Jan 16, 2013
Operator
Good morning. My name is Jackie, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Don MacLeod, Director of Investor Relations.
Please go ahead.
Donald J. MacLeod
Thank you, and good morning, everyone. This is Don MacLeod.
I’d like to thank everyone for participating in M&T's Fourth Quarter 2012 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules, from our website, www.mtb.com, and by clicking on the Investor Relations link.
Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.
Now I’d like to introduce our Chief Financial Officer, René Jones.
René F. Jones
Thank you, Don, and good morning, everyone. And thank you for joining us on the call today to discuss the fourth quarter, as well as our full year results.
Let me begin by reiterating some of my comments from this morning's press release. This past year was one of tremendous accomplishment at M&T.
For the full year, net income and earnings per share reached a new high, exceeding those earned in 2006, the last full year prior to the financial crisis. We successfully completed the integration of Wilmington -- of the Wilmington Trust merger and took the final step -- final major step in the integration process by completing the conversion of the trust systems and operations into a single platform.
Retention of the Wilmington Trust customer base has exceeded our expectations. We completed our exit from the TARP program last August by agreeing to amend the terms of that instrument and assisting in its sale by the United States Treasury through a public offering.
We were able to capitalize on the disruption from HSBC's decision to exit upstate New York markets and, as a result, increased our sale of customer and business relationships in those markets. We saw continued improvement in credit trends, with net charge-offs for the year down 30% to 30 basis points of average loans.
We continue to build our capital ratios through earnings retention, with the tangible common equity ratio increasing 80 basis points from the end of 2011, yet our return to shareholders improved. And lastly, we entered into an agreement to purchase Hudson City Bancorp, subject to the approval of the regulators and the shareholders of both companies.
All of these accomplishments were attributable to the extraordinary efforts of our dedicated employees this past year. Turning to the numbers.
Diluted GAAP earnings per common share were $2.16 in the fourth quarter of 2012 compared with $2.17 earned in the previous quarter. Net income for the recent quarter was $296 million, up from $293 million in the linked quarter.
M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions when incurred. After-tax expense from the amortization of intangible assets was $8 million or $0.07 per common share in the recent quarter compared with $9 million in the third quarter, also amounting to $0.07 per share.
There were no merger-related expenses in either of the past 2 quarters. Diluted net operating earnings per common share were $2.23 for the recent quarter compared with $2.24 for the linked quarter.
M&T's net operating income for the fourth quarter, which excludes the amortization expense I mentioned, was $305 million, up from $302 million in the linked quarter. Net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders' equity was 1.56% and 20.46%, respectively, for the fourth quarter of 2012 compared with 1.56% and 21.53% in the recent quarter.
In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Next, I'd like to cover a few highlights from the balance sheet and income statement.
Taxable-equivalent net interest income was $674 million for the fourth quarter of 2012, up from $669 million in the linked quarter. The net interest margin contracted to 3.74% during the fourth quarter, down 3 basis points from 3.77% in the third quarter.
For the most part, the reduction in margin as compared with the third quarter came as a result of what I'd call core margin pressure -- core margin compression, as pressure on the loan yields, which declined 6 basis points, was partially offset by a lower cost of funds. The items that usually have an impact on the linked quarter margin comparison, such as prepayment penalties, noninterest -- interest on nonaccrual loans, were consistent with the third quarter.
Interest income from acquired loans was $78 million in the fourth quarter, down from $87 million in the prior quarter. However, the average balance of acquired loans declined to $6 million -- excuse me, $6 billion in the fourth quarter from $6.8 billion in the third quarter, thus the yield on the acquired loan portfolio was little changed from the third quarter.
In general, the cash flows being realized from our acquired loan portfolios continue to outpace the initial expectations that we had at the time of the Wilmington Trust and Provident acquisitions. I'll discuss our outlook for the margin, balances and net interest income in a few moments.
As for the balance sheet, we saw robust growth in loans during the fourth quarter, not unlike last year's fourth quarter. Average loans increased by approximately $1.6 billion or an annualized 10% to $65 billion, from $63.4 billion in the third quarter.
On that same basis, compared with 2012's third quarter, changes in average loan balances by category were as follows: commercial and industrial loans grew by an annualized 12%. Within that category, loans to finance auto dealer inventory grew by $137 million, while all other C&I loans increased by $354 million, an annualized 10% increase.
Commercial real estate loans grew at an annualized 5%. The residential real estate loans grew by $790 million, partially as the result of a $447 million increase in our pipeline of mortgages held for sale.
In addition, the remainder of loans that we locked to retain for our portfolio in the third quarter were funded and came on to the balance sheet in the fourth quarter. Consumer loans declined an annualized 2%, driven by lower level levels of indirect auto and home equity loans, partially offset by growth in other consumer loans.
On an end of period basis, loan growth was quite a bit stronger. Total loans at the end of 2012 increased by some $2.5 billion to $66.6 billion or 15% annualized from September 30.
Thus, we enter 2013 with loans already more than $1.5 billion higher than 2012's fourth quarter average. Average core customer deposits, which exclude foreign deposits and CDs over $250,000, matched the performance on the loans side, increasing in the fourth quarter by approximately $1.6 billion or an annualized 11% from the third quarter.
Noninterest income totaled $453 million in the fourth quarter compared with $446 million in the prior quarter. The recent quarter's results included $14 million of net other-than-temporary impairment charges related to our investment securities portfolio, up from $5 million in the linked quarter.
Excluding those losses from both periods, noninterest income was $468 million for the recent quarter, up 4% from $451 million in the third quarter and up 10% from last year's fourth quarter. Mortgage banking revenues rose to $117 million in the recent quarter compared with $107 million in the prior quarter.
Within that category, residential mortgage banking revenues grew $96 million in the quarter, up from -- grew to $96 million in the fourth quarter, up from $82 million in the linked quarter, while commercial mortgage banking revenues declined compared with the prior quarter, reflecting lower volumes from what was a very strong third quarter. Service -- deposit service charges were $112 million in the recent quarter compared with $114 million in the prior quarter.
Substantially all of the $2 million decline related to M&T's decision to waive fees for customers who faced challenges arising from Hurricane Sandy. Turning to expenses.
Operating expenses, excluding the amortization of intangible assets, were $612 million for the fourth quarter, up from $602 million in the prior quarter. Expenses in the quarter were elevated, in part, due to a branch operating loss relating to a customer who misappropriated funds.
This represents the majority of the quarter's increase. In addition, the bank experienced higher levels of professional service costs related to investments in our technology platform and our capital planning infrastructure as we moved towards becoming a CCAR bank for stress testing purposes.
Nevertheless, the efficiency ratio, which excludes security gains and losses, as well as intangible amortization, was 53.6% for the fourth quarter, improved from 53.7% in the third quarter. The strong revenue trends continue to be a contributing factor to the improved efficiency ratio.
Net charge-offs for the fourth quarter were $44 million -- excuse me one second -- let me now turn to credit. Let me start with the credit quality, we feel remains good for the most part.
We did see an uptick in nonaccrual loans. Nonaccrual loans increased to $1.01 billion or 1.52% of loans at the end of 2012 from $925 million or 1.44% of loans at the end of the previous quarter.
The majority of the change came as a result of the transfer to nonaccrual status of $64 million of loans to a long-time M&T customer, that are fully secured by residential real estate. The loan shows up in our regulatory filings as a residential mortgage loan.
It is well-collateralized. And as a result, in our view, no specific reserve was warranted.
Other nonperforming assets, consisting of assets taken into foreclosure of defaulted loans, were $104 million as of December 31, down from $112 million as of September 30. And we expect to report a slight decline in our level of classified assets when we file the 10-K next month.
Net charge-offs for the fourth quarter were $44 million, little changed from $42 million in the linked quarter. Annualized net charge-offs as a percentage of total loans were 27 basis points compared with 26 basis points in the linked quarter but better than the full year net charge-off ratio of 30 basis points.
The provision for credit losses was $49 million for the fourth quarter compared with $46 million in the linked quarter. That provision exceeded net charge-offs by $5 million.
And as a result, the allowance for loan losses increased to $926 million as of the end of 2012. The addition of the -- to the allowance comes largely in response to the strong loan growth we experienced in the fourth quarter.
The ratio of allowance for credit losses to total loans was 1.39% compared with 1.44% in the linked quarter. The loan loss allowance as of the year-end 2012 was 5x net charge-offs for the past year.
As you know, we disclose loans past due 90 days but still accruing separately from nonaccrual loans because they're deemed to be well-secured in the process of collection, which is to say there is low risk of a principal loss. Loans 90 days past due, excluding acquired loans that had been marked to fair value at acquisition, were $358 million at the end of the recent quarter.
Of these loans, $316 million or 88% are guaranteed by government-related entities. Those figures were $309 million and $280 million, respectively, at the end of September.
M&T's estimated Tier 1 common capital ratio was 5.75% at the end of 2012, an improvement of 71 basis points from the end of 2011. Last week, we submitted our capital plan to the regulators as required under the terms of the 2013 Capital Plan Review.
As with the other participants, we expect to receive comments by the end of the first quarter. Let me just make one correction.
So our Tier 1 common capital ratio is 5.57% -- excuse me, 7.57% at the end of 2012. As far as Capital Plan goes in our minds, M&T's main capital action for 2013 will be the Hudson City transaction.
In addition, we remain focused on building our capital ratios to the new regulatory standards, including Basel III. So 6 months ago, we promised to provide you a better estimate of where our capital ratios would come out under Basel III, in part, hoping that we'd see more clarity around the proposed rules.
However, the body of rules for Basel III remain a work in progress for the regulators. And by our nature, we remain cautious about offering a pro forma figure.
That said, we think that the projections made by the investment community that show our Tier 1 common ratio under Basel III, being some 75 to 100 basis points lower than under Basel I, are not unreasonable, given the current interest rate outlook. Should this be the case, it would suggest that pro forma for Hudson City, we're on track to exceed the 7% Tier 1 common ratio under Basel III this year.
Before we turn to the outlook, I'd like to take a minute to cover the full year results for 2012. Diluted earnings per common share were $7.54, an increase of 19%.
Net income was $1 billion -- $1.03 billion, which represents a 20% year-over-year increase. GAAP basis net income expressed as a rate of return on average assets and average common equity was 1.29% and 10.96%, respectively, improved from 1.16% and 9.67% in 2011.
Included in GAAP earnings were after-tax merger-related expenses from the Wilmington Trust acquisition of $6 million or 0.05 -- or $0.05 per common share compared with net after-tax merger-related gain of $13 million or $0.10 per common share in the prior year. Also included in GAAP earnings for the past year were after-tax expenses from the amortization of intangible assets amounting to $37 million or $0.29 per common share compared to $38 million or $0.30 per share in 2011.
Net operating income, which excludes those items that I just mentioned, was $1.07 billion, an increase of 21% from the prior year. Diluted net operating income per share was $7.88, an increase of 20% from 2011.
The rate of return on average tangible assets and average tangible common shareholders’ equity was 1.40% and 19.42%, respectively. Turning to our outlook.
I'd like to offer a few general thoughts on where we think things are headed for 2013. Excluding any impact from the Hudson City merger, our outlook for net interest margin is consistent with our prior comments, which is to say that we'd expect in the neighborhood of 3 basis points of underlying margin pressure per quarter over the course of 2013.
Our most recent internal projections may -- projections indicate that the Hudson City transaction should have a small negative impact on our net interest margin for the year. That said, the first full quarter following the merger could be somewhat noisy as we work to restructure the Hudson City balance sheet.
For legacy M&T, we're looking for mid-single-digit growth and earnings assets, with loan growth offset by a modest decline in securities. Fee income should remain strong going into 2013 until we begin to see softening in the mortgage refinance area.
Total operating expense, excluding Hudson City, should be well controlled in 2013. And we expect stable to slightly lower charge-offs in 2013 from the levels that we saw in 2012, which are already below what we consider to be our long-term loss rate.
I'll remind you that M&T's first quarter results have tended to be seasonally low, reflecting fewer days, which affects revenue, and the higher salaries and benefits expense from the accelerated recognition of equity compensation expense, as well as seasonally high FICA, unemployment insurance and the 401(k) match. We'd note that most of the estimated $120 million of Hudson City merger-related expenses will come into play in 2013.
We continue to target cost savings from the merger to approximate 24% of Hudson City's premerger expense base. This includes the impact from our hiring program but is separate from any reductions to their FDIC cost.
Those cost synergies arising from the merger should start to become evident in the second half of the year but won't be fully realized until well into 2014. Overall, we continue to expect the Hudson City merger to be accretive to both GAAP and net operating earnings and to tangible book value in the current year and be accretive to earnings in 2014 at a high single-digit rate.
Of course, all of these 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. So we'll now open up the call to questions, before which, Jackie will briefly review the instructions.
Operator
[Operator Instructions] Your first question comes from the line of Kevin St. Pierre with Bernstein.
Kevin J. St. Pierre
Just a margin-related question. You had a 4 basis point decline in funding costs.
Are there still levers that you can pull to continue to bring that down or maybe talk about funding costs looking forward?
René F. Jones
Yes, Kevin, in terms of -- I think the answer in terms of pulling levers, no. I think -- but what you're seeing is, if you go back over the quarters, I mean, there's still a little bit of migration of the time deposit portfolios.
And there's a -- from time to time, some of our long-term borrowings are still rolling down. So I would say that it shouldn't be 0, but the ability for us to kind of think about our strategy and change that number is pretty low.
Kevin J. St. Pierre
Okay. And on the strength in the noninterest-bearing deposit growth, are you seeing a change in deposit or behavior?
Or is it all market share gains? You mentioned the disruption in your markets in the HSBC-related strength.
Can you characterize how much of that growth is market share gains versus maybe any change in deposit or behavior?
René F. Jones
Well, let me do it this way. A lot of -- in the lion's share of the growth trends we've seen in deposits over the past several, I mean, maybe 8 quarters, right, has been on the commercial side, and that continues to be true.
But what -- looking into the numbers this quarter, what I did notice is that we had pretty decent growth, particularly in December, in our consumer noninterest-bearing. So I think it's a combination of both.
I think if you were to look at our deposit trends versus others, the differential is probably market share. But what I'm surprised at is that despite the improvements in the economy, despite the fact that people are now clearly borrowing, we still haven't seen a decline in that trend.
So I don't know what you can gain from that, but that's probably the best I could do for you.
Operator
Your next question comes from the line of Brian Foran with Autonomous.
Brian Foran
I think Hudson is still its own company. But just conceptually, as I think about interest rates since August, the 5-year swap rate is about flat.
MBS yields rates are down. Mortgage rates are down and jumbo is down, more than conforming.
So is it fair to just kind of think big picture the capital accretion from Hudson City should be better but the earnings, the net interest income and loan portfolio coming over from Hudson City should be a little worse?
René F. Jones
I guess the way I think about it, Brian, is that I'm looking at, when we announced the transaction and prepayment fees we were looking at, maybe those prepayment fees are slightly slower, right, still high but slightly lower. But other than that, we haven't really seen any material change in the balance sheet that differs from the projections we made at close, maybe slightly little more loans.
Prepayments on securities have actually held up and may be exceeding what we thought. So but overall, the balance sheet looks a lot the same.
Are you thinking of just sort of the shape of the curve and then...
Brian Foran
No, I was actually thinking more along the lines of like when Capital One closed ING Direct, the interest rates had come down from the time they announced the deal to the time they closed it. The capital accretion ended up being better and they ended up with some negative accretable yields going forward turning.
So I guess maybe I'm over extrapolating, but I was thinking maybe the same thing would happen here.
René F. Jones
I think you're kind of directionally correct, but I don't know that it's significant. So each one of those things that you mentioned is probably true.
So you're saying basically the mark on the loan, maybe the premium mark is a little less. So that probably would be true, given what's happened to rates.
The big question is, what happens between now and the actual close? You don't really know, Brian.
Brian Foran
Makes sense. And then the first quarter, noisy or could be noisy comment, can you just remind us what the main areas of noise we should be thinking about are?
René F. Jones
Yes. So the way you think about is if you look at the higher levels of securities funded by structured debt on Hudson City's balance sheet, we all know today that, that's a negative trade if you look at the yield.
And a big chunk of that should go away when you mark the portfolio. But having said that, if you were to put that trade on today, it would still be underwater, right, at that marked rate.
So until that position is unwound and as we'll think about how much time do we take to that, it will driven by execution, that actually would lower your margin. So that's the way to think about it.
That trade isn't just necessarily a problem when it's not marked. Once you mark it, it's still an underwater trade.
The yield on securities will be lower than the borrowing cost.
Brian Foran
And the securities wouldn't all be gone when the deal closes. There could be some of the portfolio repositioning could happen post the deal close?
René F. Jones
Yes, because we've got to figure that out. Right?
So -- and you don't know what day will you get approval so -- right? So the way I think about it is you'll get a lot done if we get approval at the beginning of a quarter, and we'll be able to get a lot done during the course of the quarter.
But if it happens at the end of the quarter, right, you might see some distortion. You might get a whole month of just sort of low margin stuff on your balance sheet that you don't intend to keep.
But economically -- yes, economically, it's not a big deal.
Operator
Your next question comes from the line of Bob Ramsey with FBR.
Bob Ramsey
I was hoping maybe you could share some thoughts on how you're thinking about Hudson City's mortgage business in terms of intent to continue to originate those loans either for sale or for portfolio.
René F. Jones
I mean, my comments aren't going to be different from what we said in the past. Our thinking maybe in this order is that one of the things that we will be able to bring to the table, which we're sort of, in a sense, already getting started on by -- through our hiring process, is adding an agency business to the branch network that's there, which should be a positive.
And we think we can get that up and running pretty -- right, pretty much out of the gate. So that's the first thing that will be a change in the profile.
And then, at the end of the day, our view is that we're logically going to have some appetite for jumbos simply because if you look at the demographics, particularly in New Jersey and then in where the branches are in Connecticut, there's much more of an opportunity for jumbos there just because of the natural level of the home prices. So think about the fact that most of our footprint, other than Baltimore, is pretty much all in -- the average home prices are way under.
So I think the question becomes, how much of that we do? Now we don't tend to portfolio a lot.
So logically speaking, that as we start out with $26 billion, $28 billion loan portfolio, that's going to decline. But the dynamics of how we're thinking about it would include those components.
Bob Ramsey
Okay. And how does -- the CFPB recently provided guidance on qualified mortgages QM.
I'm curious if M&T would ever originate or portfolio a non-QM mortgage and then sort of what your read on the guidance is and how you're thinking about that?
René F. Jones
I mean, let me give you a very general comment. In -- overall, we didn't have too many problems with it.
We worry about any aspect of things that are price fixing because it tends to move the market. So when you set -- when you lock in the fees for something, you can't make a decision.
I think that -- and this is personally, I think that the idea that to the extent that you originate a qualified mortgage outside of those parameters that you bear the risk kind of makes sense to me. But other than that, I mean, I didn't think that we had any big problems overall.
Bob Ramsey
And so does that mean that looking at the risk of any individual loan, you all would not avoid a non-QM mortgage as long as it met the rest of your sort of underwriting criteria?
René F. Jones
We would have to think about it. We'd have to think about -- the difficulty with that simple analysis is you got to understand your exposure in regard to the overall mortgage market in total.
Right? So I think we need time to think about exactly how that would affect us, and we're thinking about it now.
Bob Ramsey
Okay. And then the last question, you mentioned a little earlier that people are clearly borrowing.
Obviously, you'll have very strong loan growth sort of across the board this quarter. I'm just curious if there is any geography that was stronger or weaker than any other?
Or sort of what maybe you attribute, how much of it is market share versus not what you're seeing in terms of line utilization? Just any thoughts around the loan growth?
René F. Jones
Let me make general comments. I mean, so loan growth was strong.
There was clearly a flurry of activity towards the end. And as you kind of look at those various types of things people were trying to do, some were simply refinancing, presumably while rates are still low.
Others, we saw doing -- focusing on recaps. There are a number of financing of acquisitions or even on the other side where we saw loans pay off, people had done either partial sales of their company, I think, around the tax laws.
In our trust department, we're away from loans now. But I think the comment that I heard in December was that we had set up a record number of trusts in the month of December.
So clearly, there's a lot of activity around sort of the changes that were coming at the end of the year, the tax code and so forth. But having said that, we also saw growth in other areas, manufacturers.
One of the things that we saw down in Pennsylvania was there seems to be some optimism associated with the aftereffects of Sandy, where people who are making equipment and infrastructure down there are already getting orders for infrastructure, i.e. boilers, those types of things.
The cost of -- we heard that cost of plywood and the cost of drywall is going up in the area, which benefits a number of our customers in the Pennsylvania markets. If you look at our loan growth by region, we were up an annualized, in upstate New York 5%.
We were up 11% in the sort of metro area, which is Tarrytown, think Hudson Valley, Westchester, New York City, Philadelphia. And then, we were about flat in Pennsylvania.
We had actually pretty -- we had okay commercial growth but it was offset by the consumers. And then what I found interesting is that even in places in upstate New York, if you were to adjust for the fact that we had a couple of large pay down of balances that were related to either full sales of companies or partial sales of companies, that the loan growth in places like Buffalo and Rochester were very -- still very robust in our middle market lending area.
So it was a ton of activity. I can't suggest that it will stay at those levels going into the first quarter, but it was clearly across the board, different regions and also different reasons for the transaction.
Bob Ramsey
All right. That's great.
And then could you give the mortgage banking pipeline heading into the first quarter?
René F. Jones
I'll get it for you. I think it's about -- oh, I'm sorry.
So let me give you that. So last quarter, we were just under $2.4 billion and that -- let me just describe the pipeline.
So that's everything that's come in to be locked and excluding things that have already locked. So it's our true pipeline of business going into the quarter.
So $2.3 billion, $2.4 billion. At the end of last quarter, it was $1.8 billion at the end of this.
So we saw -- we did see things slow down. While the quarter was robust in mortgage, December was slower than October and November.
Bob Ramsey
And is that seasonal? Or are you seeing other factors in there?
René F. Jones
I can't tell. I mean, clearly, there's some seasonal effect, fewer days.
But it's still too early to tell. I wouldn't suggest that, that -- that December is -- December was really the exception, I guess, is what I would say.
Operator
Your next question comes from the line of Erika Penala with Bank of America.
Erika Penala
My first question is on sort of the moving parts on the pro forma margin for Hudson City. So you mentioned in your prepared remarks that the first full quarter will be a small negative impact.
And part of it is, in terms of your answer to Brian's question, is that there clearly have securities that have -- are earning a negative spread because of the wholesale funding. But if I think about -- so if I think about the loans you're putting on, because you're accreting capital upfront, my suspicion is that, that yield is lower than M&T's legacy yield today.
And so I'm wondering on the deposit side, if you just look at Hudson City's balance sheet, clearly, their deposit costs are higher than yours. Is there a deposit accretable that we're not thinking about that helps sort of balance the potential negative on the loan side?
René F. Jones
No. So let me -- so -- okay, so take Brian's question and your question, Erika.
You're right, those 2 questions are perfect. So remember that as we see the change in interest rates that Brian is talking about, we've got to be concerned about the whole mark, which would affect everything.
It would affect the wholesale borrowings and so forth. And when we look at that, in combination, we don't see a big change.
But relative what -- so then if you go into the parts, but relative to my thinking on where I think I may -- I gave a quote on the announcement of the deal about where we thought the loan yields would be, I might have been like 360 or something. Today, probably on just the loan part, that's probably higher today than we were thinking.
So overall, I don't see much change in the overall balance sheet with the change of interest rates, but the components have probably changed from where we sit today. And we use that higher yield number on the loans in thinking about where we were as we go from here.
Again, that could change, and I don't know that you'd see much change in the overall mark because you'd got to count the liabilities as well. But the loan numbers, yields could change until we get to the close of the deal.
Erika Penala
And I'm sure I should go back to the original presentation. If I just look at the average balance sheet today, how should we think about the mark on the deposit side?
And I apologize if this is such an elementary question, I just wanted to make sure that I'm not understating your margin for 2013.
René F. Jones
Well, I mean, other than the structured borrowings, I think you've got to go and look at the time deposits and those are -- I mean, the time deposit rates. I would just look at the average time deposit prices offered by us and others and then maybe look a little bit into that market, and that's what we're going to take them down to.
We're going to use those current rates on time deposits and that will probably be the biggest thing that affects the deposit mark.
Erika Penala
Got it. So the mark is whatever the -- got it, okay.
And on the statement that you made with regards to 24% expense savings on HCBK's premerger expense base, excluding FDIC costs, how -- what is the length of time it would take for M&T to achieve that 24%? I know you've made comments in the past that the FDIC saving -- cost savings were immediate.
René F. Jones
Yes. It may take -- let me just do the FDIC first.
It will take a quarter lag before you come into M&T's structure for the FDIC. And then the other thing is some of the savings are going to come from your timing of your unwinding of that wholesale book, right?
So you won't get benefit until you do that. But when that's done, then you should start to see the full benefit from the FDIC.
I don't have it in front of me, but I would suggest that we should be pretty much on a full run rate after the first 18 months which is towards the end of 2014.
Operator
Your next question comes from the line of Ken Zerbe with Morgan Stanley.
Ken A. Zerbe
A quick question, in terms of the capital plan or the stress test, you did mention that your main capital action this year was going to be the Hudson City transaction. But obviously, Hudson improves your capital position.
Are you considering any other capital actions in your plan?
René F. Jones
Let me say this. I mean I think, generally, no.
It's a pretty simple -- it's a very simple thing that we're trying to do, we're keeping much of the things the same. But to the extent that we could begin the process of turning over our hybrid capital, we would start to consider that.
And remember, for us, it's less of an issue. It's not something that we would have to do a lot of because unlike others, other people are starting with big amounts of capital, right, on the top.
And so it's very important for them to kind of take those down quickly to sort of optimize the capital structure. We're moving and improving our capital over time.
So there could be some of that activity if it were to get approved and if we were to choose to do it, right? It depends a lot on rates.
And our thinking was that if rates on preferreds were low and we had the right inquiries, we would want to consider beginning that process.
Ken A. Zerbe
Got you. But that's something that you would apply for as a possibility, but just you may or may not execute, like the trep to pref [ph]?
René F. Jones
You have to apply for it somewhere to be able to do it.
Ken A. Zerbe
Yes. No, understood.
That's the reason I asked, I wanted to make sure it was being applied for. The other quick question I had, just on with the, I guess, hiring commercial bankers.
Are you able to do any of the hiring ahead of the deal closing or are you -- have you started that process? Or is that something where you start taking, I guess, resumes after the deal closes?
René F. Jones
So -- yes, it's a great question. I mean, we're well on our way.
One of the -- everything seems to be going on track with Hudson City and the integration, but the thing that seems to be well ahead is the hiring. So for example, on the sales side, we've identified and have as of this past Monday, 49 people that will work in the new footprint.
And if you look at that, 18 of them are internal people, were internal folks who have agreed to go down there and are kind of familiar with our culture in M&T and will work, but primarily in New Jersey. And then we've also hired another 31.
So if you look on the commercial side in terms of RMs, we've already got 16 people on board. We've got 23 business bankers on board.
We've got a number of mortgage originators on board already who are getting prepared to do that agency-type business that we talked about. And then we also -- while we're a little slower on that part, we also have a few people already on board who are part of the retail branch, who will become part of the retail branch network.
So from a financial perspective, some of that was in our December numbers, some of that is already going to be in our fourth -- first quarter numbers. And I feel pretty good about where we're headed there.
Operator
Your next question comes from the line of Ken Usdin with Jefferies.
Kenneth M. Usdin
I wanted to just follow up on commercial real estate, you had $1 billion of CRE growth on a point-to-point basis. And I just wanted to ask you for a little bit more color on that, any specific buckets that's coming from within?
I know multifamily had been good, but are you -- any signs that you're starting to now see that spread out in terms of demand and opportunity in CRE?
René F. Jones
Well, it is interesting because our CRE growth has been pretty -- I don't have it in front of me, but it's actually been -- it's been spread out already. So for example, on the CRE side, upstate saw a 9% growth.
The reason I talked about from Westchester down to Philly, grew 7%; Pennsylvania grew 2%. So it's coming across the board.
The other thing I would say is, again, the other category we saw was there were a number, some in real estate, where people were bridging decisions over the end of the period. So some of those loans were shorter term in nature, all right?
And then as we get into maybe the second quarter of next year, some of that -- I would expect some of that to roll off.
Kenneth M. Usdin
Then that would have shown up also in CRE. I thought you were referring more to the commercial bucket.
René F. Jones
It's both. There are a lot of -- there was a lot of year-end decisions being made, I guess is the simplest way for me to say it.
Kenneth M. Usdin
Right. Okay.
And the second point I wanted to just follow up, I understand your comments about core NIM compression and your thoughts about having mid-single-digit earning asset growth, does that lend us out to believe that aside from day count that -- and before Hudson City, that it's reasonable that you guys would still expect NII to be growing this year?
René F. Jones
Yes, that's true. You're thinking about that the right way, yes.
Kenneth M. Usdin
All right. And then the last comment I want -- I just wanted to come back on your thoughts about mortgage banking.
The -- hearing you talk about a little bit of decline in the pipeline, although it's staying quite strong. What are you seeing underneath the surface now that you've returned back to the originate for sale and are retaining less?
What do you see happening on the gain on sale side? What happened this quarter, and what changes do you anticipate from that perspective with what we've seen in rates change so far?
René F. Jones
Yes. Yes, sure.
Good question. Yes.
So I think this will be the dynamic, right? So as you see things slow down, we've built up a fair amount of capacity.
And so, as you see things like we saw in December, you're going to see lower gain on sale. And so when I look overall, quarter-over-quarter, our gain on sale was up.
So if we were somewhere 225 -- I'm sorry, 325, 326 in the third quarter, we were probably 20 basis points higher than that overall. But if you were to go to December, that came down quite a bit.
And much of that is us trying to sort of just manage the volume that we had in our capacity because we can't change it as fast. So really, the question on margin is going to come down to -- and it affects us both on our regular stuff and on HARP.
And the question will become, with margin, it's going to be -- have a lot to do with sort of the volume pickup. I think out of the gate, in January, things actually look pretty good.
So I don't know if that helps.
Kenneth M. Usdin
Yes, that does help. And I guess the second, just the last corollary to that is, if the total mortgage banking revenue were to start to tail off, how quickly could you adjust to that capacity and infrastructure that you've built on the origination side from an expense perspective?
René F. Jones
I'll say this, we got a long-tenured mortgage team, they're pretty good at it. IT is often -- that they need to go, be able to go faster when we get into those situations, but they're pretty good at what they do.
So the other thing I would suggest is that also, there are a couple of parts of our business, right? And so the labor-intensive one is really on the residential side.
We also have a commercial mortgage business, which I think doesn't have as big of an infrastructure that's required because we're using the agencies and each loan is bigger. But we also have a fairly large servicing portfolio, right?
And that tends to be much more stable. So that stream should maintain relatively steady, and we've got a lot of -- a pretty good sized workforce there.
Operator
Your next question comes from the line of Todd Hagerman with Sterne Agee.
Todd L. Hagerman
René, I just want to follow up on your comment on the Sandy and the fee waiver. I just want to make -- I understand that you indicated that you've since restarted that fees or they've still been -- they've still -- they're still in suspension?
René F. Jones
What I talked about was the impact that we had in place in the quarter during around the storm. I don't think that that's still in place.
Donald J. MacLeod
Those waivers were primarily, almost entirely, in October and November.
Todd L. Hagerman
Okay. And then just a follow-up to that, have there been any changes just in general in terms of the pricing, your various products?
And then in terms of Hudson City coming on, is there anything that we should think about in terms of either new products coming out or any meaningful pricing changes as we think about, again, the fee line item?
René F. Jones
So let me just -- so with regard to Hudson City, that's a discussion after we end up getting the deal approved and we own -- and then the merger takes place because we just don't deal with the pricing of the other institution. That's their job.
We focus on our portfolio. I think the bigger question for us is, as you look at some of the things that we're doing, some of the investment that we've made at the end of the year has been around our deposit and deposit technology.
And I think we're very -- still very focused on looking at particularly our checking products and making sure that those are redesigned to give the customers a lot more choice. And so it's not so much about what our overall fees will be, but we intend to continue to make investments to give people more choice around their checking and their deposit products.
So you'll see changes. I don't know that you can extrapolate that to anything on the fee income side, other than the fact that we hope to have higher balances.
Todd L. Hagerman
Right. That's what I was getting at.
Just in terms of product redesign, the value proposition for the customer, particularly with the new customer base coming on...
René F. Jones
Yes. I mean -- Yes, okay.
So I mean, the other thing I would add is we're doing a lot. So when we talked about earlier on the opening of the call, the technology investment and so forth, I mean, one of the things that we're spending a lot of money on is trying to improve the customer experience online.
And so we've been doing a lot of the initial work around Web banking upgrades and some of the platform there that will allow us down the road to begin to, again, offer a smoother experience for the customer. And then as I mentioned before, those products with choice, we hope is received pretty well.
Todd L. Hagerman
Okay. And then just a follow-up on the capital side.
I think you indicated on the 7% twofold [ph], I think that's both in terms of your expectations for Tier 1 but more importantly I think you would, going back, at the time the deal, that the expectation of the tangible equity was also greater than 7%. Is that...
René F. Jones
We haven't changed this as of yet anyway. We said our thinking back then was that we would fall after the deal, somewhere between 825.
I think we said 825 and 850. So if you kind of extrapolate there and you also understand that you're generating a lot of capital post the transaction date.
It seems pretty logical that we'll be, as we said on the call, we'll be above where we need to be, which is actually before the full implementation dates are in effect.
Todd L. Hagerman
Right. And so, finally, again, in terms of the CCAR process, I'm assuming that the dividend remains very near and dear to M&T and their shareholders, and that, that would also be likely part of the capital plan submission.
Particularly, again, as you mentioned, that the capital accretion that's occurring with the deal and the ongoing improvement in terms of the company earnings and so forth.
René F. Jones
Yes, we think we've done a pretty nice job of, one, keeping the volatility low in our earnings over the years, and that's allowed us to have a lot of consistency in our dividends. And we don't expect to see any changes on that front as we sit here today.
Operator
Your next question comes from the line of Brian Klock with Keefe, Bruyette, & Woods.
Brian Klock
Just a couple of quick follow-ups, René, if you could. On the margin guidance of 3 basis points or so compression per quarter, obviously that wouldn't incorporate any sort of benefit of redeeming the high-cost trust preferreds that you've got out there, right?
That would be as if those trust preferreds are still outstanding for all of 2013?
René F. Jones
Yes, you got that right. And again, Brian, I'm sure you know this, but the way I think about it is, what makes it interesting if you could do that is that it's kind of EPS-neutral, right, where rates are today.
And so while it may have some effect on your margin, you just take the dividends, and you're paying them below the line. So as it comes to net income to common shareholders given where rates are, the whole thing is relatively neutral.
Brian Klock
Right. So you'd have a benefit on the margin but EPS-neutral?
René F. Jones
Right.
Brian Klock
Right. I guess on the expenses for the quarter, I know you mentioned that there was some sort of maybe onetime items and expenses related to the CCAR.
So if I look at that $193.6 million in the other cost of operations, so should that be more like what the third quarter expense number was?
René F. Jones
You're thinking about that the right way. I believe the item we mentioned on the misappropriation of funds by the customer is in there, and our professional services were pretty high.
So typically, what will happen is while we'll continue to maintain some level of investment, you're going to see probably -- typically, what's happened in the past is you see that line soften up a little bit in the first quarter and then of course, we have a kind of a spike, given the items we mentioned, the salaries and benefits side.
Brian Klock
Okay. And with the salaries and benefits for the fourth quarter, is there any sort of sign-up bonus?
Is there anything with the new hires that would be something we should adjust for?
René F. Jones
I mean, in the context of how large that number is, I don't know that it is anything to be really thinking about there.
Brian Klock
Okay. And then just the last question on the acquired portfolio, you talked about the net interest income declining.
The yields, obviously, the yields seem to be somewhat steady. So we should be thinking about that continued pace of the runoff in the acquired balances, thus, the impact when you guys do report this in your Ks and Qs that, that accretable yield number that you're putting in there should continue to decline, but any of that would be the same as being a core reinvestment of your legacy loan portfolio since I'm still calculating that yield to be somewhat close to where your legacy loan portfolio, loan yields are.
René F. Jones
Yes, I think that's the right way to think about it. And to say it in a slightly different way, what we've been seeing is that those loans are paying off, right?
And you see that, and that's part why we gave you those balances. You'll see them in the Q and the K.
But the loans have been paying off, and that sort of results in sort of the cash flows being better, but that normal pay down is kind of at a level yield. And so from what we see today, your description is probably a pretty good one.
Operator
Your next question comes from the line of Gerard Cassidy with RBC.
Gerard S. Cassidy
Rene, can we come back to that misappropriation of funds? How much was that in the other noninterest expense line item so that we don't include it on a go-forward basis?
René F. Jones
Well, what we said was -- I think that -- I think the total other expenses were up $10 million or something like that. So it's more than half of that.
Gerard S. Cassidy
Okay. The second question is, you gave us, I think, the gain on sale margins for the mortgage banking business for the quarter.
What was the dollar amount in the mortgage banking revenue line of the gain on sale?
René F. Jones
Ask me that again, I'm not sure. Say that again?
Gerard S. Cassidy
Sure. Yes.
The gain on sale revenue or gain on sale income that you generated in the quarter by selling mortgages, how much of that -- in the 116, how much was it in the quarter?
René F. Jones
Well, our total 116, 117 I think was our number. Our total number is about -- let me verify it, and I'll give it to you.
$70 million. Yes, $70 million.
Gerard S. Cassidy
Okay. And how would that compare to the prior quarter?
René F. Jones
57, I think. Is that 57?
Gerard S. Cassidy
That's great. The other question I have for you is on your securities portfolio, what's the duration of the portfolio right now in terms of years?
René F. Jones
Right now, I think the duration is 2.2.
Gerard S. Cassidy
Okay. And then finally, obviously, all the banks will benefit should there be a parallel shift in the yield curve, but that's not expected anytime soon.
If the long end of the curve, the 10-year government bond yield starts to rise or continues to rise throughout 2012, at what point would it help mitigate your net interest margin pressure so that -- you mentioned about 3 basis points a quarter. Have you done any sensitivity to say that if the 10-year reached x level that there wouldn't be any margin pressure?
René F. Jones
Yes, we do routinely do that. So let me just -- give me 2 seconds, and I'll give you some specifics here.
So let's see. So you're talking about a nonparallel interest rate shock, and you're suggesting that the rates would go up on the long end?
Gerard S. Cassidy
Right. That's correct.
René F. Jones
Yes. And so I mean it wouldn't take long.
I mean, if you take a look at it and you look at it in terms of -- I think this is instantaneous but -- give me -- I'm not sure if I'm talking instantaneous. But basically, our numbers is, if rates were to go up 100 basis points on the long end, it's -- 3.66% is the sensitivity to our net interest income, and I'm just drawing a blank.
I don't think that is a instantaneous shock.
Gerard S. Cassidy
Would it be safe to say that if the long end of the curve went up gradually, 30, 40 basis points to somewhere in the low 2s, 215, 220, 225, would that be enough just to mitigate then the margin pressure or it would have to go up even further?
René F. Jones
Well, without using exact numbers, that would have an effect. They definitely have an effect.
Gerard S. Cassidy
Okay. It would definitely have a positive effect.
René F. Jones
Yes. Yes, I mean think about it this way.
The other -- one of the big issues I think is that the yields on the securities are coming down, especially to the extent that you've got to replace them, right? So you see a slowing in that prepayment.
That's going to take pressure off of the primary reason why we see margin compression.
Operator
Your next question comes from the line of Collyn Gilbert with Stifel, Nicolaus.
Collyn Bement Gilbert
This is a long call, so I'm going to try and make this quick. One housekeeping item.
You said that $64 million nonaccrual, that was a resi mortgage loan?
René F. Jones
Well, it's a long-term customer who we've had a relationship with, where at times we've done business loans and so forth. But the key is, is that it's all collateralized by his real estate, right?
Collyn Bement Gilbert
So that's multiple real estate, residential real estate properties, is that what you're saying then to...
René F. Jones
Let me just -- it's a fair amount of real estate.
Collyn Bement Gilbert
Okay. But it's residential real estate, not commercial?
René F. Jones
That's correct.
Collyn Bement Gilbert
Okay, okay. And then just a big picture question.
It sort of has been like the M&T story and you said for many years that you think about the GDP and you think M&T's going to grow at the rate of GDP or maybe slightly more or that the banking industry in general should sort of -- that's a normalized growth rate for the industry. If we look at what you guys put on in 2012, you grew 10%, 11%.
Would you say that 2012 was a transitional year as it related to the economy and maybe the opportunities that you saw in taking share in Upstate New York? Or do you sort of see a shift, a potential sort of opportunistic shift occurring for you guys as it relates to the rest of the economy in terms of future growth?
René F. Jones
Let me -- that's a good question. So let me start.
I'm going to go in reverse, Collyn. I would say that we have seen -- it has been an opportunistic shift given where we were, particularly through the crisis and the fact that the company stayed healthy.
And so it's presented us with a lot of opportunities, and that's probably the first differentiating factor as to why our revenue growth has been higher than the general economy. But I would argue that the only way that you can get into that position is if you take the view that you shouldn't be growing much faster than the economy.
So I think we still have that view, and we'll try to do our best not to make too many mistakes. But then the other thing, and so we can get down into it, I mean the Upstate New York markets was something that happened to us that was exceptional that impacted our loan growth.
The fact that one of the things I think people may be underestimate is that while our charge-offs have been really low, and there's a view out there that, "well how much lower can they get when the economy improves?" We tend to move like the economy, so we just have a lower base.
But having said that, what's different now is that a lot of the portfolios that we acquired are also seeing a benefit from that. And you just don't -- based on the way the acquisition accounting works, you see that in your net interest income, right?
So I think you've got it. And we hope that those types of things -- good things will continue to happen to us.
But we think the path to get there has just sort of stick to our knitting and focus on integrating these transactions and not trying to push too hard or make things happen that aren't given to us by the general economy.
Operator
Your final question comes from the line of Stephen Mead with Anchor Capital.
Stephen Mead
Just coming back to the dividend policy, because of the submission of the Capital Plan and also the Hudson transaction, is the dividend policy in a sense on hold or what? And have you stated some level of either growth in the dividend or payout of earnings?
René F. Jones
Well, what we said and I guess the better term is that what we reminded people is that there's nearly never been a big change in the way we think about dividend payout, cash payout. For the longest time, we've maintained, you can go back, a dividend payout ratio that was somewhere between 25% and 32%.
And our thinking was that as the company grew, then the shareholders would be rewarded by growth in the dividend as well. We kept it in that range because we wanted a lot of flexibility because we were very keenly aware that consistency is important and that from time to time, there are disruptions, definitely in banks, in bank stocks, in bank earnings.
So we felt that the easiest way to do that is to not have too high of a payout ratio. When we saw the low point of the storm hit in 2009, that made our payout ratio increase and then we had the highest payout ratio.
But it was from maintaining it consistently, right? So as you see in the last 2 quarters, we've come down to about 32% roughly, I think, is what I saw the payout ratio the last 2 quarters.
So that's probably right about at the top end of the range of where we've been the last 20 years -- I can only vouch for the last 20 years. So we don't really see any change in that nor are we aware of any reason why we would change our approach.
It also happens it's now seen to be consistent with the views of the regulatory community.
Stephen Mead
Okay. The other question, just going back to the Hudson City transaction, that deal was announced just before the September announcement by the Fed to purchase mortgage-backed securities.
Did you anticipate that in your negotiation of Hudson? And how has, in a sense, the Fed's policy to repurchase mortgage-backs, how has it changed things in terms of your integration of Hudson?
René F. Jones
It hasn't. I mean, keep in mind that first of all, it's not an agency portfolio.
And two, what we tend to do is -- when we show up on day one, it's an organization we don't know and I think -- first, we think about credit, then we think about credit and we think about credit again, right? So we're deep into the loan files and looking at what we think the risk is of the portfolio.
And we would have had no foresight into what the Federal Reserve was going to do. And as I look at it today, I don't see it having much impact on our thinking.
I also think that if you look at what's happened to mortgage rates, there's been really little influence from any of that to what's being passed through to the customer. So hopefully that's hopeful, but I don't think there's really...
Stephen Mead
So you -- on the consumer side of the equation, in terms of the margin compression that's occurring and the asset yields coming down faster than say cost of funds, it's got to affect people's calculation of returns on equity just...
René F. Jones
Yes, you've got to separate the description of what I'm telling you is happening to our balance sheet, which are loans we booked several years ago. And any time we make a forward-looking decision, whether it be on making a loan or definitely a transaction where we're going to buy a bank, we're looking at forward curves, right?
And quite frankly, we tend to price transactions by looking at forward curves and making sure that we can, at least economically in our analysis, pay a price that allows us to hedge those -- any changes in that forward curve, right? So they're 2 sort of separate things.
The earlier description is of what's been rolling off our balance sheet from loans that were made in prior periods.
Operator
You have a follow-up question from the line of Gerard Cassidy with RBC.
Gerard S. Cassidy
Can you tell us when -- what's the timing of when you think you might be able to close the Hudson deal?
René F. Jones
No, there's no change. I mean, we would like to be able to do it by the second quarter, I think.
So no change in what we said. And what I can tell you is there's been really no change.
We're moving along in the regulatory process, and one of the big steps in the process was submitting our Capital Plan on January 7. So we've now done that.
And hopefully, we'll get feedback and work with the Fed and other parties to get there by the second quarter.
Gerard S. Cassidy
Would that be toward do you think the front-end of the quarter or the latter part of the quarter or is it just too hard to say right now?
René F. Jones
They only let me talk to you at the end of the quarter.
Operator
That was our final question. Now I'll turn the floor back up to Mr.
MacLeod for any closing comments.
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 conference call.
You may now disconnect.