asset buffer earlier in the quarter prior to the adoption of the final LCR rule and the delay of its implementation for banks like M&T until 2016. We purchased $1.7 billion of securities during the quarter funded by $1.7 billion of bank notes issued in late July.
We estimate the impact from those actions combined with the full quarter effect from our actions in the second quarter reduce the margin by about 6 basis points. During the quarter we had a further increase in deposits from our institutional trust business and which we held at the Federal Reserve.
On an average basis interest bearing deposits with banks including the Fed was some $1 billion higher in the third quarter than in the second quarter and we estimate that this further elevation of excess funds diluted the margin by 3 basis points as compared to the last quarter. The end of period balance for interest bearing deposits with banks was higher than the average for the quarter indicating further negative impact on the margin in the fourth quarter, but a slight positive impact on net interest income.
The additional accrual day in the quarter contributed to 1 basis point to the compression. The remainder of the margin compression is attributable to the impact of new loans coming on at rates lower than those maturing as well as the lower impact from ancillary items such as interest from the repayment of non-accrual loans and recapture of deferred loan fees which in aggregate were somewhat lower than we would typically expect.
Our outlook for future core margin compression is about 4 basis points per quarter. Average loans increased by $420 million or 3% annualized compared with the prior quarter.
On that same basis average commercial and industrial loans were down on an annualized 2% reflecting the usual seasonal contraction of loans to auto dealers to finance the inventories. Average commercial real estate loans increased by about 5% annualized reflecting an improvement from the sluggish growth in the first half of the year.
The improvement was driven by both a higher level of originations as well as lower pay downs on existing loans. Our residential mortgage loan volumes declined an annualized 5% reflecting the natural pace of principal amortization of the portfolio that the held for sale pipeline was flat.
And average consumer loans grew an annualized 10% reflecting growth in indirect auto and recreation finance loans. Overall end of period loans grew 5% annualized as softness in July and August was overcome by stronger results in September.
We will expect the seasonal recovery in floor plan activity to be a tailwind in the fourth quarter. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, increased an annualized 7% from the second quarter, reflecting the elevated level of trust deposits I referenced earlier.
Turning to non interest income, non interest income totaled $451 million in the third quarter compared with $456 million in the prior quarter. There were no securities gains or losses in either period.
Mortgage banking revenues were $94 million in the third quarter compared with $96 million in the prior quarter, lower revenues associated with loans sales activities were partially offset by $4 million increase in servicing income. Commitments to originate residential mortgage loans for sale declined by about 3% while the gain on sale margins was effectively unchanged.
The pipeline for mortgage loan applications was down at the end of the quarter. Fee income from deposit service charges provided were $110 million during the third quarter compared with $107 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 $129 million compared with $130 million in the prior quarter; a $4 million decline in seasonal tax preparation fees from the second quarter was mostly offset by new business. Credit related fees which are included in other revenues from operations were impacted by the soft lending environment early in the quarter and were down by $5 million from what was a comparatively strong second quarter.
Turing to expenses, operating expenses for the third quarter which excluded expenses from the amortization of intangible assets were $672 million unchanged from the prior quarter. Salary and benefits were $349 million up $9 million from $340 million in the second quarter, about $5 million of the increase came from one additional compensation day in the quarter.
The remainder of the increase related to higher BSA/AML staffing as well as higher incentive compensation. Other cost of operation declined by $7 million from the previous quarter.
Legal expenses decline from the second quarter which included $12 million addition to the litigation reserve, professional services including outside consultants were flat quarter-over-quarter. The efficiency ratio, which excludes intangible amortization 59.7% for the third quarter compared with 59.4% in the prior quarter.
The next list, turn to credit. Credit quality remained strong and in line with our expectations.
Nonaccrual loans declined further from the end of the second quarter, that ratio of nonaccrual loans to total loans declined by 7 basis points to 1.29% as of the end of the third quarter. Net charge-offs for the third quarter were $28 million, $1 million lower than in the second quarter and annualized net charge-offs, as a percent of total loans, were 17 basis points for the third quarter improved slightly from 18 basis points in the previous quarter.
The revision for credit losses was $29 million for the recent quarter, and the allowance for credit losses was $919 million amounting to 1.40% of the total loans as of end of September. The loan loss allowance as of September 30 was 7.7 times year-to-date annualized net charge-offs.
Loans 90 days past due, on which we continued to accrue interest excluding acquired loans that had been marked to fair value at the acquisition, were $313 million at the end of the recent quarter. Of these, $265 million or 85% are guaranteed by government-related entities.
Turning to capital, M&T's Tier 1 common capital ratio was an estimated 9.77% at the end of September, up 14 basis points from 9.64% at the end of the June. Our estimated common Tier 1 ratio under the recently adopted Basel III capital rules is approximately 9.52%.
Turning to the outlook, as is our usual practice we will update you on our outlook for 2015 on the January call. However we have a limited number of observations regarding the reminder of 2014 while our view of loan growth is largely unchanged, lending environment remains very difficult particularly on the commercial side.
Where we primarily had been seeing pressure on rates and spreads, we are also now beginning to see further relaxation of structures including longer loan tenures, lower cap rates, and a limited or non- recourse and personal guarantees all of which tends to keep us on the side line. We were pleased with our progress for the plans during the quarter with the rules for implementation of liquidity coverage ratio now finalized we will be opportunistic in completing any remaining build out of our liquid asset buffer before the end of 2015.
We expect continued core margin pressure of about 4 basis points as we enter into the fourth quarter and addition to full quarter impact of the actions we took in the third quarter towards the LCR compliance combined with higher end of period trust deposits held at the Fed will further reduce the margin but not net interest income. We remain focused closely on investing in our infrastructure with an eye toward improving our efficiency ratio in the longer term once the pace of those investments begin to trend downward.
Since early in 2013, M&T has been working due diligently to address the concern identified by the Federal Reserve with regard to a M&T BSA/AML and other compliance initiatives and we are very much on track with the expenditure trajectory that we outlined for you back in January of this year and that elevated spending has produced good results. We have made significant progress in-lined with the plans and milestones that we set for ourselves.
Of course as you are aware of our projections are subject to a number of uncertainties, various assumptions regarding national, regional economic, growth changes in interest rates, political events, another micro economic factors which made different materially from what actually unfolds in the future. Now let's open the call to question before which Maria will briefly review the instructions.
Operator
[Operator Instruction] Our first question comes from the line of Brian Klock of Keefe, Bruyette & Woods.
Brian Klock
Good morning Don. René I guess, can you let us know I guess what are the milestones that you’ve hit so far with BSA and AML and what are sort of the next big milestones that you have on the checklist?
René F. Jones
I mean, I think the way I think about it in terms of the BSA/AML I mean there is a number of things that we have been able to achieve and as I said I think we are sort of on track with the commitments we have made. But to run through them you know first on the list was improving M&T's risk governance, our infrastructure, and then all of the training associated with our frontline employees.
Second was that we build a comprehensive risk rating model to better identify potential money laundering risk and that's been up and running since this spring and so there has been several months to kind of work the kinks out of there and show how that's working for all the new customers that we have on-boarded since those dates. Third we have sort of begun a bank wide effort to update our customer information to better understand our customers and how they plan to use the product and services and we have made substantial progress there.
Of course that has been going on for almost a year now, maybe just over a year. We have made some substantial progress there.
Fourth was we improved our process for monitoring and reporting suspicious activity reporting and then finally we have sort of implemented a review by a third party to sort of determine whether certain transactions undertaken in the past by our customers were properly identified and reported and of course that's ongoing. So the way I would characterize it is that we really have made a lot of progress.
We feel that we are on track with all the requirements that were outlined in the written agreement that and the plans that we conveyed to our regulators but having said that of course as is typical for these types of things, they take a long time and there is a fair amount of work that obviously would go on beyond the end of 2014 and 2015 to meet the full requirements but at the same time, we believe our progress to date has been substantial.
Brian Klock
Great. Thanks for that and I guess thinking about what you need to do going forward and what's been done I think it mean in order to sort of talk with the Fed and say here we have made substantial compliance and for the Fed to say we can approve this Hudson City merger or not even other written agreement maybe something that required some more test work, maybe the third-party review something that they would need to see in order to do that or what are the other things that would – the Fed would need to see and I guess in your opinion to move things along with the Hudson City merger?
Donald J. MacLeod
So, Hudson city. So let me start out Brian, I know it's not your question but I have to start out by saying that how saddened we were by Ron's passing.
He was very, very close to us. He was a good friend with lot of roots in Western New York and lot in common with us as is true of the existing management team at Hudson city.
So I think that we are going to miss him greatly as well others I think. But I mentioned that because as we think about what we did back last January, M&T and Hudson City mutually agreed to extend that period in which either party could sort of walk away from the transaction without a penalty and we did that extension all the way out to December 31 of this year and in doing that, what we were attempting to do by providing that sort of 12 month window in the discussions that we had between M&T and Hudson City was to ensure that we could provide enough time to show that we could make this substantial progress that we are talking about, that we’ve talked about today.
And we also wanted to in addition to be able to show our commitment and we also though included in that thought process was that we needed to provide enough time for the various regulators to come in and take a look at what was being done and to also at that point in time, consider whether M&T was in the right condition to be able to proceed with any sort of transaction. So all we can really say is that there is nothing sort of in the timeline that we kind of that has surprised us.
We think we’ve met all our milestones in that process and at the point where we are sitting here today I guess we sort of always envisioned that we were going to be – there was very – we still wouldn't be able on the October call to be able to provide any clarity other than the fact that whether or not we have done what we tried to do and we have done that. And so I think what has to happen is you just have to let that process take its course and give the regulators time to make their assessments and do what they feel is appropriate thing to do.
But we feel good about the work we have done. That's sort of the best I can share with you.
Brian Klock
Great. That’s is very helpful.
Thanks for taking my questions.
Operator
Our next question comes from the line of Sameer Gokhale of Janney Capital Markets.
Sameer Gokhale
Thank you. Rene you talked about mortgage banking revenues and some of the items that flow through again this quarter.
If you would just help clarify I mean you look at the sequential comparison certainly I think you have talked about the $4 million in servicing income I think that was incremental compared to last quarter, but I thought last quarter’s mortgage banking revenues were elevated because you had gains on the sale of three portfolios of performing loan and still when we look at Q2 to Q3, level of mortgage banking revenue is relatively flat and it looks like the servicing only contributed an incremental $4 million. So were there any other items that also kept the level of mortgage banking revenues elevated, you mentioned a few of them if you could just help clarify that would be great?
René F. Jones
I think – I am just looking for the numbers. I don’t have that on my finger tips but I mean off the top of my head, one of the things I would say is that commercial held up very nicely in the quarter.
Let me see if I can just grab a number on the commercial gain on sales. Yes, the commercial business which Fannie and Freddie business was up $2 million, but other than that no I think what was interesting is that the volume was probably little stronger than I thought it would be and that sort of offset the decline that I was also probably expecting on a linked quarter basis.
And having said that’s sort of why I mentioned the applications, applications were down a bit about 9% in our pipeline which is really consisting of applications that haven’t made all the way through the processes, was down about 18%. So I do think there is still little bit of downward pressure that we would be logical to see as we move into the fourth quarter but no it held up pretty well and it was real core business.
Sameer Gokhale
Okay. That is helpful insight.
And the other question was I know you talked about this again in your prepared comments but if could just help me understand the flow of funds in terms of the interest bearing deposits, it sounds like you had some institutional trust money that came through and so your deposits grew sequentially and that money was deposited with the Federal Reserve and can you just help me understand how that tends to work again is that drawn short notice and then you again have to withdraw those funds out from where you deposited them I mean just the flow of the funds would be helpful and how that particularly works?
René F. Jones
Yes. So the larger size deposits that we have been taking as I mentioned relate to our institutional trust business and then in many cases we are serving as escrow agents and then – in the case of this quarter, a number of folks who were doing M&A transactions have deposited money with us that we hold until those transactions go through approval in some cases that's the various regulators, the justice department and so forth.
At times we have those types of transactions due to our trust duties which tend to be relatively short term. In this case they were little longer as much as six months because of the nature of those transactions.
And so given where we are now where we have got more deposits because of the – quite frankly us but also the industry has just flushed with the excess liquidity that exists nationally there is no really use for that. We put it aside and it goes into the Fed and we earn interest income but it tends to dampen a bit of our tangible ratio and it of course dampens the printed net interest margin.
So it's just service that we provide for our good, strong trust customers.
Sameer Gokhale
Okay. That's very helpful and just my last question was touching, going to touch on the floor plan commentary and lending dealer floor plan lending and I think you had suggested that seasonally balance tend to be lower in Q3 and you see seasonal increase again in Q4.
And what I was wondering is when you look at this business, what do you see when you hear about lot of optimism that dealers tend to have and it certainly seems like floor plan lenders aren’t concerned and I was curious because you tend to underwrite conservatively if you had any changes to your underwriting standards or lending criteria as far as floor plan lending goes, especially like some of the concerns about auto lending really across the board. So if you could address that that would be helpful?
Thank you.
René F. Jones
Yes. Sure.
Sure. I will start with the little bit of history.
So we entered the auto was in 1950 and if I can remember, Don you might have to help me out but the first time we lost the dollars through charge outs was in maybe 2005, it was before the down turn in the economy and at that point in time, what I think was changing was structural thing in the industry where for the previous 50 years what would happen is floor plan there was a lot of support by the manufacturers. So somebody got into trouble, they would take them out.
And they stopped taking them out as course of the manufacturers got into their own problems of course and frankly before the crisis started but we went through a pretty exhausted process at that time and the thing that we sort of concluded throughout our footprint was that there was a lot of difficulty with anybody who had a single flag and so if you were unable to have multiple brands it was going to be much more difficult to do. So we went through a pretty exhausted process in 2005 and 2006 which positioned us relatively well.
Then during the crisis, what you saw was a massive amount of consolidation in that process. So you are actually dealing I believe with a significantly lower volume of dealerships who are much, much stronger than they ever were in the past.
And that's how you are entering the process. So then today they are benefiting because car sales are going up nationally and my sense although I haven’t looked at it recently, but I would suggest those guys are probably stronger than they ever have been in the past because they are not really depended upon sort of this big brother backing that existed for the sort of – for the early years, early goal, so as I have talked to customers during that space and the RMs that deal with them, things look pretty good.
The underwriting damage have not diminished significantly there. It's competitive like any other place.
But quite frankly, in that space for us our relationships are really long. It's not like we are picking up a lot of new dealerships.
I don't know that there are a lot of new dealerships. These are people we have done business with for quite some time.
That's what I can tell you.
Sameer Gokhale
Okay. That's very helpful color.
Thank you.
Operator
Our next question comes from the line of Bob Ramsey of FBR.
Bob Ramsey
Hi! Good morning everyone.
I wanted to touch this a little bit more on Hudson city and sort of how we think about the milestones from here. I know you said you have sort of done what you expected to do in terms of hitting milestones and targets.
Does that mean you all still hope to be able to close the deal by year end and were you all announced when the Fed sort of restarts the application review process?
René F. Jones
Well I think, I think, – I guess the way I think about it is I will stuck them at high level, I mean I talked to Don every week and other parties, talk to each other quite frequently. So we are both very, very committed to the transaction, all the economics are still there and it's an interesting thing that when you have this longer period to watch the portfolio that you are going to merge with, it gives you a significant amount of comfort above and beyond what typically, typically this takes in a lot faster pace.
But having said that, I mean all we are doing is working really hard. We are providing external folks like the regulators and everything they need to access our position.
And we are just letting it play out. I don't think quite frankly enough time is passed for us to be able to answer your question on that.
Having said that I mean as soon as we are to hear something in any direction it would be our responsibility to talk to you guys about it and to mention it.
Bob Ramsey
Okay. No that’s helpful.
And I mean it sounds like maybe the deadline is more formality than anything else and did all party seem committed and you guys continue move forward and do everything and it – I mean it doesn't sound like it's hard to stop. Is that fair?
René F. Jones
Define hard to stop.
Bob Ramsey
As if December 31, has come and the deal has not been approved as if it would online somehow.
René F. Jones
Well, it's been a long dance and we all still like each other. And quite frankly I have to say I mean what I feel bad about it, it's not difficult M&T to put somebody through a process like that.
So I think our relationship is strong and we will have to see what happens.
Bob Ramsey
Fair enough. Fair enough.
Shifting topics a little bit I know you pointed 4 basis points of margin compression sort of expectation heading into the fourth quarter, given where rates are today as you all look forward is that a good pace on sort of go forward basis through the foreseeable future until rates move higher or do you think that the pace of compression diminishes as we head through 2015?
René F. Jones
No. It's funny because this is the first quarter we look basis points by basis points of what’s going on in the margin.
This is the first quarter where we seem to be above our 2% to 3% about 4% compression. So, my sense is that's not going to go away.
There is too much competitive pressure and too much pricing pressure out there for that to happen. When I look back, I mean I am pretty excited about the fact that our net interest margin this quarter versus – I am sorry, net interest income this quarter versus last year declined by $4 million bucks.
So it's almost – just basically flat. And so I think that's been our trade off of trying to figure out how in terms of getting the right volume and serve our customer base, but do so in a way that doesn't result in too much margin compression.
So I feel like I did almost the decade ago where we were saying look if you are going to see large growth in volume, you are going to see margin compression. And so my sense is that we didn’t change our outlook because that sort of mid single digit 5% growth is probably what's reasonable and if we stay there I think margin compression probably stays where it is.
I don't see it getting less.
Bob Ramsey
Fair. And would the thought process be there that you can continue to sort of hold the net interest income I mean if margin goes down or any asset go up and flattish on the net interest income line?
René F. Jones
I don't know I mean it's not like when I look at my volume that we are not getting decent spreads and we are – we are getting decent spreads, we are getting decent returns, we measure economic problems. So, all the volume that we did which was about $2.2 billion of new commitments that went through our senior loan committee was done at very strong economic profits.
So that's kind of the way I think about it. I guess the other thing I would say Bob is that I don't think you see a change in the competitive environment until some of the liquidity is taken out of the system.
It's just too much money, everybody is available, everybody is healthy. In some cases, probably some of the regions where have seen most competition, one of the most interesting observations that was made in preparing for the call by one of some of our relationship managers involved in was that we had a number of credits actually that were in our catalog that were taken out.
And that always kind of gives you some interesting sense of how competitive it is but it's not as if the revenue go trends or devoid from what's happening on the credit side. And my sense is that this will be one of those times where things will be slower and revenue goes tight as they always are and my job is sort of maintain our discipline so that we do well in the next cycle.
Bob Ramsey
Great. And then last question around the margin hop out, but did I understand you correctly that it's sort of 4 basis points sort of core compression and then the liquidity which doesn't have the same impact on the interest rate as the liquidity could actually drive a little more compression on top of that or was the 4 all end including the liquidity expectation?
René F. Jones
No, the four was on its own and then the liquidity impact would be further compression and the reason I have been talking about it that way is because at least today in this year that liquidity has added a little bit to net interest income as we look to 2015 I have got to re assess whether the remainder of what we do on liquidity coverage ratio is neutral or negative or at where it is and I think I might change the way I talk about. Right now that's the best way for you to understand sort of what’s going to happen with the dollars of revenue.
Bob Ramsey
Got it. Very helpful.
Thank you Rene.
Operator
Our next question comes from the line of Ken Usdin of Jefferies.
Ken Usdin
Hey Rene. How are you doing?
Rene can I ask you a couple of questions on the expense side you mentioned all the progress you have been making with the compliance side, pieces we are still obviously seeing an increase on the salary side and but yet we start to see a little bit of decrease on the other expense side. Can you walk us through where you are in that hiring and consulting spend, we are still escalating from here, have we peeked or we actually turned the corner?
René F. Jones
I kind of feel like we are at the top end as it relates to hiring for BSA/AML as I look at the projection I mean we were I think last call I said we had done – we had like 571 or 572 individuals. That number this quarter is 613, but as I look at the projection I think we are fully staffed in my mind and on the professional services as you saw that didn’t change.
I mean that was you know it was exactly the same numbers it was last quarter and I think that's going to – I know that that’s going to stay around for a little while longer because we have got work and volume to get through particularly on the fact that we got to get through the customer information and we use the term remediation, but really getting customer information on all of our customers. So not just the high risk ones we then we got to get on the medium risk and the lower risk customers.
So I have all got to go through sort of refresh of information. So I think that will be around for a little bit before we begin to see a taper off.
Ken Usdin
So, are we on that point about the professional services, I’m not sure where exactly we see that the other line was down about $7 million from $240 million to $233 million but in that you are saying that those kind of consulting cost have been stable within that?
René F. Jones
Yes it's in there. I am going to, Don tell me if I’m not, I think we spent around $102 million on professional services and it’s in that same line but then what you are seeing is you are seeing that the litigation reserve, you need another one so and really the expenses that we are placing that we are on the salary side with the extra day and then some hires.
Ken Usdin
Okay. So you are kind of saying on net and then do you have an understanding of just when that would start to roll like as we – I hear your point about we will kind of see it hang around for a while but as you get into some point next year, do you have a line of sight in terms of when we can finally actually see that trend down or do you anticipate these type of level carrying through all the 2015?
René F. Jones
Well, as we hit each of the milestones which we have done lot of them, you are not going to need the level of external services and labor that we are doing today and I kind of talked about the idea that we are going to see this happen sort of through this year and that would sort of position us well as we get in 2015. So my sense is that as we are now sort of fully staffed with full time internal people, and as the work starts to get to completion, various completion stages, you will need less and less of external labor.
We just have to tie in to ramp up the internal people and get fully qualified internal people. It was going to take too long for us to have made the significant progress that we wanted to make in the past 12 months.
So we used the lot of external people to supplement in the internal.
Ken Usdin
Okay. I got it.
Thanks Rene.
Operator
Our next question comes from the line of Gerard S. Cassidy of RBC Capital Market.
Gerard S. Cassidy
Good morning. I’ve technical question regarding the Hudson city deal, do you officially have to reapply to the Federal Reserve to get that deal done?
René F. Jones
I mean we had our same application that has been outstanding for the period and obviously this thing that you would need to do as balance sheet change and circumstances change. You got to make sure that constantly you always have the right up-to-date current information available to the Fed.
That's I mean pretty straight forward.
Gerard S. Cassidy
How about again just on a technical basis here, what pace that application that's sitting at the Fed to the meeting that they will have at some day in the future to vote to approve or disapprove? What's the catalyst that puts it in front of them on the agenda to vote?
René F. Jones
All I can say is from my years of experience on – you basically when you have an application and there are number of steps, some of the most important steps are making sure that each institution from a supervisory perspective there is a very strong understanding of where those institutions are from a supervisory perspective and that's sort of the standard protocol that goes on in I think almost written in is BSA/AML and that's why we are sort of in this situation. So the supervisory teams have to do a full assessment and make sure they understand where you are and then everything else is relatively standard in an application process.
So we are really focused on particularly making sure that we all get a clear picture of where both firms are from a supervisory perspective.
Gerard S. Cassidy
Okay. I know this has probably putting the carpet for the horse but from the sounds of what you have done for BSA/AML the amount of money you have invested, the people and so on, you are probably going to be defined as best in class by the regulators after this process is completed.
If you agree with that does that give you an advantage in a year or two should acquisition activity pick up again of sizable banks that you may be able to convince the potential seller that you can get the deal done to spend all – invest all the money into BSA/AML?
René F. Jones
No. No.
look I think actually – couple of things are – I will restate a couple of things. We know what happens this fall we are not done with the work that we need to do.
We are under a written agreement. It will take a long time to get out from that written agreement and what we are dealing with today in terms of the topic you are talking about is this really a unique and special circumstance.
Our focus is really on continuing to build up that infrastructure and I can't – I mean, I think you can get this from other institutions as well but I can't express to you the amount of change that has gone on in the regulatory environment in particular as I look forward around information, information management structure of the data, and that is stuff that we will continue to make investments on to make sure that we sort of have this – sort of renewed focus on our restructure and our capabilities to manage risk. And my sense is that when we are done, we will look a lot different than we looked five years ago and we looked three years ago.
And so I don't think that anywhere in our discussion is M&A and all that kind of stuff. We are very focused on the topic on hand and I think what we are dealing with right now is unique.
We have got lot of work to do to demonstrate that we can sort of maintain our restructure.
Gerard S. Cassidy
Turning back to more on a day-to-day business side, you talked about some of the underwriting standards now are being stretched. Two part question.
Could you compare this period of underwriting to a prior period when you looked back over the last ten years what would be the similar time period would you say and second is there any geographies that you are finding it more intense as you mentioned New York versus Baltimore versus Upstate New York tougher?
René F. Jones
Yes. So okay.
So what's similar now to say 2004 would be the amount of liquidity in the system enhanced by the Fed that there is no capital in the system as well. And that's similar.
I mean if you remember when we were talking about then we are talking about the fact that it was really easy to raise money for hedge fund because everybody had all this excess cash that they couldn't find anywhere to invest because rights were low. That feels identical.
I think what’s a little different though is sort of when I look at the underlying economies that we serve I don't think it's clear that those economies are as strong. So when I flip through the largest credits in our non-performing book I do not see one area.
I see cuts across whether it would be people that are in the refining business, manufacturing business, baked goods, where you can run – I just did this yesterday, you run down its cuts across the economy so I don't think that there is as much underlying economic strength as we probably felt when we were back at that time. The good news is that what we are hearing is that sort of several of our regions are suggesting that the actual – there is a slowly improving underlying economic condition and we are hearing that almost across each of the footprint.
The down side is for us is that people are stretching on terms, they are stretching on particular stuff deal structures and the one of that strikes me the most is that when we are stretching out going past ten years, or going out to ten years in terms of term structure. And particularly if you think about the idea that there is huge amounts of liquidity in the system, indirectly that means that asset prices are very, very high.
And if that liquidity were to not be around, you start to wonder about looking at deals with the ten year structure and really whether they can sustain those higher rates and so forth. Upstate New York has been a wonderful place to be back then when they used to ask me well all your growth must be coming out of Baltimore because there is nothing going on in Buffalo, that is not true.
That's a more stronger growth. We saw like 6% growth linked quarter annualized linked quarter there and in the New York city metropolitan area we saw 9% growth but as you get down to Baltimore that was very competitive.
And so was Pennsylvania. Pennsylvania is talking about the economy improving in the lot of different places but that the lending available is pretty in terms of place that’s sort of outside of our capabilities.
To give you a sense we had one transaction which we lost which is an existing customer. It was priced at LIBOR plus 70 basis points and it was 15 year commitment which will be so far under water even before you consider the expenses in the efforts of the RM this doesn't make sense.
So some days are similar, I think but that's the best I think I can tell you. We are watching it very closely though.
Gerard S. Cassidy
Just final question regarding your comment about reviewing your non-performing credit shift across the broad swap of the economy, would you say that those credits have been on the list for a fair amount of time or is that you are seeing this broad swap of new non-performers that maybe changing from what you just said from the guys in the field same thing seem to be getting better. Are these credits have just been sitting there and you’ve been working on for 12 or 18 months to try to get them into performing standards?
René F. Jones
Last year I would have said we have seen a lot of term new stuff going in, old stuff going out. This year I think we are seeing improvements.
So the credits are they are – and quite frankly, the majority of them are actually paying. So we are receiving interests payments under the terms, it's just that they weren’t in the original terms.
And then a small subset but it's always sort of helpful to kind of look at where they sit. And again a couple of years back, obviously they would have been for us in residential development and that stuff from – in those portfolios but now it's more evenly spread across the various economy.
Gerard S. Cassidy
Thank you. I appreciate all the color.
Operator
Our next question comes from the line of Jeffrey Elliott of Autonomous Research.
Jeffrey Elliott
On the liquidity coverage ratio, what you sound on that now?
René F. Jones
Well, we made a lot of progress essentially what's difficult about the talking about the ratio is that if you were looking at balance sheet for the rules and get through all that, I mean we are pretty much there but we tend to take maybe a little bit more of a conservative view. We throw out the cash, large cash balances and those things and I think we are sort of what I would characterize is as we do that more conservative view we are in striking distance.
I think we are doing that with basically five more quarters to go. The only reason we haven’t really closed that out is because we have some time to be opportunistic about the types of paper we are buying and to do that maybe over little longer period.
But that's the best way I can characterize it.
Jeffrey Elliott
When you say you are pretty much there on the phase in 90% throughout the –
René F. Jones
Yes that's the way to think about it. The phase in 90% the estimate and the proposal was 80, that's now been moved out a year and moved to 90.
So we are all in striking distance of all that where we intend to be and again that's we are taking a very conservative view. We are not counting large amounts, large amounts of the cash that we have sitting on for institutional type things and so forth.
Jeffrey Elliott
Thank you.
Operator
Our final question comes from the line of David Darst of Guggenheim Securities.
David Darst
Good evening. So, you’ve announced and discussed kind of the organic plants you got around business banking and commercial lending in New Jersey, would you say that you are kind of own track with what you would have been doing had Hudson city acquisition closed say six or 12 months ago or do you think that you are kind of ahead of pace or different pace for much little while have been doing on the commercial side in New Jersey?
René F. Jones
I would say we are definitely on track, we are probably ahead and there is always in adversity right, one of the things that I think we learned we were really impressed at how much progress the team could make and how the circumstances sort of forced the team to work more closely together to provide a full service to the relationship so we did all the stuff without branches. So we think we have learned something there and all of that has been very positive, we are very, very pleased with what the team has done in New Jersey and I would say it's ahead of pace from the original schedule that we had planned.
David Darst
Okay. And then I guess can we talk about maybe this is premature, but I guess there is some anticipations to be remixing the Hudson city residential mortgages into your commercial loans from this perspective is there a time line change or your ability to scale up New Jersey markets do that?
René F. Jones
No. No.
It's ahead of the original plan despite the fact that we did – there has been delay. So that's gone really well.
And quite frankly, if I were to think about how you do this I think I remember talking back then about how that works when you go into a market a lot of times as you try to build relationships you get a little bit more business on the CRE side but I don't think that's really the case. I think we have done nice job on both CRE middle market, business banking as well, and the business banking in particular is impressive when you don't have a branch network.
David Darst
Great, thank you.
Operator
Now that was our final question. I will now like to turn the floor back over to management 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 news release is necessary, please contact our Investor Relations Department at (716) 842-5138.
Operator
Thank you. This concludes today's M&T Bank's Third Quarter 2014 Earnings Conference Call.
You may now disconnect your lines at this time and have a wonderful day.