M&T Bank Corp
NYSE:MTB
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M&T Bank Corp
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Good day, and thank you for standing by. Welcome to the M&T Bank Second Quarter 2021 Earnings Conference Call. [Operator Instructions].
I would now like to hand the conference over to Don MacLeod. Thank you. Please go ahead.
Thank you, Erica, and good morning. I'd like to thank everyone for participating in M&T's Second Quarter of 2021 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 and then on the Events and Presentations link.
Also before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These materials are all available on our Investor Relations web page, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors. These statements speak only as of the date made, and M&T undertakes no obligation to update them.
I'm happy to say that our Chief Financial Officer, Darren King, will be leading the call today. Also joining us today is Brian Klock, who started with M&T in May and who will take over as the Head of Market and Investor Relations at the end of this year. Darren?
Thanks, Don. Good morning, everyone. Welcome back, Brian, after a 17-year hiatus. Welcome to the other side of the table. And I have a rhetorical question for you: where would you rather be than right here right now?
You got it, Mark -- I mean, Darren.
All right. Let's jump into the business of the day. As we noted in this morning's press release, we were pleased with the continued rebound in the economy from the pandemic-induced slowdown. We continue to see improved customer activity across all sectors of the economy. Notably, while not back to pre-pandemic levels, we're seeing improvements in the leisure and hospitality sectors. While nonaccrual and criticized loans increased from prior quarter, loss emergence remains subdued, leading us to recognize a further moderate release from the allowance for credit losses. The balance sheet continues to strengthen as both capital and liquidity grew from already elevated levels, positioning the bank to continue to be a source of strength for our customers. We continue to make progress towards the fourth quarter close of the People's United merger, and we were pleased with the overwhelming shareholder support of the combination.
Looking at the results for the quarter. Diluted GAAP earnings per common share were $3.41 for the second quarter of 2021, improved from $3.33 in the first quarter of 2021 and $1.74 in the second quarter of 2020.
Net income for the quarter was $458 million, compared with $447 million in the linked quarter and $241 million in the year ago quarter.
On a GAAP basis, M&T's second quarter results produced an annualized rate of return on average assets of 1.22% and an annualized rate of return on average common equity of 11.55%. This compares with rates of 1.22% and 11.57%, respectively, in the previous quarter.
Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $2 million or $0.02 per common share, little changed from the prior quarter. Also included in the quarter's results were merger-related charges of $4 million related to M&T's proposed acquisition of People's United Financial. This amounted to $3 million after tax or $0.02 per common share. Results for this year's first quarter included $10 million of such charges amounting to $8 million after-tax effect or $0.06 per common share.
Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions.
M&T's net operating income for the second quarter, which excludes intangible amortization and the merger-related expenses, was $463 million compared with $457 million in the linked quarter and $244 million in last year's second quarter. Diluted net operating earnings per common share were $3.45 for the recent quarter, up from $3.41 in 2021's first quarter and up from $1.76 in the second quarter of 2020.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.27% and 16.68% for the recent quarter. The comparable returns were 1.29% and 17.05% in the first quarter of 2021. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Now let's take a look at some of the underlying details in our results. Taxable equivalent net interest income was $946 million in the second quarter of 2021 compared with $985 million in the linked quarter. A decrease in PPP-related income accounted for approximately half of the quarter-over-quarter decrease in net interest income as the first round of PPP loans continues to wind down.
The net interest margin for the past quarter was 2.77%, down 20 basis points from 2.97% in the linked quarter. Higher levels of cash on deposit at the Federal Reserve continued to contribute pressure to the margin, which we estimate accounted for 7 basis points of the decline from the first quarter.
Lower fee amortization from the PPP loan portfolio, both scheduled amortization and accelerated recognition from forgiven loans, contributed about 6 basis points of the margin pressure. The impact of interest rates, primarily lower income from our hedge program, partially offset by a lower cost of deposits, accounted for about 3 basis points of the decline.
All other factors accounted for some 4 basis points of margin pressure. Compared with the first quarter of 2021, average earning assets increased by some 2%, reflecting a 13% increase in money market placements, primarily cash on deposit at the Fed and a 6% decline in investable securities. Average loans outstanding declined just under 1% compared with the previous quarter.
Looking at the loans by category on an average basis compared with the linked quarter, overall, commercial and industrial loans declined by $668 million or 2.4%. Dealer floor plan loans declined by $859 million, reflecting the well-documented auto production and inventory issues experienced by the industry.
Due to the late first quarter timing of round 2 originations and delays in forgiveness of loans over $2 million in size, average PPP loans declined by less than $50 million from the prior quarter. All other C&I loan categories grew slightly over 1%.
Commercial real estate loans declined by about 0.5%, similar to what we saw in the first quarter. We continue to see very low levels of customer activity. Residential real estate loans declined by 2%. We've seen little opportunity for additional buyouts of loans from Ginnie Mae servicing pools, as delinquency and payment trends continue to improve. Absent those, the ongoing runoff of acquired Hudson City mortgage loans continues at a moderate pace.
Consumer loans were up 3%, consistent with recent quarters, as growth in indirect auto and recreation finance loans has been outpacing declines in home equity lines and loans. On an end-of-period basis, total loans were down 2%, reflecting the same factors I just mentioned. PPP loans totaled $4.3 billion at June 30 compared with $6.2 billion at the end of the first quarter. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000 increased over 3% or $4 billion compared with the first quarter. That figure includes $2.6 billion of noninterest-bearing deposits.
On an end-of-period basis, core deposits were up by just under $700 million. I'll note here that the repeal of the prohibition of paying interest on commercial checking deposits has led us to reconsider the need for a Cayman Islands office. It held no deposits at the end of the quarter.
Turning to noninterest income. Noninterest income totaled $514 million in the second quarter compared with $506 million in the linked quarter. The recent quarter included $11 million of valuation losses on equity securities, largely on our remaining holdings of GSE preferred stock, while the prior quarter included $12 million of such valuation losses.
Mortgage banking revenues were $133 million in the recent quarter compared with $139 million in the linked quarter. Revenues for our residential mortgage business, including both origination and servicing activities, were $98 million in the second quarter compared with $107 million in the prior quarter. Lower gain on sale margins were the primary driver of the decline. In addition, residential mortgage loans originated for sale were down about 5% to $1.2 billion compared with the first quarter.
Commercial mortgage banking revenues were $35 million in the second quarter compared with $32 million in the linked quarter. Trust income rose to $163 million in the recent quarter, improved from $156 million in the previous quarter. This quarter's results included $4 million of seasonal fees arising from tax preparation work we undertake for clients as well as the result of the growth in assets under management in the wealth and institutional businesses. Service charges on deposit accounts were $99 million compared with $93 million in the first quarter. The primary driver of the increase were customer payments-related activity.
Turning to expenses. Operating expenses for the second quarter, which exclude the amortization of intangible assets and merger-related expenses, were $859 million. The comparable figure was $907 million in the linked quarter.
Salaries and benefits declined by $62 million to $479 million from the prior quarter. Recall that the first quarter's results included $69 million of seasonal salary and benefit costs.
Our deposit insurance increased by $4 million to $18 million during the quarter, primarily reflecting higher levels of criticized loans, which factor into the FDIC's assessment calculation.
Other costs of operations for the past quarter included an $8 million addition to the valuation allowance on our capitalized mortgage servicing rights. Recall there was a $9 million reversal from the allowance in 2021's first quarter. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 58.4% in the recent quarter compared with 60.3% in 2021's first quarter, which included the seasonally elevated compensation costs.
Next, let's turn to credit. As I noted at the start of the call, we're pleased with the signs of spending and revenue trends for our customers as the overall economy continues to improve. That said, some industries are improving more rapidly than others, and the supply chain issues and pressures on costs go beyond just the automotive sector.
The allowance for credit losses declined by $61 million to $1.6 billion at the end of the second quarter. That reflects a $15 million recapture of previous provisions for credit losses, combined with $46 million of net charge-offs in the quarter. The allowance for credit losses as a percentage of loans outstanding declined to 1.6% -- 1.62%. That ratio was little changed from 1.65% of loans at the end of the prior quarter. Annualized net charge-offs as a percentage of loans were 19 basis points for the second quarter compared with 31 basis points in the first quarter. The allowance for credit losses at the end of the quarter reflects our assessment of credit losses in the portfolio under the CECL loss measurement methodology, which includes our macroeconomic forecast.
As we've previously indicated, our macroeconomic forecast uses a number of economic variables, with the largest drivers being the unemployment rate and GDP. Our forecast assumes the national unemployment rate continues to be at elevated levels, on average, 5.4% through 2021, followed by a gradual improvement, reaching 3.5% by mid-2023. The forecast assumes that GDP grows at a 7.4% annual rate during 2021, resulting in GDP returning to pre-pandemic levels during 2022.
Nonaccrual loans increased by $285 million to $2.2 billion or 2.31% of loans at the end of June. This was up from 1.97% at the end of March. We expect to disclose an increase in criticized loans with our second quarter 10-Q filing. This reflects the prolonged recovery in certain sectors of the economy, notably hospitality and health care. M&T's commercial loan grades reflect the performance of individual properties with limited consideration of property values or guarantor ability to sustain cash flows from other sources.
Notwithstanding those increases, loss emergence on troubled loans continues to be moderate. Interest reserves are healthy, sponsors remain supportive and collateral values are well within our underwriting assumptions. The allowance for credit losses continues to reflect our ultimate loss expectations. Loans 90 days past due, on which we continue to accrue interest, were $1.1 billion at the end of the recent quarter, and 96% of these loans were guaranteed by government-related entities.
Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.7% compared with 10.4% at the end of the first quarter, and which reflects lower risk-weighted assets and earnings net of dividends. As previously noted, while the People's United merger is pending, we don't plan to engage in any stock repurchase activity.
Now turning to the outlook. As we reach the halfway point of the year, the cautious outlook we conveyed on the January and April earnings calls has been well aligned with what we're actually seeing. The fiscal and monetary stimulus programs, along with the vaccination programs, have clearly brought a turnaround in economic growth and employment. But the downside effects from these actions continues.
Excess liquidity in the system has suppressed loan growth, particularly commercial loans for M&T in the broader industry. Customer deposits are at all-time highs and grew faster than our ability to deploy them into assets that earn above our cost of capital.
The fundamental aspects of our outlook haven't changed. Total loan growth, roughly flat on a year-over-year basis, excluding the PPP loans, with pressure on C&I, especially dealer floor plan and CRE loans being offset by growth in consumer loans. Net interest income down low single-digit percentage from full year 2020. Low single-digit growth in total fees. We see the potential for a slowdown in mortgage banking in the second half, offset by stronger trust income, payments-related fees and commercial loan fees.
Expenses for the first half of the year have been mostly in line with our expectations with year-over-year growth largely attributable to expenses directly tied to revenue growth such as Entrust, and to higher corporate incentive accruals coming as a result of improved overall profitability compared to last year.
As these trends continue, together with costs associated with the reopening of the economy and costs incurred in preparation for the People's United merger, we expect there to be a little more pressure on expenses in the second half of 2021.
The credit environment continues to improve along with the overall economy, but some segments are recovering more slowly than others. We're encouraged by the progress we're seeing in our hospitality portfolio with respect to bookings and cash flows, but that sector's return to normal will lag the overall economy.
Lastly, the planned merger with People's United remains on track, and our estimated time line for approval by the regulators, closing and integration remains unchanged. Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Now let's open the call to questions before which Erica will briefly review the instructions.
[Operator Instructions]. Your first question comes from the line of Ebrahim Poonawala with Bank of America.
I guess if we could just follow up on the outlook for expenses being pressured in the back half. When I look at second quarter, we grew about 7% year-over-year. Give us a sense of how we should think about it. Like, should back half be higher than first half levels in terms of what we saw in expenses? Any color around that would be helpful.
Yes, sure. I guess when you look at the quarter comparison in second quarter versus second quarter last year, that was when the economy shut down and everything stops. So you're in for a larger expense increase there in that quarter, looking at a year-over-year basis.
When we think about the whole year and where we go for the second half, the things that we're looking at is we're looking at some increase in fee-related expenses as we continue to see those fee categories grow. We're looking at, as I mentioned before, continued increase in our incentive accrual based on the performance of the bank. And so you recall that last year, we reduced the incentive paid to our senior folks based on the performance of the bank. And then the other place where you'll see some growth is as we continue to make our investments in technology and prepare for the People's integration. So we'll probably see some expense pressure in the third quarter. We'll call out what's related specifically to the merger because some of those will either be onetime or they could, in fact, be expenses that will start maybe a quarter earlier than we might have thought as we prepare for the -- for legal day 1 and for the conversion.
But overall, the expense growth that we saw this quarter, we wouldn't be running at that high of a rate for the whole year, certainly not excluding the impact of the People's merger. I'd be thinking more in the, I don't know, 3% to 5% taking into account the corporate incentives as well as the growth in some of the fee businesses.
Got it. -- That's helpful. And I guess, just on a separate topic. Rene, last quarter, you provided some color around the hospitality book. I'm just wondering if you've seen any improvement in terms of the debt servicing for these borrowers. And I understand you don't expect credit losses stemming from this portfolio, but how does that inform your ability to get back to sort of season on reserve levels as you think about the next few quarters?
Yes, sure. I guess the way we're looking at it and thinking about it is when we look at the criticized portfolio, we're really focusing on the stand-alone cash flows of each of the properties in each of those specific, I guess, called pieces of collateral. Because with many of our relationships, our clients will have multiple properties. And so we look at each property, and we assess its ability to cash flow. And that's what affects the criticized balances.
When you look at actual losses, just because they're struggling, many of them are actually still earning interest and accruing interest because the sponsors have outside sources that they're bringing to support the deals. And then the other thing we're looking at is we keep getting updated appraisals on loans and properties that we have, both in criticized and particularly in nonaccrual. And what's been a pleasant surprise is when we look at the recent appraisals that have come in, they've been very strong. We've seen valuations, I believe were on a fully as-is basis that are above -- well above our loan cost and on a stabilized basis that are maybe down 10% from the original appraisals. And so when we think about the lost content in the portfolio, which is reflected in our allowance, we feel quite comfortable with what's there. The question, obviously, will be the timing on when the cash flows get to a point where we would see them as non-criticized any longer.
We are seeing improvements in occupancy rates in the hotel portfolio across the board, but we're not quite back to pre-pandemic levels there, mainly because business travel hasn't resumed. We're seeing good performance in leisure travel, but not as strong yet in business. And so as those vacancy rates come down and revenue per available night or per available room comes up, we'll see those assets go from criticized back into performing, and then that will support further reductions in the allowance.
Your next question comes from the line of Ken Zerbe with Morgan Stanley.
Actually I'd love to stay on the whole reserve topic for just a second more. Obviously, the amount of reserves that you released this quarter is very small, I mean certainly relative to what we've seen at a number of other banks. I know you can't necessarily comment on how you differ from other banks, but I am kind of curious any color you have on like what assumptions that you're making that might explain the differences in your -- sort of your limited reserve release versus everyone else? Or maybe it's not assumptions at all. It really is like this big criticized portfolio that you're talking about. Any color would be helpful.
Sure. No, happy to go into some of the details there. I guess, a couple of broad thoughts to start. The CECL methodology is a lot more penal on consumer books than on commercial books because they tend to be longer dated. And our institution, as you are aware, skews more commercial. That's one.
It also is -- has a big impact on credit card portfolios. And credit card at M&T is not a huge part of our book of business. And so when you look at some of what was being done last year, in reserving, what you saw was much larger additions to allowance than you would have seen at M&T because of those mix differences. And so now, when we're going in the other direction, the releases are also higher for those same reasons.
And so when you look inside our portfolio, and just to give a little flavor on the allowance, it's obviously is a collection of the different asset classes and the loss expectations in those assets. And so if you think about C&I, the C&I provision, there was a little bit of a release or recapture because there was a decrease in the loans outstanding because of the auto floor plan, right? And so that was as much a function of a decrease in assets as it was the loss rate on the assets.
Within the real estate portfolio, we continue to have a loss assumption that's pretty much unchanged, and there was a slight uptick there because of the increase in -- or the size of the criticized portfolio. If you look in the mortgage book, it was a decrease, again, because of the reduction in the assets as well as the continued great performance of home prices, which affect the model and the loss expectations. And so there was a decrease there. And then in the other consumer portfolio, it was actually an increase because of the growth in balances offset a little bit by strong used car prices, which brought the loss rate down a little bit. And so there's different pieces in each of the portfolios that will move the allowance either up or down. It could be because of economic factors. It could be because of the balance. But those are some of the dynamics that are happening underneath, and hopefully, that helps give a little bit more color to what's happening with the allowance.
It does. That's perfect. And then just maybe a follow-up question. In terms of the securities portfolio, I certainly understand your rationale for not wanting to invest in very low-yielding securities at this point. At what point might that change? And how low could the securities portfolio go before you feel like you need to invest at least something?
Yes, sure. I was waiting for this conversation. I got to listen to Rene last time on the same subject.
When you look at where we sit today -- I'll talk about the securities portfolio, but also just some of the other parts of the bank. We just talked about the reserve and where the reserve sits relative to CECL day 1. When we look at our underwriting and our losses or expectations, to me, we are adequately reserved, if not maybe a little bit more, and that's future potential. You look at our capital ratios at 10.7%. We're probably going to print near the high of the peers in terms of that ratio. And we'll hold on to that until we do the merger. That's untapped potential. And I see the securities portfolio the same way. And so we've been allowing that to run off. I think what you'll start to see is as we start to think about maintaining it where it is and then look as we prepare to merge with Peoples. And if you -- what's on our mind as we think about how and when to deploy that excess cash, it's a combination of just replacing some of the cash with securities in our own book, but what the combined balance sheet is going to look like.
And so Peoples will bring a higher percentage of securities and cash, which will balance us out a little bit. And they'll also bring a bigger on-balance sheet consumer mortgage portfolio as a percentage of their assets because they've tended to be an originate-and-hold shop where we were -- we've been an originate and sell. And so the combination of those 2 factors when we combine the portfolios, we'll start to bring down some of our asset sensitivity. And based on that combined portfolio, we'll start to think about how we want to deploy that cash into what types of securities and what type of duration we might want to add. So it could be through the securities portfolio itself with mortgage backs, it could be just retaining mortgages and getting the same exposure, but having it on the balance sheet in an HTM as opposed to an AFS type of portfolio.
And so those are the things that we're looking at, and we'll look to do other things we can to optimize the cash looking to reduce borrowings, we'll continue to reduce time deposits, which will get some additional ones with Peoples. But I think as we look forward, our belief is that the deposits are probably going to stick around a little bit longer than we might have anticipated, which is affecting our thinking about deploying and the duration that we want to assume and what percentage of the cash we want to put to work. But I think we're probably at a point where we start to see that securities portfolio level off, and we'll be selective about jumping in, but we'll probably keep it roughly where it is.
Your next question comes from the line of John Pancari with Evercore ISI.
Just a question on the margin front. I wanted to see if you can -- baked into your net interest income expectation for a low-single-digit decline in 2021, how should we think about margin trajectory underlying that going forward from here? Obviously, on an underlying basis, clearly, the Peoples deal would impact that. But I wanted to see if you can elaborate a little bit on the stand-alone margin expectation?
Yes. It's a tricky one, John. And so when we think about -- when I think about the net interest income, the reason I've been explicit and we've been explicit about talking about that dollar number as opposed to the margin is there's a lot of things that are going to bounce the margin around that don't affect the dollars, right? So first and foremost is cash. And we're still in a place where each extra $1 billion of cash compresses the margin by 2 to 3 basis points, but it actually adds a nominal amount to net interest income.
The other thing that bounces the net interest margin around is just the pace of forgiveness on the PPP loans. And when you look at the first -- or the last 4 quarters, we've really seen the bulk of round 1 PPP loans forgiven. And so when you accelerate that origination fee, obviously, that affects the net interest income and the margin, but isn't necessarily repeatable. And so when we think about the full year guide for net interest income down low single digit, factored in there is the earning assets, which we've talked about, where we think those will be. And if you go underneath and look at the actual loan spreads and deposit costs, those are pretty stable. And that portfolio is producing a pretty stable stream of net interest income and the movements are generally caused, certainly in the NIM, by cash, by the pace of PPP, and then ultimately, the hedge portfolio that we've talked about, I think, for several quarters now, that it's out there. The notional amount outstanding hasn't changed, it's still around $17.5 billion, but the effective yield is coming down each quarter. And so that will put a little bit of pressure on the net adverse margin and, ultimately, net interest income. But as I at least look through the next couple of quarters on a stand-alone basis, I think net interest income is roughly around where it was this quarter.
Great. That's helpful. And before I ask my second question, I have to acknowledge the Levi [ph] quote.
I appreciate that. He's one of our favorites.
Not a Bills fan, but got the analogy. And then just separately, on the loan growth outlook for the relatively flat expectation for the year. Can you just talk about when do you see an inflection in balances as we look over the next couple of quarters? Is an inflection -- in the near term, can you see an inflection in the back half as consumer offsets the continued declines in C&I and CRE?
Yes. I think you'll start to see it, but it's going to be nuanced, and it's going to be -- it's not going to be obvious. And the reason it's going to be that way is there's 2 portfolios that we have that are going to cause a top line decrease in loans. So first and foremost is PPP, which is well documented, right? And we know we've got now $4.3 billion at the end of the quarter that's going to run off and will depend on the pace of forgiveness, but there's reason to believe that, that will happen in the next 3 or 4 quarters. And then there's also the Ginnie Mae buyouts that we've added on to the balance sheet to use up some of that excess liquidity because we like the duration and the yield on that. And as the economy continues to improve, it's our expectation that we will actually -- those will become re-performing and they will get packaged and sold back as securities. And that will bring down those mortgage balances, but obviously, we'll drive some fee income.
And so when you look underneath the portfolio, back to some of the trends that we had talked about, ex floor plan, C&I was actually up modestly, and we did see a very slight uptick in utilization rates of C&I lines in the quarter. And we will see production come back in the auto sector, and we'll see some of those floor plan balances growing again.
Just for context, our current line utilization in the -- or in the auto floor plan space is about half of its long-term average. And so that by itself is worth a couple of billion dollars. And so we'll see that start to come back. We think it will be really first quarter of next year.
And then when you look in the real estate space, not surprisingly, there's not a lot of activity going on. And usually, what drives some of the CRE growth and declines is just activity in assets changing hands. And that -- when that happens is both a positive and a negative, we see payoffs because some of our clients sell. But we also gain assets when construction projects come online or come due and/or when our clients are out looking at assets and growing their portfolios.
And so right now, that's pretty subdued and expect that the CRE balances will be kind of flattish, maybe slightly down as we work our way through.
And then the big growth is in the consumer portfolio. I say big. That sounds more grandiose than it is. It's consistent growth. in the auto floor plan -- or auto indirect as well as refi auto and -- auto and recfi. Sorry.
So it's there. I like the trends that we see. The spreads are still holding up. The returns in the business we're booking are solid. And so we don't feel a need to chase it, but to be there to support our clients with what their activities are, and it will largely reflect the economy.
And your next question is from the line of Ken Usdin with Jefferies.
Darren, wanted to follow up and ask to a point about the eventual re-securitizations on the Ginnie Mae, I was wondering if you could just help us understand how big is that book in the loan book now? And if your fee guide for down low single-digit contemplates getting some of that re-securitization income back into fees this year?
Sure. So as you look at the Ginnie Mae portfolio, let's call it, $3.5 billion to $4 billion that will ultimately get re-securitized and sold. The pace is a little bit unknown right now is the foreclosure moratoriums keep getting extended, that gets pushed out. When we gave the original guide about fee growth in low single digits, that contemplated some degree of gain on sale coming from that portfolio. That's been pushed out a little bit. One of the things that happens on the other side, though, is as long as those assets sit on our balance sheet, we're accruing interest income. And so that's helping with the net interest income. And when we look at the potential gain on sale, it will move the percentage growth in fee income maybe a percentage point, and it would be towards fourth quarter of the year, not likely much before then, just given what we're seeing and the time it takes to get those securities considered re-performing and available for sale. So it will be back-end loaded and start to spill into 2022.
Yes. Understood. And just a follow-up question. It's great to see the trust business continuing to rebound up another 4%. I'm just wondering, can you just talk through just some of the underlying growth drivers in trust? And do you have the -- what the fee waivers were this quarter and if you expect that those would have peaked and maybe we get a little bit of help back on those going forward given the IOER changes?
Yes. Let me make sure I got all these. So I'll start with trust and then I'll talk about the waivers. So we're really pleased with how things are progressing in the trust business. There's really two main drivers of the trust fee income in the last few quarters. Our wealth team has really done a great job with leveraging the changes that they made to their platform to be out and growing new customers, which is very encouraging. And then for the existing customers plus the new ones, everybody's benefiting from the capital markets and the growth there.
And another piece of our trust business is we manage assets on behalf of retirement plans. And as we manage those assets, it's a great business because each month employees contribute more to their plan, we're signing up new employers, and the market has been growing. And so the combination of those 3 things is driving growth in assets under management, which is leading to top line.
Keep in mind, this is where I say we're seeing expense growth, that in many cases, we're a fiduciary of those. We're not the underlying asset manager. And so there's a sub-adviser fee that doesn't get netted against the trust fee income, it's in the other expense line. And so as we grow those assets under management, we like the returns in that business and we like the profit it adds, but it does cause expenses to go up at the same time. And so that's why when we say there's expense growth related to fee growth, that's one of the big drivers.
When we look at the waivers in the funds, it's in the neighborhood of, call it, at the high end, $15 million a quarter is where we are today. And what it will take to get back in there, we probably need -- I think we need Fed funds up probably closer to 50 basis points before you see that start to materialize as opposed to the first 25. So this would be another one of these things when I look forward and I think about what the potential is for the bank in addition to the things we talked about with cash and capital and the provision, obviously, the waivers is another one that can turn around. So lots of latent potential. We just need to unlock it.
Your next question is from Bill Carcache with Wolfe Research.
Good to have you back, Darren.
Thanks, Bill. Nice to be back.
As PPP balances wind down, is there an opportunity to grow your small business lending into other markets outside of your traditional footprint, perhaps by partnering with other financial technology players or doing a bolt-on type deal like we've seen from others? More broadly, the question is, I guess, just any color that you can give on the extent to which you consider these kinds of moves across any of your business lines.
Sure. And great question. Small business is 1 of the cornerstones of M&T and who we've been for years in the communities that we serve. I think the #1 opportunity that sits in front of us is people. We mentioned it on the announcement of the deal. And the more we get to know our new colleagues at Peoples and the geographies, we continue to be excited about the upside there. And that bringing our brand of small business banking to that franchise is really exciting.
And we have been watching with great interest what's been happening with nationwide small business lending. And I have the benefit of -- I used to actually run that division in a prior career here at M&T., and we've seen people come in and out of that business a lot. And one of the things that always excited me in that business was when people announced they were getting in because it's tough. And one of the things that's really important to remember about small business is that small business loans are okay business, but the real value is in the deposits and the small business franchise is actually self-funding. And so one of the tricks, and when you talk about nationwide small business lending, what we're watching is not the ability to give out money because that's easy, but the ability to make sure that you risk rate it, that you take care of fraud, which we saw some fraud in some of the PPP situations. And then ultimately, your ability to win the whole relationship, right?
And so if you think about M&T and our approach to banking, it's always been full relationship banking. And one of the keys is having -- we've always talked about the operating account of our customers, whether it's consumers, whether it's small business or middle market companies. And that's a little bit of a tougher proposition on a nationwide and remote basis, but it's something that we watch. And fortunately, we had a very strong PPP showing, and we were able to win some new relationships in our footprint. And for now, I think we'll focus primarily on capturing the upside that we see in the new markets that come with the People's combination.
Your next question comes from the line of Gerard Cassidy with RBC.
Darren, welcome back into the seat.
Gerard, thanks.
I thought for a minute, they just dropped me off with that long delay, but I'm glad you picked up. A couple of questions for you. We all -- and you referenced it in your prepared remarks about a floor plan lending and what's going on in the auto industry, and the supply issues in other industries as well. The question is this: autos in particular, you went -- there are some stories that have been written recently that maybe the auto dealers may follow what they're doing today into the future, meaning keeping a lower inventory and having higher margins. So maybe they sell fewer units, but the margins are higher. That may be a way to go. Are you hearing anything like that from your guys in the front line deal with the auto dealers that the normal inventory levels and the normal floor plan lending will come back or maybe it will not come back?
Gerard, it's a great question, and it's one that comes up often. It tends to come up a little bit more in other business circles than with the dealers. I mean, they obviously -- they love the situation that we're in right now. Because of the -- how quickly the cars are moving off a lot.
The thing that you got to keep in mind, especially as it relates to the auto business is a lot of the production is pushed by the manufacturer. And while we do a lot of floor plan with the dealers, generally, the new car production is floored by the manufacturer. And the manufacturer will actually have incentives and will buy back cars that don't sell. And so there's what's on the dealer's lot and what they'd like to do, and then there's what the manufacturing industry are part of the value chain wants to do. And I think the last SAR, if my memory is correct, printed around $15 million, and it averaged about $17 million pre-pandemic. And so that's a lot of production that's not there right now.
And one of the other elements of the production that happens is it goes from the manufacturer to the dealer, and some of the unused inventory ends up in rental agencies. And obviously, that was an industry that early on was hit pretty hard by the pandemic, but seems to be coming back. At least if any of you have tried to rent a car lately, you'll find, one, it's difficult, and two, it's really expensive. So I think as some of that production comes back, you'll see it move its way through the lots and back into the rental car companies.
So probably more insight or information than you wanted in the response, but I don't think it will stay this way because I think there are other forces at play that are unique to auto. It's a different world in recfi, where the manufacturers don't have that same power and the dealers themselves have more control over inventory on the lots. And obviously, that sector has been through a big change through the pandemic as well. But I think we will see a rebound in auto floor plan lines. Will they get -- usage, I should say. Will they get all the way back to where they were? I guess that remains to be seen. But it will be a function, I think, of the ability of the manufacturers to ramp up production.
Very good. I appreciate the insights. Coming back to your comments about your average balance sheet, and you talked about deposits at the Fed, your securities, et cetera. I don't know if you're able to do this, but when you look at your spread, I think in this quarter was 2.71%. Your margin was, of course, 2.77%. And you look at the different categories of asset yields, how far away is the current market, your incremental loan that you make or the incremental security that you purchased, to the actual averages that you're showing in the third quarter? Is it a 10, 20, 30 basis point difference on the incremental new asset production versus what your averages are showing?
So when you look at -- when I look at roll on and roll off margins, what we've seen for probably the last 6 to 9 months, this roll-on margins have been better than roll-off margins. And so that bodes well for the portfolio over the long run. But what we've also been seeing in the last few quarters is the spread, or call it abnormal spread, I don't know, is coming back closer to what it was pre-pandemic. And so you'll see over time, spread, which is really the piece that matters the most to us, coming back to pre-pandemic levels, but hopefully not below. But in the last little while, what we've seen is roll on better than roll off.
I'm cautioning a little bit because when I think about the press release and I think about the page in the press release that talks about yield and particularly on C&I, there's a lot of movement in there right now because that's where all the PPP fees are rolling in and out of, and so that's why we're getting some wild swings in margin there. And then when we look at the CRE yield, that's where some of the hedge would be. But when you take all that stuff away and just look at what's actually in the portfolio, the yields and -- sorry, the spreads over the year have been a little bit better than what they were going into the pandemic. They're trending back there. And so I would think that over time, our long-term average yield or spread would be similar to what it was pre-pandemic. And as we start to deploy some of that cash, hopefully, into things other than securities, but into supporting customers, that we continue to see a net interest margin that, in the long run, prints in the top quartile of the peers, as has been our history.
Your next question is from the line of Christopher Spahr with Wells Fargo.
So my questions are tech-related. So what's your outlook for your tech budget over the next, say, 3 to 5 years? In the past, you said tech cost is around low double digits of revenues. But given the challenging rate environment and the pending Peoples deal, I was just wondering what you think it will be post merger? And then what are the incremental investments in light of the comments you had in -- for the second quarter?
And then as a follow-up, I'll just give that now. What's the mix of this budget in terms of run versus change the bank. Before the pandemic, we kind of estimate it was around 60-40 as you focused on reducing customer friction and reducing -- improving processes.
All right. Let me make sure I got -- I'm trying to keep up with you, Chris, on the list here. So tech budget, things that we're focused on, on spending and kind of mix of build the bank versus run the bank? Did I miss anything there?
Correct. No, that's pretty much it.
Okay. So I guess I'll just start with what we saw in quarter-over-quarter. I mean, we look in that software and data processing line, there's 2 elements there. One is contracts that we have where we pay a fee based on volume. And so as some of the data processing volumes increase, so will that fee. And that's one of the drivers. And then the other 1 in there is software licenses. And what we tend to find is the first quarter is a little bit light on that, and it tends to catch up as the year goes on. Some of the licenses will grow as we prepare for people, because we'll be buying additional licenses for the people's employees, whether it's for commercial loan, RMs, whether it's for the branches or staff employees. And you might see that a little bit in advance of the merger and those would not be considered onetime expenses, but they would have been contemplated in our due diligence. And so you'll see some of that.
And then the other thing that happens is as you shift more of your technology into ASP or cloud-based environment, that you pay more in kind of monthly or quarterly fees versus the upfront investment cost. And so it's a little bit of a shift. And so that impacts the growth of the overall tech budget, right? That you'll have a higher tech budget if you're kind of building your own software versus buying off the shelf. The difference is it costs you a little bit less upfront, but then you've got the tail of the ongoing software licensing costs.
And so when we look at our tech budget and how it's grown over the last several years, it's been high-single-digit compound annual growth rate. When you look over the last 5 years, there's times when it moves up and we invest a little bit more, and times when it levels off. But I think that's a pretty good estimate of where we've been and likely where we're going. And the focus is across build the bank and run the bank, it's 60-40. I think that's a good number and a way to think about it. Whether it's 60-40 run versus 60-40 improve or build can shift in time. Some of the things that you're investing in or we're investing include data, data quality, data warehousing, cybersecurity, risk management things, which, I guess, are build the bank, but could be considered run the bank depending on how you qualify them, but they're just part of being a larger institution.
As we've noted, we're spending -- focused on things that improve the customer experience, whether it's been the mobile app, whether it's been improving the interactions that happen in the call center, whether it's providing better technology to the branch teams. We've made some big upgrades to our cash management system. We've made big upgrades to our loan origination systems to try and help the commercial RMs and make their lives easier. And so it's across those types of investments. that you're seeing us spend our dollars. And I think tech budgets are just part of banking. They're going to be there. It's hard to separate technology from banking these days. But that doesn't mean it's the only part of banking, as we'll reemphasize that we've always been a bank in our communities where our folks and the personal touch and relationship management matters. And the technology is there to complement that approach and to make our teams that much more effective with clients.
Your next question is from Dave Rochester with Compass Point.
Just a quick one on capital. I know this may be a better question for the next earnings call. But just given what you're seeing today and your higher capital levels, do you think you'll be in a good position to get a lot more aggressive with the buyback once you close the deal? The capital ratios will still be pretty robust at that point. So just curious if you're looking to get more aggressive following the close.
Yes. I guess, I would -- more aggressive, that gives me a little bit of agita, but we certainly are -- will be -- continue to be active and prudent stewards of capital. My first hope is that we go back to the conversation we were having before about loan growth and that we continue to grow customers and grow balances, and we use that capital to deploy it for -- in the sake of our customers. That said, when you look at the things in front of us with hopefully deploying some of that cash and seeing some releases of provision and get the synergies, the cost savings out of the merger, we're going to be creating more capital, and that gives us a great opportunity to go and do buybacks. And so we'll go through and put the 2 banks together. We'll put our forecast of loan growth together and uses of that capital. We'll consider the dividend and where that is within our capital governance and then what we can't deploy effectively, we'll give it back to you guys. And so I think just based on where I sit and where our ratios are right now, it's safe to say that capital deployment will be in our future.
Would you say that the chances are better than not that you wrap up the buyback that you have out there by CCAR next year?
Well, since we announced the buyback in January, and we got approvals from the Board, but we didn't actually use it because we announced the deal. And so I don't think we could use that whole thing up before CCAR next year because we'll be submitting that in April of next year. And so between the fourth quarter and the first quarter, to be able to use up that whole allotment would be pretty difficult. But we'll -- go ahead.
I was just thinking through the first half of next year.
Even through the first half, that would start to get tough. But like said, we'll be back to you guys with some more detailed thoughts on capital deployment. As we get through legal day 1 and get the 2 banks put together, at least on paper, and we can get a look at the balance sheet and confirm the forecast. But I think it's definitely safe to say, as I mentioned before, that a ramp-up in the rate of capital deployment compared to certainly the last few years is in front of us.
Sounds good. Maybe just one quick one on expenses. You guys addressed this a little bit earlier, but just trying to tie this back to the guidance you gave earlier this year for flat to less than up 1% expense growth for the year ex the deal. I know you factored in some fee growth into that guidance as well. Are you still thinking that, that guidance works at this point ex the deal? Or has the revenue performance been better than what you thought at that point?
Yes. I guess -- I think there's a couple of things. Some of the revenue performance has been a little bit better. And then it's more overall bank performance has been better, right? So when we were contemplating our accruals for incentives at the start of the year, we were expecting not as quick a rebound in the economy and maybe a little bit higher charge-offs than what we're actually experiencing. And so as we work through the year and we see better performance at the bank, we tend to set our accruals as a percentage of the bank's net income, and as the net income is increasing, we're accruing a higher amount for incentives. And so if you go back to that original guide of flat to 1% ex the Peoples and the other things, we're probably more going to run 1% to 2% ex the Peoples' deal.
Okay. Great. One last one on deposits. I hear you loud and clear when you say you're expecting deposits to stick around for a while. But I was just curious if you've seen any increased spending, whether it's amongst consumer customers or business customers of deposits in recent months?
Yes. It's interesting to see the deposits. We are seeing people spending, but it's not seeing -- not -- it's not showing up as a decrease in the balances. What's interesting is I've started to get back out again as we reopen the economy, and lucky for Gerard's question, I had spent some time with some of our dealers but a couple of our other customers, and they had received PPP loans. And I'm going somewhere with us because it was interesting to me, that they had just gotten forgiven. And I said, "Oh, well, what are you going to do with the money left?" And they said, "We have every cent still." I said, "Why? You got that to pay for these expenses." And they said, "Oh, we did that out of our normal cash flow. We just adjusted our operations. We didn't want to spend the money until we actually had the loan forgiven in case we didn't get it forgiven." And so that gives you a little bit of an insight into some of the mindset of the type of customers that we have, one. But two, that those dollars are still sitting there and available to be spent.
And so I think we'll start to see those move, but we need to continue to see movement in the economy. And from any of the customers that I spend time with and talk to, there's obviously some supply chain challenges in certain sectors. The biggest supply issue is talent and available workers. And I think that's the next thing to go, is to get more folks back on the employment rules, and then we'll start to see, I think, some more of that spending and demand for the cash out of both the consumer and the business deposit accounts.
Your next question is from Peter Winter with Wedbush Securities.
Just two quick housekeeping questions. Last quarter, Rene mentioned that there was about $90 million in swap income. And I was just wondering what it was in the second quarter and maybe the outlook for the second half of the year.
Yes. You said you had a couple. Is that your only question? Or do you have another one?
Well, just the other on PPP. How much is left in terms of amortized fees?
So in swap income, for the quarter, it was down about $14 million. And as we mentioned I think a couple of calls ago that the total for the year was going to be closer to -- for '21, close to what it was in 2020, but kind of peaking in the fourth quarter last year, first quarter this year, and then declining each quarter from there. It looks like they will be down kind of round numbers, call it, $10 million a quarter. The rest of the way, this was a bigger quarter just because of the nature of some of the swaps that went on and off. But no change to that guide.
And when we look at PPP, we look at PPP round 1, the bulk of the origination fee has now gone through and been captured in the income statement and through net interest income. But PPP round 2, while the forgiveness portals are open. We haven't really recognized any forgiveness on those yet. And so the whole second round of balances and the origination fees associated with them are still hanging out there.
Round numbers, emphasize round, maybe $100 million of income to come in. And hopefully, we'll start to see it in the next quarter. But the good news with it is it either amortizes in every month or it accelerates, but you don't lose it. And so that's out there, and that's also factored into our guide about net interest income being down low single digits year-over-year.
And this does end our allotted time for questions and answers. I'll turn the call back over to Don MacLeod for closing remarks.
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. Goodbye.
This concludes today's conference call. Thank you for participating. You may now disconnect.