M&T Bank Corp
NYSE:MTB
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M&T Bank Corp
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Welcome to the M&T Bank Third Quarter 2018 Earnings Conference Call. It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.
Thank you, Maria, and good morning, everyone. I’d like to thank you all for participating in M&T’s third quarter 2018 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 comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements.
Now, I would like to introduce our Chief Financial Officer, Darren King.
Thank you, Don, and good morning, everyone.
We were quite pleased with M&T’s results for the third quarter, which we characterized as strong in this morning’s press release. Some highlights from the quarter include continued growth in net interest income, both on a linked quarter and a year-over-year basis; fee revenues that remained steady with softness in mortgage banking and trust income seasonality being offset by higher commercial loan fees; well-controlled expenses, notwithstanding the steps we’re taking to invest some of the savings from tax reform into higher compensation for certain employees; and credit performance that is stable to a point beyond our expectations with the current run-rate of credit losses benefitting from a sizable recovery this quarter. These higher levels of profitability, both preprovision and aftertax afford M&T many opportunities to deploy capital, including through the return of capital to our shareholders. During the quarter, we increased the quarterly common stock dividend by 25% to $1 per share per quarter and repurchased nearly $500 million of M&T common stock.
Now, let’s look at the specific numbers. Diluted GAAP earnings per common share were $3.53 for the third quarter of 2018, improved from $3.26 in the second quarter of 2018 and $2.21 in the third quarter of 2017.
Net income for the quarter was $526 million, up from $493 million in the linked quarter and $356 million in the year ago quarter. On a GAAP basis, M&T’s third quarter results produced an annualized rate of return on average assets of 1.8% and an annualized return on average common equity of 14.08%. This compares with rates of 1.70% and 13.32% 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 $5 million or $0.03 per common share, little change from the prior quarter. 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 when they occur.
M&T’s net operating income for the third quarter, which excludes intangible amortization, was $531 million, up from $498 million in the linked quarter and $361 million in last year’s third quarter. Diluted net operating earnings per common share were $3.56 for the recent quarter, up from $3.29 in 2018 second quarter and $2.24 in the third quarter of 2017. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders’ equity of 1.89% and 21% for the recent quarter. The comparable returns were 1.79% and 19.91% in the second quarter of 2018.
In accordance with the SEC’s guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP including tangible assets and equity. As a reminder, the year-over-year comparisons for both GAAP and net operating earnings are impacted by the reduction in the federal income tax rates for 2018 and beyond with M&T’s effective tax rate for the first three quarters of 2018 some 12 percentage points lower in 2017.
Recall that both GAAP and net operating earnings for the third quarter of 2017 were impacted by a non-deductible $44 million payment to the U.S. Department of Justice that related to matters at Wilmington Trust Corporation prior to its acquisition by M&T and a $50 million addition to M&T’s reserve for litigation matters. Net of tax impacts, these actions reduced net income by $48 million or $0.31 of diluted earnings per common share in that quarter. GAAP pretax income in the recent quarter improved by 10% from the year-ago quarter, excluding the prior year’s increase to the reserve litigation.
Turning to the balance sheet and income statement. Taxable equivalent net interest income was $1.03 billion in the third quarter of 2018, up $20 million from the previous quarter. The comparison with the prior quarter reflects an expansion of net interest margin to 3.88%, up 5 basis points from 3.83% in the linked quarter, combined with the impact from one additional accrual day in the recent quarter. The primary driver of the wider net interest margin was the further increase in short-term interest rates arising from the Fed’s June and September rate actions, lifting overall asset yields. A big difference between this quarter and the prior two was the relationship between the Fed funds rate and short-term LIBOR. That spread widened to a lesser extent than in recent quarters, resulting in a margin improvement, consistent with our previous estimates.
Average loans declined by $274 million or less than 0.5% compared with the previous quarter. As has been the case for the past several quarters, the continued planned runoff of the mortgage loan portfolio acquired with Hudson City was the main factor. The other higher yielding loan categories grew about 0.5% in the aggregate.
Looking at the loans by category, on an average basis compared with the linked quarter, commercial and industrial loans were essentially flat compared with the linked quarter with the usual seasonal third quarter slowdown in dealer floor plan balances, offsetting growth in others C&I loans.
Commercial real estate loans were also effectively flat compared with the second quarter. As noted, residential real estate loans continued the expected pace of pay down. That portfolio declined by some 3% or approximately 14% annualized, consistent with previous quarters.
Consumer loans were up about 2%. Continued strength in recreation finance loans complemented modest growth in indirect auto loans. The ongoing longer term trend of softness in home equity lines and loans continued to offset the gains in the indirect portfolios.
Regionally, the pace of commercial loan growth is fairly consistent with no particular region standing out, either positively or negatively. The notable exception is New Jersey where we’re seeing decent growth over what remains a modest base.
On an end of period basis, loans declined some $1.1 billion are just over 1% compared to the previous quarter. Excluding residential mortgage loans, the other loan categories declined by about $500 million in the aggregate, which was almost entirely due to a decline in commercial mortgage loans held for sale at September 30th, compared with June 30th.
Average earning assets also declined by about 0.5%, or about -- excuse me, $376 million, which includes the $274 million decline in average loans. Average investment securities declined by $425 million, notwithstanding the fact that we did purchase from short duration trip treasury securities during the quarter.
Average core customer deposits which exclude deposits received at M&T’s Cayman Islands office, CDs over $250,000 and brokered deposits declined an estimated 2% compared to the second quarter. This primarily reflects the decline in commercial escrow deposits, as noted in prior quarters, as well as a seasonal decline in municipal money market balances.
Average time deposit balances declined by 3%, a slower pace than in recent years. The increase in market rates has contributed to higher growth in long duration CDs, while the runoff of acquired Hudson City time deposit balances continues to slow.
Turning to non-interest income. Non-interest income totaled $459 million in the third quarter compared with $457 million in the prior quarter. Mortgage banking revenues were $88 million in the recent quarter compared with $92 million in the linked quarter. Residential mortgage loans originated for sale were $545 million in the quarter, down about 15% from the second quarter. Total residential mortgage banking revenues including origination and servicing activities were $59 million, down very slightly from $61 million in the prior quarter.
During the third quarter, we entered into a subservicing contract which brought an additional $9 billion of servicing assets. We expect to see the full run-rate benefit to mortgage banking revenues from this contract during the fourth quarter. Commercial mortgage banking revenues were $29 million in the third quarter compared with $31 million in the linked quarter, reflecting some of the same pressures on loan margins that balance sheet lenders are seeing.
Trust income was $134 million in the recent quarter, compared with $138 million in the previous quarter and 7% above the $125 million earned in last year’s third quarter. Recall that results for the second quarter included some $4 million of seasonal fees earned for existing clients in preparing their tax returns, which did not recur in the third quarter.
Service charges on deposit accounts were $109 million, improved from $107 million in the second quarter, largely the result of seasonal factors. Losses on investment securities were $3 million in the quarter compared with the $2 million gain in the second quarter. As we’ve noted previously, this volatility comes as the result of changes in the fair value of our GSE preferred stock, which prior to 2018 have been recorded in accumulated other comprehensive income. Included in other revenues are certain categories of commercial loan fees including letter of credit and loan syndication fees, which improved sharply compared to what we saw in both the first and second quarters.
Turning to expenses. Operating expenses for the third quarter, which exclude the amortization of intangible assets were $770 million, unchanged from the previous quarter. Salaries and benefits increased by $13 million to $431 million, reflecting in part the impact from our plan to invest a portion of the savings from the lower federal income tax rate towards higher wages for certain employees as well as a modest headcount increase.
Other cost of operations declined by approximately $18 million from the second quarter, reflecting in part lower legal related expenses. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 51.4% in the recent quarter. That ratio was 52.4% in the previous quarter and 56% in 2017’s third quarter.
Next, let’s turn to credit. Credit quality has largely been in line with our expectations. However, this past quarter’s results exceeded even our expectations due to a sizable $13 million recovery on a previously charged off commercial loan. Annualized net charge-offs as a percentage of total loans were 7 basis points for the third quarter, down from 16 basis points in the second quarter. The provision for credit losses was $16 million in the recent quarter, which matched net charge-offs. The allowance for credit losses was unchanged at $1.02 billion at the end of September. The ratio of the allowance to total loans increased slightly to 1.18%, reflecting the lower level of loans at the end of the quarter, as well as the ongoing mix shift in the balance sheet.
Nonaccrual loans were $871 million at September 30th, up from $820 million at the end of the second quarter and remaining within the range seen over the past several quarters. The ratio of nonaccrual loans to total loans increased by 7 basis points ending the quarter at exactly 1%, also impacted by lower quarter-end loans balance.
Loans 90 days past due on which we continue to accrue interest, excluding acquired loans that have been marked to a fair value discounted acquisition, were $254 million at the end of the recent quarter. Of these loans, $195 million or 77% were guaranteed by government related entities.
Turning to capital. M&T’s common equity tier 1 ratio was an estimated 10.44% at the end of the third quarter, compared with 10.52% at the end of the second quarter, reflecting strong capital generation during the third quarter net of share repurchases, as well as the impact from a modest end-of-period decline in risk-weighted assets. During the third quarter, M&T repurchased 2.8 million shares of common stock at an aggregate cost of $498 million.
Now, turning to the outlook. Going into the final quarter of 2018, our outlook for the year remains consistent with the commentary we’ve offered previously. As we highlighted at a recent investor conference, the soft commercial lending environment, combined with our mortgage loan portfolio runoff, makes it difficult to grow loans on a full-year average basis. That said, we do see the potential for growth in the coming quarter compared with the last, aided by seasonal strength in the dealer floor plan loans.
We continued to anticipate improvement in the net interest margin for the remainder of 2018, consistent with our prior guidance. Throughout 2018, we have seen the margin improvement from each fed fund gradually decrease as markets normalize and deposits become more expensive, behaving in a manner more consistent with prior cycles. We will offer our updated thoughts on the net interest margin and the outlook for growth in net interest income on the January call after we report our full-year results.
Residential mortgage origination activity will remain challenged by higher long-term interest rates, but the mortgage subservicing contract, I mentioned previously, will provide a partial offset to the revenue pressures that come with the natural aging of the servicing book. The outlook for the remaining fee businesses remains little changed.
The expense outlook is also unchanged. We continue to expect low, nominal, annual growth in total operating expenses, excluding the first quarter’s $135 million addition to the reserve for the Wilmington Trust Corporation shareholder litigation.
The growth rates of the individual expense categories may vary from quarter-to-quarter, as we continue to manage across the bank’s total expense base. As a reminder, our outlook does reflect our view that the FDIC surcharge on large banks will end in the fourth quarter of 2018.
Our outlook for credit also remains little changed. The sizable recovery that benefited the third quarter results was indeed a positive event, but one that we don’t anticipate repeating next quarter. We also anticipate continuing to execute our 2018 capital plan given our strong profitability and capital ratios.
Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future.
Now, let’s open up the call to questions before which Maria will briefly review the instructions.
Thank you. [Operator Instructions] Our first question comes from line of Ken Zerbe of Morgan Stanley.
Thanks. Good morning.
Good morning, Ken.
I guess, maybe just starting with deposit costs a little bit. I understand, you guys have a really low deposit beta relative to many other banks we’re seeing. So -- but, I was hoping you could just talk about, like, where are you seeing pressures? And, if you are -- whether it’s specific markets, certain products, is there any way that’s getting incrementally more challenging on the margin? Thanks.
Sure, Ken. I think, when we look at our deposit costs and the change quarter-to-quarter, it’s not any one region in particular, but the place where we see movement, varies by segment. So, in our commercial portfolio -- or sorry -- well, start with commercial. In the commercial portfolio, it’s really been in interest checking and in non-interest checking in the form of earnings credit rates. And so, we started to see some pressure there. We have some balances in commercial that are linked to an index. So, as the index moves up, the price moves up there. But, we continue to see corporate treasures paying a lot more attention to their excess balances and considering moving them to interest checking, sometimes into on-balance sheet suite and in the end to off-balance sheet suite as well. But, we’ve been very active with our customers, making sure we’re out working with them to help them put their excess balances to effective use.
In the consumer space, we’re seeing behavior that’s fairly typical, as you work your way through a rising rate cycle. The main event so far has been balances moving from money markets, savings accounts into time accounts. And as we mentioned in the, I guess prepared comments that in -- within the CD book, we’re starting to see people lengthen out the terms that they’re signing up for. So, early on, if you probably looked about a year ago, we would have said, most of the action was in the one year CD space. And with the changes in the curve a little bit of late, we’ve seen a little more activity in the 18 and 24-month space. And so, as you’re seeing a little bit of remixing where balances are shifting from money market into time. But generally, both of those are pretty consistent with what our prior experience has been as well as what we tend to model when we do our ALCO runs and we put in our asset sensitivity in the K and the Q. The one thing that’s probably a little bit unique to us perhaps compared to some of the others is just a percentage of our deposit base that fits in non-interest bearing and operating accounts, fee based business or consumer and obviously that helps to mitigate to some extent the impact of rising rates.
Okay. That helps. And then, last question, just in terms of I guess capital returns. Given that your loan growth is let’s say incrementally gotten a little bit lower, hence your revised guidance that it’s hard to grow the average balances. At what point would you go, or can you go back to the Fed and ask for maybe a revision to your capital return approval or is that even an option or something that you guys would consider? Thanks.
So, technically, the option always exists. But, you can go back to the Fed and do a resubmission after you’ve gone through and done your initial CCAR asking and been approved as well as an update like we did last year after mid-cycle. When we look at where things are right now, this is one quarter that was maybe a little bit slower than we anticipated. Fourth quarter, things usually pick up. And we’re not materially off where our capital plan was. And when you combine that with still waiting for a little bit of clarity on how the regulations might change, I would suggest that it’s probably a low probability that we would go back this year as we did last year.
Our next question comes from the line of Matt O’Connor of Deutsche Bank.
As you guys talked a little bit about kind of the loan growth outlook on a near term basis here and it seems like most of the optimism is based on maybe seasonality. As we kind of look more medium term, can you talk about your confidence in growing loans and maybe just see overall balance sheet because obviously, the securities balances have come down, you’ve got some capacity to buy there if you wanted to and also to expand. So, maybe just talk about the medium term outlook for loan and balance sheet growth and then if there is any kind of added thoughts in the securities portfolio that are worth mentioning?
Sure. I’ll start with the securities portfolio and then work to loan growth. The securities portfolio, really our preference is to invest our deposits into the loans with our customers. The securities portfolio really is meant to help with our liquidity coverage ratio. And so, depending on the deposit balances as well as the mix of loans, that will impact our liquidity coverage ratio requirements, and we’ll set our securities accordingly. And when we think about what we need for the liquidity coverage ratio, we think about not just what’s in the securities portfolio but what’s in cash. And the combination of those two is what we look at. And the securities portfolio, a little bit more of it of late is sitting in cash than in securities just because when we look at the overnight rate compared to the one year treasuries, there’s not enough of a premium to make it worth stepping in.
If you go to the loan book, when we think about the loan book, it’s really important to take our portfolio and separate out the residential real estate portfolio from the other asset categories. So, we expect to continue to see run off in the residential real estate portfolio. Given its characteristics, we don’t see any reason to believe that the pay down rates that we’ve been seeing for the last several years is likely to change. And that’s kind of been around 13% to 14% annualized. The only thing that will happen obviously is as that portfolio gets smaller, the dollar amount of decrease will also get smaller. And therefore, the amount of growth needed in the other portfolios to create absolute loan growth will get a little bit easier.
In consumer loans, we’ve been pretty consistent with our positioning in indirect auto as well as
rec fi and anticipate that that will continue, obviously depending on the strength of the consumer, but right now have no reason to believe that that will slow materially.
And then, in commercial real estate and C&I, they’ve been relatively flattish the last couple of quarters actually. And I think that that performance is a little bit masked by the overall loan decreases. And really the challenge there has been payoffs and paydowns. And the place those are coming from differs by the portfolio. So, our commercial real estate portfolio, we’re seeing some paydowns of construction balances where construction projects are coming to completion, and then we see some permanent financing going into the insurance companies. Now, we have seen a little bit of movement in our construction commitments, which gives us a little bit of optimism for the next 6 to 12 months. But those balances obviously build as projects move through their completion cycle and so, we will be watching that.
In the C&I portfolio, obviously we talked about the seasonal factors but we continue to see active in the floor plan business. We see some activity in healthcare and in certain segments of healthcare, and we’ve seen some increase in commitment. So there’s -- there are some reasons to be optimistic as we look forward. And really the wildcard is some of the things that are little bit outside of our control. And that’s activities around private equity which has really kind of been the issue in C&I lending where we see private equity coming in and buying out some of our customers and injecting equity and/or coming in and putting that on top of our with their loan funds. And so that’s a phenomenon that’s likely to continue for little longer. But, what we’ve learned through time is to be patient and to not reach and to be there for our customers. And that’s what we’ve been doing for the last 12 to 24 months and will continue to do.
Our next question comes from the line of John Pancari of Evercore.
Related to that loan growth commentary you just gave, that’s helpful. Just wondering, how would you view the 2019 trajectory in terms of growth. I know, you implied, it’s tough to grow ‘18, but are we looking at something that could be in GDP range for a ‘19 excluding the runoff remaining in the resi book?
John, we’re going through right now finalizing our thoughts on 2019 and putting our plan together. We’ll be back in January with more specifics about how we see 2019 unfolding. So, I think, it’s a little premature to comment. We’ll also -- our thoughts on 2019 will be impacted to some extent by the fourth quarter that we’ve seen in years go by, some substantial movements can happen in the fourth quarter and can have a big impact on your start point for 2019. So, I’m going to defer my thoughts on that until January.
Okay. All right, got it. And then, on the on the margin, just a couple of quick things here. What is the impact to the margin that you expect from the incremental moves in -- by the Fed? So, for each -- for the next 25 basis points Fed move, what does that equate to by your latest math in terms of a margin benefit? And then, separately, curious by your updated thoughts on the loan to deposit ratio, I know it’s around 97.5 here, moved up a little bit. Where do you think that could go just as you leverage other parts of your loan book to fund new loan originations? Thanks.
So, for net interest margin, we’re not changing our expectations that for a 25 basis-point increase that it would be outside of the 5 to 8 basis-point range. That number, when we talked about that at the start of the year was an average for the year for each 25. What’s been true is it started out at the higher end of that and in fact above, early on in the year and it’s come down towards the lower end of that more recently as we start to see deposits, pricing look more like prior cycles. And so, for the rest of the year, that’s kind of where we see things going. As we go into 2019, again, we’ll be updating our models and looking through our thoughts on in particular deposit reactivity and we’ll give you new guidance at that point. I should wrote down your other question.
It was the loan to deposit ratio.
The loan to deposit ratio, right. Thanks. Sorry. So, the loan to deposit ratio has kind of hovered around 97%, 98%, 99% each quarter for the last three, depending on combination of some of the held for sale balances at the end of the quarter, or what happens during the quarter, as well as the pace of loan runoff and originations. And kind of the combination of those factors, we expect to be in play for the coming several quarters. Hard to foresee us getting down to a 95% ratio, although you never say never; equally hard to see us going meaningfully over 100%. I expect we’ll be in this range for the foreseeable few quarters but something else that we’ll look to update over the -- in January.
Our next question comes from the line of Frank Schiraldi of Sandler O’Neill.
Good morning. Just a couple of questions. I wanted to ask about the rate of runoff in resi. I mean, I believe most of that Hudson City production is variable rate. So, I’m not sure rates are doing anything to it. But just wondering or if you could remind us on your thoughts on how that rate of runoff changes, if at all, in coming quarters.
Sure, Frank. There is a mix of different things within that Hudson City book. There are some 5 ones and 7 ones, and as you pointed out, rates aren’t impacting them. There are some jumbos in there, as well as small portion actually of good old all day. And what we’ve seen over the hikes since 2015 is really not much of a change in the prepayment speed or payoff ratios in that book. And so, we’re not anticipating a material decrease, probably down slightly, maybe a point ‘18 over ‘17 and if rates continue on their trajectory, maybe another point reduction in 2019. The bigger factor there really is just the size of the portfolio and what -- how much in dollars runs off each quarter as much as the rate of decline.
Got you. And then, just you already mentioned, you talked about on the deposit side about the amount of balances sitting in non-interest bearing. I think, that’s a focus of investors this quarter’s non-interest bearing and some contraction we’ve seen at other banks. It looks like your balances were pretty flat linked quarter. So, just wondering if there is any noise there or just if you could talk little bit about the ability to defend those balances or if you’re starting to see pressure there?
So, for the non-interest bearing deposits, it’s a keen area of focus for us whether that’s within our consumer portfolio where we actually did see some checking account growth in the third quarter, which was nice to see, as well as in our small business and in our commercial customers. And that’s the number one thing we focus on everyday in our calling activity because that’s really the anchor relationship product, no matter which business we’re in. And so in the commercial space, our teams have been out talking to customers, helping them optimize their cash, which obviously will mean some of that will move into interest bearing, be it on-balance sheet suite, on-balance sheet interest checking, but also some remains in the operating account.
For our small business customers, that tends to be a place where operating balances tend to say and as a category where deposit balances typically exceed loan balances. And that continues to be the case, and a place where we’re strong. When you look at our market share in SBA across our footprint, we tend to be one, two, or three position in most of those markets, and it’s an area of focus that we’ll continue to spend time on. And then, as we mentioned in consumer, there is obviously some excess balances in checking accounts today. And some of that you might start to see move but not likely until there is more movements in savings rates and money market savings rates. We’ve seen a little bit of that in the banks, but not much. Most of that action’s been in the non-bank space in the online savings account space. So, we see a little bit of migration. But, we’re keenly focused on it. We expect that it will decrease slowly over time just as rates move, which is pretty normal, but we’re not expecting on mass exodus of funds.
Our next question comes from line of Ken Usdin from Jefferies.
Hey, thanks good morning, Darren. It was nice to see flattish trajectory on the expenses this quarter. Just wondering if you can give us a little bit more color, first on just what led the increase in salaries and benefits on one side. And the other, you mentioned I think the legal and professional fees came down another, and if this is a more kind of a normal starting point for that as that has, looks like, started to tell off?
Sure, Ken, happy to discuss those. For salaries and benefits, there’s really two main drivers that are of the increase that would be sustainable. Number one is the increases that we’ve made to compensation for many of our employees, which was really an outgrowth of the tax reform. We were one of the places that didn’t actually do a one-time bonus at the end of last year, opting rather to invest in permanent increases to the comp for many of our employees that included raising the minimum wage to $14 up to as high as $16 an hour depending on the geography. And that went in, in stages. Some of it went in, in the first half of the year and the second step, when it became effective, starting July 1st. So, you started to see that come through in the third quarter.
The other thing that happens for us is, we have an influx of new graduates into our develop -- management development programs usually in the summer. And so, you get a little bit of an uptick in headcount and salaries there. Some of that will come down. And the other part where were spending a lot of time is with our professional services in the technology realm. And it’s our objective to over time switch much of the professional services or some of the professional services, I guess, I should say, from kind of contractors to permanent on-staff employees. So, we’ll see some headcount growth there.
The 13 million was probably a little bit higher than what would be a more normal rate; there is probably about $3 million or $4 million of what I would call seasonal expense in there that likely won’t repeat, but the movement is definitely up from where we were in the second quarter.
On the professional services side, there is always some movement in that category from quarter to quarter. This quarter, we saw substantial decrease, mainly because we had such a big quarter in the second quarter in terms of litigation related legal expenses. Those have come down fairly dramatically since then. And then, one of the other big professional services expenses is some of the IT help that we have and that can bump around a little bit from quarter to quarter. But, where we were this -- in the third quarter is probably a reasonable starting point, maybe I’d add a few million dollars to that. But, I think it’s reasonable starting point for going forward.
Okay. Got it. And then, just bigger picture, I think you’ve talked about just continuing to expect this quarter nominal amount of expense growth as you go forward, and you mentioned both. Can you balance, as far as -- you know you’ve mentioned the needs to invest, but you’ve also mentioned self-help stuff, whether it’s from branches or some of this decline in legal, et cetera? Can you just talk us through some of the moving parts of that and your ability to continue this nominal type of growth rate in expenses? Thanks.
Sure. So, what you saw a little bit this quarter in the expense line item is kind of the explanation or story we’ve been talking through for the last several quarters. The things will remix on the income statement. So, we saw that the professional services came down, but the salaries and benefits went up. As we change the mix of contractors to staff, those two line items you’ll see some shifts. And when we talk about investments in technology, some of it you see on the line that is professional -- sorry, outside data processing and software. And that’s the software piece but oftentimes the expense shows up in the salary and benefit line because that’s where a lot of the teams are that are doing the work of installing and adding any customization or integration, shows up on that salary and benefits line. And so, while there will be some increases in what we invest in our technology teams, those over time can be offset and have been in the past by reductions in the branch network, which will affect both the furniture and equipment expense line item as well as the salary line item.
So, when we think about the bank and we think about our expense trajectory, we look across the whole $3.2 billion of expenses. And we’re always thinking about how investments that we made yesterday can be monetized today to help offset the investments we’re making today for the future. And you see some of that move from time-to-time. You’ve seen us invest a little bit more this year in advertising and promotion to drive some customer growth, which we talked about on the consumer checking side. So, we’re always looking across the various categories. And as we mentioned, we’ll see some move from quarter-to-quarter. But overall, we focus on the bottom line. And part of what’s helping us as we looked forward was knowing that some of the legal-related expenses would come down as things got settled, as well as the FDIC surcharge will go away. So, we’ll be looking to invest some of that in the franchise.
Our next question comes from the line of Steven Alexopoulos of JPMorgan.
I wanted to start to follow up on Frank’s earlier question and the comments you gave that you don’t expect the mass exodus of noninterest bearing. So, if we think about the $32 billion and you’re working with your treasures now, how much do you think could be a risk to migrate out into alternatives over time?
I guess, my starting point to think about that Steven is to look at where we were before the crisis and what percentage of the liabilities of the bank sat in noninterest bearing deposits. Now, obviously, we’ve had some growth in customer since then. So, the absolute dollar amount of where we end up, post normalization, if you will, should be higher. But, we anticipate that the mix of noninterest bearing to interest tracking to money market and savings to time would look pretty similar to where we were then. And the only question mark will be, how much ends up off-balance sheet and off-balance sheet suite. And I’ll be off by a little bit of my recollection is that during that time period, about $3 billion to $4 billion came on-balance sheet from off-balance sheet.
Okay. That’s very helpful actually. Just one separate question. Can you give some color on the C&I loan growth in the quarter, if you exclude the seasonal decline in dealer that you saw?
Yes. If you exclude the seasonal dealer decline, which is actually a little bit less this year than what we’ve seen in prior years, dealer decline this quarter, I think was around $150 million to $200 million, which is a little bit less than what we saw in the third quarter of last year. I’m not sure -- I suspect that has a lot to do with how vehicle sales have kind of slowed down a little bit that the current model year isn’t going off the lot quite as quickly. But outside of that, we’ve seen some increases, in particular in the healthcare segment, really in assisted senior living and acute care. And I guess, given demographics of the population that probably makes some sense that you see some of that. Over time, those stabilized projects also can lend themselves to fee income because often times those also get taken over by some of the capital markets or the insurance companies. But that’s some of the places where we’ve seen some increase that offsets the floor plan, at least this quarter.
Our next question comes from the line of Gerard Cassidy of RBC.
Good morning, Darren.
Good morning, Gerard. You’re Red Sox. Keep it up.
There you go, absolutely. Can you share with us, going back to -- your comment just a moment ago about non-interest bearing deposits to total deposits. And when we look back over 20 years, the numbers today are considerably higher than what you had even before the financial crisis, as a percentage of total. And I’m assuming that’s because of acquisitions of companies like Wilmington Trust, and if you go back even further, Keystone Financial. So, on an apples-to-apples basis, the percent today around let’s say the mid-30% range. Is that equivalent to where you were when you kind of do a pro forma with the deals that you’ve done over the years?
If you look at the recent deals and the most two most notable being Hudson City and Wilmington Trust, they brought a different deposit profile. So, I think going back over 20 years is probably not likely to repeat itself. I think, we got to look at a little bit more like where we were going into the crisis. And when I think about Wilmington Trust and what it brought, definitely a nice base of non-interest bearing deposits, because we have a number one share in the State of Delaware in consumer and small business, and those tend to be drivers of non-interest bearing deposits, but it also brought a big private banking book. And that tends to skew more towards interest checking and money market savings. So, that’s kind of an offset there that would look a little bit different than what we would have looked like prior to merging with Wilmington Trust. And then, at Hudson City, Hudson City obviously is very-skewed towards interest-bearing, in particular time accounts, but also money market and interest checking. And so, those will -- because of the nature of those balances, they would tend to decrease non-interest bearing as a percentage of the portfolio.
So, I am thinking about run-rate maybe through 2019 and into 2020, I would start to look at where the bank was in kind of 2008 and 2009, and then adjust for time deposits being a little bit bigger percentage today and going forward as rates change and balances migrate in there and a little bit more in money market due to private banking customers. And then, interest-bearing being the rest -- sorry, non-interest-bearing making up the rest. And I guess, I would expect that that would be -- I haven’t looked at the math but in that range of 25% to 30% of what our deposit balance base might look like.
Very good. And then second, a follow-up question. If I recall, I think you guys introduced Zelle recently to your customers.
We did.
Two things. Just, how did the rollout go? Are you seeing client engagement, or how has been client engagement? And second, technology spending is obviously critical. Do you find that if you’re not the first one to have the latest bell and whistle that it’s still okay, you’re not losing customers because you’re not the first one in line to get the latest and greatest?
So, I can answer the second part easier than I can answer the first. And the answer is, we’ve been both the first and not the first, and it hasn’t made a material impact in our customer acquisition rates or retention rates. Back when Apple Pay came out, we were actually one of the first banks in on Apple Pay. And the adoption was, as we know, slow and it didn’t move people into or out of our checking account. With Zelle, which has been live now for about two weeks, we’ve been pleased with the number of signups that we’re seen and the level of activity. I don’t have exact numbers for you, Gerard on how that’s moving, but it’s moving in a nice direction. And we were not the first to implement Zelle, but we’re certainly not the last. So, I would characterize it as more towards the middle of the pack, maybe towards the middle end. But, we have haven’t seen a meaningful uptick in customer acquisition since and we haven’t seen a meaningful decrease in acquisition or conversely an increase in attrition with the delay. Our take on it, Gerard, is that customers look at the bank and they look at the total package of benefits that are offered and that’s things like Zelle, it’s things like mobile check deposits, it’s the quality of the mobile apps. It’s how many branches you have; it’s whether they are in good shape; it’s access to ATMs and the call center and not to mention the product’s feature, functionality. And it’s really the combination of everything. And you need to be collectively competitive. And so, any one factor in a moment in time generally doesn’t tend to move the needle positively or negatively. But over time, if you’re not competitive, then, that’s when problems occur.
Great. And just quickly, what’s the duration of the securities portfolio now?
It’s just about three years. It was a little shorter than that. But as rates went up and some of the mortgage-backed securities in there extended, the duration’s gotten a little bit longer.
Our next question comes from the line of Saul Martinez of UBS.
First, can you just give us an update on CECL preparations, where you’re at there, and any thoughts on when we might actually see an estimate of the financial impact, and what part of your portfolio also just more susceptible to reserve increases, or conversely, the reserve releases? It does seem like you’re pretty well reserves in part to your portfolio, even under the current loss [ph] model.
Sure. So, we will continue to work through the CECL process from the work we’ve done and talking to our peers, as well as talking to the regulators. We’re pretty much in line with where everyone else’s in those preparations. It’s our objective to start to run somewhat in parallel in 2019, in terms of making sure that CECL process is up and running and ready to operate on a quarterly basis, given some of the technical aspects of it compared to the current AOL process. But, at this point, we don’t have an estimate on what we expect the impact of CECL to be. I guess, in the grand scheme of things, given our reserve and where it is and when you think about it in relation to capital, you’d have to have a pretty meaningful change in your allowance to have a big change in your capital ratios. And so, as we think it through and look at it, we’re not anticipating a meaningful change in either direction to our capital ratios as a result of CECL.
Got it. That’s helpful. And if I could just follow up on deposit costs, you’re obviously still outperforming peers in terms of betas. And as you’ve highlighted that the Hudson City runoff, the benefits from that are tailing off, but, is the expectation still that you will be an outperformer in terms of deposit betas or do you feel like we’re getting closer to a point where maybe your betas start to converge with the peer group?
We’re expecting that the cost of deposits is going to increase from here forward. And you saw this quarter, time deposit costs increase I think about 12 basis points. And when we look at the cost of our time deposits in our legacy portfolio and our Hudson City portfolio, they’re identical. So, from our perspective, those two portfolios are now merged. And we priced them -- we priced the whole network the same way, there’s nothing special for New Jersey anymore. So that’s what will start to move in concert. And as we mentioned, we expect to continue to see migration from money market savings balances into time. And the rate of increase in the time costs will be a function of mix, and how much goes into two-year CDs or even three-year depending on where Fed funds go, versus what stays in one-year or less.
As we mentioned, in the commercial space, we have a number of balances that are related to the index and then obviously those will move exactly with the index. And then, the other costs of deposits will move in lockstep with the markets. We operate our bank obviously in competitive markets, and we have to maintain our pricing equal to that of our competition. And so, the rates of increase did go up a little bit this quarter, probably going to go up a little bit next quarter and over time, I think will start to normalize to what we’ve seen in terms of reactivity that we’ve seen in prior rising rate cycles.
As we mentioned, I think the thing that is a little bit different for us compared to maybe some of our peers is just the mix, and the things we’ve been talking about before about the mix of noninterest bearing deposits in the overall book, and that helps minimize the overall cost of our deposits.
Have you given an estimate of where you think the terminal beta on your interest bearing account to trend to as we get closer to the more normal -- or the terminal Fed funds rate?
We haven’t talked about that and don’t have a thought on at this point.
Our next question comes from the line of Brian Klock of Keefe, Bruyette & Woods.
Good afternoon, gentlemen.
Good morning. Good afternoon. I guess, it just crossed.
It just crossed, Darren. So, because of that, I’ll keep my questions pretty short here. I guess, just to follow up on the dealer floor plan discussion from earlier. Can you remind us what the size of that portfolio is and what was the growth that you saw in the fourth quarter of last year from the third quarter?
Brian, I got to be honest with you. I don’t know the growth rate that we saw quarter-to-quarter in that portfolio off the top of my head. The total balances of floor plan are about $3.5 billion to $4 billion, and obviously those are on line. The increase or decrease certainly from third quarter to fourth is much a function of what’s going on in the industry and delivery of models as well as how fast the rolling off the lot. So, I don’t have an exact number for you on how much those might grow. If you think about what came off this quarter, it’s about $150 million, $200 million. We expect that that will go back on and a little bit beyond that. So, I guess, I’d be thinking kind of $200 million to $300 million increase from where we ended the quarter.
Great. That’s helpful. Thanks, Darren. And then on the mortgage banking side, thanks for the details that you gave earlier. So, it looks like in the quarter versus second quarter, mortgage banking was essentially flat, you said around $61 million. And so, the last quarter you had a pretty decent commercial real estate gain on sale. So, I guess that implies that somewhere -- you had a much smaller ones in servicing fee and commercial real estate somewhere around $13 million, $14 million a quarter. So, do you think that going forward, we’re going to be more in the kind of average 26, 27 for the first half of the year, and it’s below for that for the third. So that’s something you think we should expect to be in the mid-20s going forward or how should we think about the commercial real estate side of it?
So, I guess, if you think about this quarter versus last, total mortgage banking revenues were down about $4 million. That was about $2 million in residential side, both combined between origination servicing and about $2 million on a commercial side. The consumer side is a little more predictable, because a bigger chunk of our revenues is from servicing, and obviously the servicing portfolio is the declining asset, so it slowly marches down. We mentioned that we added about $9 billion for servicing over the course of the quarter; and so, the full impact of that will show up in the fourth. On the commercial side, there tends to be a little bit more volatility. History has suggested that that business tends to be backend loaded or weighted, meaning, we tend to see historically a little bit more volume in the second half of the year than the first half of the year. What we’ve seen and saw this past quarter in particular was a little bit of a slowdown in volume as rates were going up that people were reticent to lock with some of the movement. And the other thing, we saw a little bit of a remixing between Fannie and Freddie, which caused a little bit of margin decrease, which lowered the revenue we received.
The good news is, is the mix also shifted to a space that’s little bit more capital friendly. So, not surprisingly, as the yields go down, so do the capital requirements to support it.
That’s helpful. And I guess, just on the subservicing, if I calculate the math right on the entire servicing portfolio, you’re getting about a 26 basis points fee, subservicing usually something less, so should we be thinking something like $3 million to $4 million of income a quarter from the new subservicing book for a full quarter or is it something little higher than that?
I would think it’s little bit less than that because usually it’s the way subservicing works, you get higher rates, you’ve got MSR and you own the asset and a little bit lower, if your just the sub-servicer. So, I would be more in the range of 1 to 2.
1 to 2, got you. I’m a Bill’s fan, remember. So, I’m optimistic all the time.
We appreciate that; hard to be these days.
Our next question comes from the line of Christopher Spahr of Wells Fargo.
I just have -- want to take a step back and look at the overall tech budget that M&T has. Maybe you can talk about how does it -- of the $3.2 billion of annual expenses today, how does it compare to like as of the first full year of merger close in 2016, and what do you think it’s going to be in 2020?
If you look at our spending, our total spending on tech, as a percentage of our operating expenses it’s increased each year for the last four. If you look at our compound annual growth rate in our technology-related spending for the last four years, it’s up kind of 8% to 10% a year, on average. And we see that rate continuing into -- or we see growth continuing into 2019 and 2020, but we see the rate actually starting to moderate a little bit. And especially as we remix the talent that is doing the technology work that that will help moderate that expense growth. But, what it doesn’t mean is that it slows down our ability to invest and deliver new product and capabilities for our customers and for employees. So, we are in an industry that is very tech-driven and we’re committed to making sure that we’re investing in the franchise at a pace that keeps up with the demands of our customers and employees, but manages the risk of how fast to do it.
And as a percent of the total expense base, I know you talked about some of it is paid in salaries, you have outside data processing and some professional services.
Those are the two primary line items which you see the tech expenses in.
Okay. But, you don’t break it out kind of as a percent of total or is it dollar amount?
We have -- we don’t know.
Okay. And then, finally, just kind of seeing the progress you’re making in tech, can you give us the percent of customers that are mobile and digital, or number or percent?
From a digital perspective, that number is quite high. The number of customers and the percentage of customers that are online is well over 60%. When we look at those that are mobily active that number continues to grow each quarter, and right around 30% of the customer base, which is up from about 25% last year. So, steady growth each month and each quarter.
Our final question comes from line of Kevin Barker of Piper Jaffrey.
In regards to some of your market that you mentioned, I noticed that you said New Jersey was pretty strong. Are you seeing growth in any other markets or are you looking to expand outside of your existing footprint, more specifically up in New England?
So, we have -- expectation is to grow in every one of our markets, by and large. No one gets a free pass at M&T. If you look at our expectations based on our market share, we would expect higher growth rates in New Jersey, in Philadelphia, in Baltimore, Washington, perhaps in the surrounding areas of New York City, just given our share there. As you point out, we have office in Boston that’s been officially open for just about two years now. It’s a combination of our Wilmington Trust franchise as well as our core banking franchise. And we’ve been making inroads there. But, the basis of our expansion is always the same. And it starts with our customers. And we follow our customers into new geographies and take care of them. Oftentimes, our real estate customers lead the way and we follow them into those geographies. And then, once we’re in there, we get involved in the market, like we normally do, both from a philanthropic perspective as well as being on boards and getting to know folks in the community. And that’s usually how we expand from there that we’re very selective in how we grow that we never compromise on our credit standards, as we do that. But, those are markets where we are definitely looking to expand, and Boston and Massachusetts is certainly on our radar screen.
When you look at that opportunity and potential expansion outside your existing markets or even like where you have smaller presence, there’s been obviously a lot of changes that have been going on, specifically in the Boston market with Chase coming into that market. Does that change your perspective on being a potential growth opportunity?
Can you ask the question again, is it because Chase coming into Baltimore, we’re more interested in growing somewhere outside of Baltimore?
I’m saying Chase coming in -- JPMorgan coming into Boston in particular and some of the changes that are occurring within Boston. I mean, you obviously have very strong presence in Baltimore already.
Sure, yes. So, obviously, Baltimore, our focus will be on protecting our customer base and continuing to grow and be meaningful and relevant in that geography, which for us is basically our second hometown. In Boston, just because of our physical presence, we’ll be selective there. And we’ll focus on the relationships that we have and expanding them judiciously. But, Boston’s a very large market. And actually, if you look at the top 20 MSAs in the country, one where the presence of the Big Four is actually quite small, with the exception of Bank of America. So, I’m sure that’s part of what’s on JPMorgan’s minds as they go up there. Our view is that it’s an attractive market. It’s a place where our way of banking we think fits. And we’ll look to grow at a measured pace and watch and see what opportunities present themselves.
And, thank you. That was our final question. I would now like to turn the floor back over to Don MacLeod for any additional or closing remarks.
Again, thank you all for participating today. And as always, if any clarification on any of the items on the call or news release is necessary, please contact our Investor Relations department at area code 716-842-5138.
Thank you. Ladies and gentlemen, this does conclude today’s M&T Bank’s third quarter 2018 earnings conference call. You may now disconnect.