M&T Bank Corp
NYSE:MTB
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M&T Bank Corp
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Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Don MacLeod, Director of Investor Relations, to begin.
Thank you, Lorrie, and good morning. I'd like to thank everyone for participating in M&T's fourth quarter and full year 2019 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 & 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'd like to introduce our Chief Financial Officer, Darren King.
Thank you, Don, and good morning, everyone. As noted in this morning's release, M&T's results for the fourth quarter closed out a year of solid performance, which included 8% growth in earnings per common share; 11% growth in noninterest revenues, with mortgage banking and trust fees leading the improvement; a stable year-over-year net interest margin notwithstanding the interest rate volatility we experienced in 2019; a credit environment that remains favorable, which, although nonaccrual loans increased slightly, reflected the sixth consecutive year of credit losses below 20 basis points; and industry-leading returns on shareholder capital, with return on equity for the year improve slightly to 12.87% and return on tangible common equity exceeding 19% for the second consecutive year.
We'll review the numbers for the full year in a moment, but first, let's turn our attention to the results for the fourth quarter. Diluted GAAP earnings per common share were $3.60 for the fourth quarter of 2019 compared with $3.47 per share in the third quarter of 2019 and $3.76 per share in the fourth quarter of 2018.
Net income for the quarter was $493 million compared with $480 million in the linked quarter and $546 million in the year-ago quarter. On a GAAP basis, M&T's fourth quarter results produced an annualized rate of return on average assets of 1.6% and an annualized return on average common equity of 12.95%.
This compares with rates of 1.58% and 12.73%, 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 $3 million or $0.02 per common share, down slightly from $4 million and $0.03 per common share in 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 fourth quarter, which excludes intangible amortization was $496 million compared with $484 million in the linked quarter and $550 million in 2018's fourth quarter. Diluted net operating earnings per common share were $3.62 for the recent quarter compared with $3.50 in 2019's third quarter and $3.79 in the fourth quarter of 2018.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.67% and 19.08% in the recent quarter. The comparable returns were 1.66% and 18.85% in the third quarter of 2019.
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. Both GAAP and net operating earnings in the fourth quarter of 2018 were impacted by certain noteworthy items.
Included in the fourth quarter 2018 results was a $20 million contribution to the M&T charitable foundation, that amounted to $15 million after-tax effect or $0.11 per common share. Also included in 2018's fourth quarter was a $15 million reduction in M&T's provision for income taxes arising from an IRS approved change in the tax treatment of certain loan fees, which was retroactive to 2017.
This also amounted to $0.11 per common share. Turning to the balance sheet and income statement. Taxable equivalent net interest income was $1.01 billion in the fourth quarter of 2019, down $21 million from $1.04 billion in the linked quarter. The net interest margin declined to 3.64%, down 14 basis points from 3.78% in the linked quarter. A higher average balance of funds placed on deposit with the Fed had an estimated 4 basis points dilutive effect on margin.
Higher cash balances were a result of elevated escrow deposits, seasonally high commercial deposits and increased trust demand deposits. We estimate that the lower short-term interest rates on the Fed's July, September and October rate actions pressured the margin by as much as 10 basis points. The linked quarter 38 basis point decline in 1-month LIBOR was another factor in the decline. Included in that 10 basis point impact of lower rates was a decline in the overall cost of interest-bearing deposits, the cost of which declined by 9 basis points compared with the linked quarter, which provided a benefit to the margin of about 2 basis points.
Average loans increased $167 million compared with the previous quarter. The ongoing and planned runoff of residential real estate loans, primarily acquired Hudson City mortgage loans, was more than offset by growth in other loan categories, which increased in total by $509 million or 0.7% from the third quarter. Looking at the loans by category on an average basis compared with the linked quarter, commercial and industrial loans were about 1% higher than in the prior quarter. This included $110 million seasonal increase in loans to vehicle dealers to finance their inventories, combined with an almost equal increase in other C&I loans.
Commercial real estate loans were down less than 1% compared with the third quarter reflecting payoffs as well as completed construction loans, which did not roll over into permanent financing and a lower level of commercial mortgage loans held for sale. Residential real estate loans, approximately half of which were acquired in the Hudson City transaction, continued the expected pace of pay downs and that portfolio declined by about 2% or $342 million.
Consumer loans were up 3% with growth in recreation finance loans, and to a lesser extent, in direct auto loans, outpacing further declines in home equity lines and loans. On an end-of-period basis, loan growth was stronger in the commercial portfolios, with commercial and industrial loans, about 3% higher than at the end of the prior quarter, while commercial real estate loans were up about 2%.
There were no particular regions or industries that stood out in terms of loan growth during the fourth quarter. Average consumer deposits, which exclude deposits received at M&T's Cayman Islands office as well as CDs over $250,000 were up about 3% compared with the third quarter. As noted earlier, elevated escrow deposits, seasonally high commercial deposits and higher levels of trust demand deposits were the drivers of that increase.
Turning to noninterest income. Noninterest income totaled $521 million in the fourth quarter compared with $528 million in the prior quarter. The quarter's results included a $6 million or -- included $6 million of securities valuation losses on our remaining portfolio of GSE preferred stock compared with a $4 million gain in the third quarter. Mortgage banking revenues were $118 million in the recent quarter compared with $137 million in the linked quarter.
Residential mortgage loans originated for sale were $697 million in the quarter, down about 16% compared with the third quarter. Nonetheless, origination revenues improved by $3 million to a total of $26 million as a result of higher gain on sale margin. Residential servicing revenues were little changed from the previous quarter. Total residential mortgage banking revenues, including both origination and servicing activities, were $91 million compared with $88 million in the prior quarter. Commercial mortgage banking revenues were $27 million in the fourth quarter compared with what was a record $49 million in the linked quarter. Trust income was $152 million in the recent quarter, improved from $144 million in the previous quarter, and up 12% from $135 million in 2018's fourth quarter.
New business generation continues to be strong, while the strength in equity markets has been a modest tailwind. Service charges on deposit accounts were $111 million, essentially unchanged from the prior quarter. Trading and FX gains were $17 million, improved from $16 million in the previous quarter, primarily reflecting customer interest rate swap activity done on behalf of commercial customers in connection with loan originations during the quarter.
Turning to expenses. Operating expenses for the fourth quarter, which exclude the amortization of intangible assets, were $819 million, down from $873 million in the third quarter. Salaries and benefits declined by $8 million to $469 million from the prior quarter, reflecting a lower headcount and seasonally lower benefit costs. Other costs of operation for the recent quarter reflect a $16 million reduction in the valuation allowance on our mortgage servicing rights. Recall that there was a $14 million addition to the allowance in the third quarter.
Excluding the changes in the valuation allowance, other costs of operations declined by $825 million, driven largely by lower professional services expense. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 53.1% in the recent quarter, improved from 55.9% in the previous quarter. Next, let's turn to credit. Our credit quality continues to be pretty much in line with the trends we've been seeing for quite a while. Annualized net charge-offs as a percentage of total loans were 18 basis points in the fourth quarter of 2019 compared with 16 basis points in the third quarter. The provision for credit losses was $54 million in the recent quarter, exceeding net charge-offs by $13 million. The excess provision primarily reflects loan growth. The allowance for credit losses was $1.05 billion at the end of December. The ratio of the allowance to total loans was 1.16% at the end of 2019, unchanged from the end of the third quarter and up 1 basis point from the end of 2018.
Nonaccrual loans declined by $42 million at December 31 compared with the prior quarter end. The ratio of nonaccrual loans to total loans fell 6 basis points to end the quarter at 1.06%. 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 $519 million at the end of the quarter. Of those loans, $480 million or 93% are guaranteed by government-related entities. We'll address CECL in a few moments during the discussion of our outlook for 2020.
Turning to capital. M&T's common equity Tier 1 ratio was an estimated 9.72% at the end of 2019, compared with 9.81% at the end of the third quarter. The decline reflects earnings retention during the quarter, share repurchases and the impact of loan growth, which, in turn, led to slightly higher end-of-period risk-weighted assets. M&T repurchased 1.7 million shares of its common stock during the past quarter, costing an aggregate $282 million. Next, I'd like to take a moment to cover the key highlights of 2019's full year results. GAAP-based diluted earnings per common share were $13.75, up 8% from $12.74 in 2018. Net income was $1.93 billion, improved from $1.92 billion in the prior year. These results produced returns on average assets and average common equity of 1.61% and 12.87%, respectively.
Net operating income, which excludes intangible amortization, was $1.94 billion, up slightly from the prior year. Net operating income for 2019, expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.69% and 19.08%, respectively. Average diluted common shares declined by 7% as a result of repurchase activity, while the total payout ratio, including common stock dividends, was 102%.
Tangible book value per share grew to $75.44 at the end of 2019, up 9% from the end of 2018. As we reflect on our 2019 performance through the lens of relative performance against our peer group, large regional banks, we are particularly gratified by our growth in earnings per common share, our return on tangible common equity and the absolute level of our net interest margin, which remains at or near the top of the peers.
Let me just backtrack a second for a minute, Darren. Going back to the other cost of operations, Darren misspoke and said, there was a decline of $825 million. It is $25 million.
Thank you, Don. I'm not sure what I was looking at when I read that, but thank you for the clarification. Okay. So let's turn to the outlook. Looking forward into 2020, our outlook was fairly consistent with what we shared on the call last January as well as with the trends we've been seeing over the past quarter. While GDP growth may slow from the pace seen in 2019, we still expect it to be at a level consistent with the average annual rate of growth seen since the last recession ended.
Unemployment remains very low and both consumer and commercial customers' financial positions are healthy. Consumer confidence remains relatively high, although commercial customers have remained cautious as ongoing and unpredictable global events, including disagreements over tariffs have led to sustained levels of uncertainty. We were pleased to see progress toward the tailoring of capital and liquidity regulations for regional banks based on systemic risk to the U.S. economy. We are awaiting final approval for the capital regulations, including the stress capital buffer for banks in the Fed's Category IV like M&T. It's still unclear whether those rules will be in place for the 2020 CCAR process. However, with the usual caveat that events never unfold entirely in the manners you expect, here are a few thoughts for the coming year.
As we share our outlook on the net interest income and the net interest margin, we'll start with the caveat that one unfolds will likely be impacted by actions taken by the Federal Reserve as to short-term interest rates. After a year of volatility, including 3 rate cuts over the course of 2019, the markets have calmed somewhat. The markets currently are signaling an additional rate cut in 2020 towards the end of the year. The fourth quarter net interest margin of 3.64% is a good starting point to think about where we're headed for 2020.
We expect a lower combination of cash at the Fed and investment securities as we enter the first quarter and for that lower level to persist over the course of the year. This reflects a decline in escrow, commercial and trust demand deposits from seasonal highs in the fourth quarter as well as a further repositioning of our portfolio of liquid assets as the Fed's tailoring rule for liquidity becomes effective. The result will be a beneficial impact on the reported margin compared with the fourth quarter which could be as much as 10 basis points. Loans outstanding grew 2.4% on a full year average basis in 2019 and were up a similar 2.8% on a yearend basis.
As has been the case for the past few years, this reflected a 9.1% decline in residential mortgage loans on a full year average basis, offset by 5.4% aggregate growth in other loan portfolios. Lending activity in the commercial bank in 2019, both Commercial and Industrial, and Commercial Real Estate was characterized by better originations and a reduced level of payoffs and paydowns than was the case in 2018.
We expect those trends to continue in 2020. As has been the case for the past several years, we will continue to allow the Residential real estate portfolio to run off as we reposition the balance sheet to higher returning assets. However, the rate of decline on both the percentage and absolute dollar basis will slow compared to prior years as the portfolio of loans acquired with Hudson City becomes a smaller percentage of the total.
Given these factors, our expectation for 2020 is that average total loans will grow on a full year basis at a low single digit pace, in line with or perhaps a little better than what we saw in 2019.
Taking aggregate, our outlook for 2020 reflects a lower level of earning assets but with a higher proportion of loans than in 2019, which improves our return profile. Combined with some improvement in the margin from what we reported in the fourth quarter and a flat rate scenario, we expect low -- a low single-digit decline in net interest income on a year-over-year basis.
We enter 2020 with a higher run rate in residential mortgage servicing revenues following the additions to our servicing and subservicing portfolios in 2019. Thus, year-over-year growth is sort of baked in. The outlook for residential originations is less clear with long-term rates above the low point seen this past summer. The commercial mortgage banking business had a record year for both volumes and revenues in 2019. Matching or beating that will be difficult, but that's our goal for 2020.
The outlook for the remaining fee businesses remains consistent with our experience in 2019 with growth in the low single-digit range, with the exception of trust revenues, which have been growing at a solid mid-single-digit pace. The fourth quarter's operating expenses, excluding the reduction in the MSR valuation allowance are a good indication of a starting run rate for modeling 2020.
Last year's GAAP results included approximately $100 million of items we do not expect to recur in 2020. The write-down of our investment in the asset manager and the settlement of the eSoft litigation. That implies that total expenses on a GAAP basis should be down year-over-year. The capabilities we added to our IT division over the course of 2019 should enable us to continue to reduce professional services in the coming year as well.
Other than normal wage growth, we don't foresee the need to accelerate expenses beyond the current run rate. We'd remind you that we expect our usual seasonal increase in salaries and benefits costs in the first quarter of 2020, which primarily reflects annual equity incentive compensation as well as a handful of other items. Last year, that increase was approximately $60 million. Based on the proceeding, we expect to be able to produce neutral to slightly positive operating leverage for the year.
Our outlook for credit remains balanced. Just as we completed our sixth consecutive year of net charge-off experience below 20 points -- excuse me, below 20 basis points. At the risk of sounding like a broken record, I'll caution you again that this trend can continue, and that losses will eventually tick upward. There continue to be some modest pressures on nonperforming and criticized loans but there are no apparent weaknesses in any particular industries or geographies. Our adoption of the new loan loss accounting standard known as CECL was effective January 1, 2020.
Our expectation, based on forecasted economic conditions and portfolio balances as of December 31, 2019, is that the adoption will result in an overall increase of approximately $140 million or 13% to our reserves. With total commercial reserves being down slightly, reflecting shorter contractual maturities and residential mortgage and consumer reserves increasing substantially due to their long dated maturities.
For regulatory capital purposes, we have elected to phase in the CECL transitional amount over a 3-year period. Therefore, the effect of the adoption on the capital ratios will be recognized in a uniform manner, resulting in a reduction to the CET1 ratio by approximately 3 basis points over each of those 3 years.CECL also impacts the accounting for loans previously acquired at a discount that are on our balance sheet.
Acquired impaired loans will transition from 90 days past due and accruing to their current performance status, whether accrual or nonaccrual. Approximately $170 million of the acquired impaired loans will transition to nonaccrual status. The income from these loans will only be recognized on an as cash is received basis, consistent with originated nonaccrual loans. Lastly, in the future, our loss provision will reflect expected net charge-off activity plus CECL reserves, for loan growth by category, plus or minus changes in our reasonable and supportable forecast.
We don't see anything meaningful on the horizon that would lead us to believe that the tax rate for 2020 will be significantly different from what it was in 2019 in the area of 25%. As to capital, we'll continue to execute our 2019 capital plan through the end of this year's second quarter. Our capital allocation philosophy remains unchanged with investments in our business at high returns being our first priority, while paying a dividend that's sustainable through economic cycles. After that, we seek but don't reach for acquisitions that make sense and add value to our shareholders, our customers and our communities. When those aren't forthcoming, we return capital to shareholders.
We have little appetite for warehousing capital over an indeterminant timeframe until those opportunities present themselves. 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, Lorrie will briefly review the instructions.
[Operator Instructions]. Our first question comes from the line of Ken Usdin of Jefferies.
Darren, just on the expense front, I'm wondering if you can just clarify a little bit on the point that GAAP expenses you expect to be down because they had that $100 million. And you mentioned that the core, you don't see it really changing from what the growth rate is. So the core, can you just help us understand without having to accelerate investments, what you see as the core underlying growth rate of expenses that you should expect?
Sure. So I guess, if you look at the full year expenses on a GAAP basis, you've got about $100 million of 1x in the litigation, the addition of litigation reserve as well as the write-down on the asset manager. And then when you look at that number and you look at where we grow from there, it's 1% or less.
Got it. And then can you talk about the puts and takes just in that 1% or less? So you're making some investments that you've talked about in the last couple, where are you getting the saves out of and that confidence that you can keep it, 1% or less relative to the growth that we've seen in the last couple of years?
Yes. Yes. When we look at the trajectory we've been on. Remember that a big portion of last year's growth and expenses was related to the mortgage business and the servicing that we both acquired and took on in the form of subservicings. We had that expense to support that revenue. And then the rest of what was happening was this transition of our IT capabilities from professional services to salary benefits. And we started to see those professional services come down in the fourth quarter, which we expected, and we expect that trend to continue into 2020.
And so as we go forward, the gains and efficiency that we will get -- or expenses from reducing professional services will offset salaries and benefits as that cycle continues itself. So we think we're at a point where we're self-funding, and that's why we feel confident that the run rate that we're at now, we can basically run at that ex normal increases that happened in salaries and benefits as you go from year-to-year.
Your next question comes from the line of John Pancari of Evercore.
On that same line of questioning, the -- so your operating leverage comment that you expect positive operating leverage, that's on a GAAP basis, just to confirm, correct?
That is correct.
Okay. So -- and then looking at it from what you would just walk through in terms of core, that would imply modest negative on a core basis then?
On a core basis, that would, yes.
Okay. And the -- and then in terms of your ongoing IT and franchise investments, I know you had indicated last quarter that they are largely complete. Is that still how you're viewing it? Or is there any change to the ongoing infrastructure investments that you're making?
Well, we're continuing on the transition that we've talked about and that really is building up our internal IT capability. And we had the uptick in 2019, they got that process started. But from where we end the year, we're now in a place where we're seeing professional services come down that offset the salaries and benefits costs that we're adding as we're making those conversions. And the place that we're at now is we think that those investments are kind of self-funding. And so that with the expense base that we're at now, we can continue that transition without having to have meaningful growth. As we get to the other end of it, obviously, it's our expectation that we'll continue to use those internal team members to improve the expense run rate into 2021 and 2022. But obviously, we'll give you more details on that when we get there. But for the purposes of 2020, we think we're in a place where we can operate basically at the level that we're at now with some modest growth from here.
Your next question comes from the line of Erika Najarian of Bank of America.
I wanted to inquire a little bit more about the potential for the margin beyond the first quarter. Heard you loud and clear that balance sheet action is going to be quite accretive in the first quarter. If the curve stays or the curve forecast stays static, how should we think about the net interest margin trajectory beyond the first quarter?
And also, as we think of earning asset growth, should we expect earning asset growth to be flat relative to the actions that you're taking? Or should we expect some balance sheet shrinkage?
Sure. So in the first quarter, we expect the net interest margin to increase, at least what the printed margin is because of the change that you'll see in cash and investment securities, and you can kind of see that at the end of period. And those lower levels we expect to persist throughout the year. So when you get to the first quarter margin, and assuming, as you pointed out, a fairly stable rate environment, we would expect that margin and -- that we end the first quarter with to be fairly consistent throughout the year, assuming that, that forward curve, in fact, occurs, maybe plus or minus a couple of basis points along the way, but relatively stable.
We anticipate that the average earning assets will start the year lower, and then come up as the year goes on as we see the loan growth that we talked about in the forecast that, overall, it's kind of low single digits, and along the lines of what we saw in 2019 as we go through 2020.
Got it. And my follow-up question, and I apologize, you're probably going to get 1,000 expense questions, but we just want to make sure we're getting it right. So as we think about the run rate for 2020. If we take $100 million out of GAAP, that's $3.368 billion, and you're saying growth of 1% or less. That includes any nominal increase in salaries and benefits. So in total, core should go up 1% or less from that $3.368 billion base.
That's right. Yes.
Your next question comes from the line of Peter Winter of Wedbush Securities.
I was just curious on the capital. You ended the year at 9.72%. I'm just wondering where you think it's going to end in 2020. And then secondly, how much is left in your stock buyback authorization?
So where we'll end in 2020 is a little bit tough to predict, just depending on what happens with the tailoring rules and SCB as we go into CCAR this year, which will have an impact, obviously, on where we might bring the capital ratios, too. And then the other thing that we're paying attention to is just the pace of loan growth and, in particular, risk-weighted assets. But if you look at where we've been over the course of the last, actually, kind of 5 or 6 quarters. It's been coming down around 9 to 10 basis points a quarter, and we continue a measured movement down towards the low end of the peer group. And over the course of the last year, I believe, we've gone from being slightly above our peer median in terms of our CET1 ratio to slightly below the median, and we'll continue a measured and thoughtful move down towards the range that we've discussed for some time now. Obviously paying attention to what's going on in the macro environment and what's happening with loan growth. And if you look at what's left outstanding in the capital plan that we discussed or disclosed in July. It's around $750 million, $800 million.
Okay. And just given you're doing some of the work on remixing the balance sheet to help the margin. I'm just wondering, any updated thoughts on the hedging strategy?
Nothing that is different from what we have talked about in the past. If you look at where we've been, our notional amount has grown, but what's actually outstanding has been relatively consistent. In terms of notional dollars, it's $14 billion, $15 billion of cash flow hedges, plus another $4 billion, $5 billion of debt. And what we've been doing is just extending some of those out into future years to have that same amount of protection in place for a little bit longer.
Your next question comes from the line of Frank Schiraldi of Piper Sandler.
Just on -- to try to ask the capital question another way. Just curious, and I know you got the CCAR cycle coming up. But given how little impact -- little impact CECL has to the regulatory capital levels here, just curious, your thoughts on capital return overall for the back half of the year. Is it sort of the expectation, or I don't know, the wish list that you would continue to return 100% plus capital of earnings?
I guess, we don't peg it as a payout ratio number that we're looking to achieve. But more we're projecting forward what we think our loan growth will be and what our risk-weighted asset growth will be and looking at what capital we think we need to fund to support that loan growth and make sure that we're running an organization that is very safe and sound.
We continue to believe that we can move the current ratio down. And we'll continue to do it at the pace that we've been on for the last several quarters, being consistent in terms of what that decline is.
Any quarter, you might see some difference between what the change is in the ratio based on primarily asset growth in the quarter. But when you look over the long term, over the last few quarters, we've been on a pretty steady pace. I think one of the things that we're also going to be watching as we go through the first part, at least of 2020, is just how the new CECL methodology impacts earnings on any given quarter, which will be impacted by the mix of loan growth in that quarter and just making sure that we're thoughtful with those capital returns.
But as you point out, given where we are, we were pleased that the impact on our capital ratios from CECL was fairly nominal, and so we can continue on trajectory that we've been on.
Okay. And then just sort of a ticky-tack question on the provision. Given -- if the environment, if the credit environment stays as is for 2020, let's hope. Given the day 1 CECL adjustment, is it -- and I know a lot more goes into it than this, but is it sort of fair for just modeling to assume provisioning goes up by sort of that 13% number, all else equal?
I guess, I haven't done that, that way. The way I tend to think about it is you've got charge-offs that will happen. And then if you look at net growth in loans and look at the new allowance rate and multiply those 2, that probably gets you the excess provision. And of course, if you look in any quarter, the mix of loans that drive that shift in portfolio can move that around. But if you look over the course of a full year, we wouldn't anticipate any meaningful mix shift in terms of where the growth is coming from, on a percentage basis, which would give you that allowance percentage is a reasonable starting point. As I said, it could move around a little bit within that quarter, but over the course of the year, I would expect it to be within a few basis points of that number.
Your next question comes from the line of Steven Alexopoulos of JPMorgan.
So regarding the anticipated decline in liquidity in 1Q '20. If we look at 1Q '19, you -- quarter-over-quarter, you're down $1.4 billion. Do you think you're going to have a similar decline in 1Q '20? Or is it much larger than that, just given how much more deposit growth you've had recently.
It's probably going to be larger than that given the trust demand business was probably the primary driver, if you look back in prior years, plus a little bit in the commercial. Commercial balances tend to move up in the fourth quarter, and then these companies as they prepare to make their distributions to their owners. That's why you see them come down in the first quarter.
And so that's pretty typical. I think businesses are still having a little bit more of their cash sitting in operating accounts versus in interest bearing. And then the other thing that's happened this year for us, obviously, as we've increased the escrow balances, and there is some seasonality to those. So when you put all those factors together, you'd probably get a bigger decrease there, and then we'll be looking at the securities portfolio in aggregate, and that will probably come down a little bit, too, as we react to the new changes in the LCR.
Okay. Got you. And then on the trust income, which came in much stronger than the original guidance call part. It didn't sound like market appreciation was a big factor. Give more color on why that was so strong this year.
So there's a couple of things that happened there. We have, within there, a business that is olds' retirement assets. And when you add to -- when you add clients to that, you can -- they can come in big chunks, and we had 1 big retirement funds that came in during the course of the year. That stuff is kind of hard to predict, and that helped with some of the trust fees as well as in our, what we call, our institutional client services business. There seem to be a little bit more activity in that business as the back half of the year went on which helped with the trust fees. And obviously, when I talked about that retirement business, the assets that came on also grew because of the markets. And so there was some help from the markets to be sure but the business continues to add team members and add clients, and this had a strong year.
Okay. That's helpful. Maybe just one final one on expenses. I appreciate the color on the 1% expense growth in 2020, given the reinvestment of some of the cost saves. But what is expense growth at M&T running at these days without cost saves? What's the natural organic growth rate of expenses?
When I think about our natural organic growth rate and you look at us through time, and you hold to the side some of the things that have happened with various litigation expenses or mortgage servicing rights or the write-off that we had. We're kind of a low single-digit grower, and it's mainly driven by compensation costs year-over-year.
Last year was just kind of outside because of the mortgage -- the growth in the mortgage servicing business, and then step 1 in our transformation for technology. But generally, when you look at how we run the bank, we pay a lot of attention to our growth rate in expenses because we know we're in a tough industry. And so we're always looking for ways to manage those and keep them in aggregate, growing at low single digits and making investments and finding offsets to cover the cost to keep it at that pace. And that philosophy hasn't changed.
Your next question comes from the line of Gerard Cassidy of RBC.
Can you give us some color on that residential mortgage portfolio? You indicated it was down, I think, the runoff that is, down about 9%. You expect it to be less this year. It looks like your resi mortgages at the end of the year are just over $16 billion or 18% of total loans. Where do you see that eventually bottoming out? When does the runoff from the deal that you've done? And we have a stabilized number from that portfolio.
Sure. It's a good question, Gerard. As we watch the portfolio of residential mortgage loans. When you look underneath there, it's down to about 1/2 Hudson's -- Legacy Hudson City mortgages and 1/2 Legacy M&T plus new originations. We're allowing that Hudson City portfolio to run down, and we'll continue to just because of the return profile of the mortgage business. And the rate of growth or the rate of decline in aggregate in the mortgage portfolio is slowing just because the Hudson City mortgages are becoming a smaller percentage. But we'll continue to run those down. We'll probably -- you'll see a little bit more growth in the legacy business, especially some of that comes from the servicing business, but you're not going to see it hit a steady state likely in 2020. The only thing that as we work through the new liquidity rules after the tailoring that we're contemplating at what role the mortgage portfolio plays in overall funding since the mortgages are pledgeable with the Federal Home Loan Bank for funding on a short-term basis. So there's a number of considerations that go into where that portfolio ultimately ends, but we probably continue seeing it move down, but in a smaller dollar amount over the course of 2020.
Very good. And then I know the rules are not set yet on the SCB, but from what you understand today and assuming they don't vary dramatically from what we all understand. Do you expect any kind of meaningful impact come CCAR because of -- if they incorporate the SEB in CCAR this year?
I guess if they incorporate it, it would be helpful because the threshold that you have to meet would be lower, and there will be some opportunity there. There's also been talk of not having to pre-fund the dividend and not having an assumption of asset growth under stress, which all of those things are positive. The offset to that is what our loan growth assumptions look like. And in particular, what the mix is in terms of risk-weighted assets that will be an offset. But it's obviously -- remains to be seen how the -- this will be implemented by the Fed, given that there is unlikely to be an NPR before, and it will all be handled through the rules and the assumptions that are provided to us.
Your next question comes from the line of Saul Martinez of UBS.
I guess, we have 10 more minutes. A couple of questions. One, just a follow-up on CECL. By my calculations, your ACL ratio goes roughly from about 115 to about 130 basis points. As I think about the changes in your mix in the loss content on your net loan growth, because there's obviously a lot going on there with resi coming down, consumer going up. How do I think about the loss content, the lifetime losses on your growth relative to your back book? Is the net growth in loans, those with loss -- lifetime loss of above 130 basis points. I know it doesn't change in any given quarter all that much, but should we think that ACL ratio naturally gravitate upwards over time as your balance sheet remixes?
I guess, if your time horizon is 10 years, and we don't do anything to change the growth rates of the various portfolios, that's probably true. I think if you look in the short-term. In short term, in this case, would be like over the next 12 and 24 months, you probably don't see much change in that, just because the start point on some of those other portfolios, meaning the other consumer, is relatively small as a percentage compared to the resi mortgage, the commercial real estate and the C&I.
And that assumes that we don't do anything to look at those portfolios and look for alternatives, like you've seen some of the other organizations thinking about auto securitizations, for instance. We haven't done one of those in a while. I'm not suggesting that we are going to do one, but that would have an impact on, obviously, the portfolio and the allowance in there, because if you did a securitization that allowance would come off.
So there are number of moving factors. But I guess the short answer to your question is, your math is consistent with ours. And I think it would take a couple of -- at least a couple of years of running at the rate that we're at with no change to see that number go up.
Okay. No, that's helpful. All right. I'll just change gears a little bit. At a conference in early November, I think it was a Banc conference. You highlighted your -- some of your key metrics versus your long-term averages. And your NIM, I think you were at substantially higher than what -- the premium up of your NIM, the delta between your NIM and the peer median was substantially higher today than it has been historically. I think it was like 6 basis points or something like that. And historically, it's 20 something in that neighborhood. It seems to like from your outlook, you think that really elevated delta with your peer group should remain not too far from where it is today. And I think you were kind of hinting at the conference that maybe that NIM, that excess NIM versus your peers will gravitate down over time. Am I reading that right? I mean, what's changed since November and -- other than, obviously, the rate outlook. But am I reading that right that you think you will be able to maintain a premium NIM that is historically high?
I guess, I'll break apart your statement into two pieces. Do we think we'll be able to maintain a premium NIM? Yes. That's kind of always been the nature of our portfolio, largely because of our funding mix, but also because of the pricing on our loan book. It's been a little higher than what we would normally expect, and especially in this kind of time period. And you can see that the gap between us and the next closest peer on the median has come down a little bit. But really, when you look over the last couple of quarters, it's been fairly consistent. We would need to see rates come down a little bit further to see that delta compress. But we expect over time that we try to run bank to have slightly lower cost of deposits and a slightly higher yield on our loans and manage our expenses a little bit better in credit. It's not our objective to be outsized performance in any one of those categories, but a little bit better in each one. And over a long period of time, that adds up to consistent returns, which is really what our objective is. And some of them may move a little bit in any one-time period, be that a quarter or a year.
But over long periods of time, that's kind of how we try to run the bank to achieve the returns that we do. So we expect that the margin depending -- obviously, given the earlier comments in a stable rate environment, we expect the margin to be relatively stable this year. Given that, we would expect to maintain our premium over the -- our GAAP, our positive GAAP compared to the next closest in the median. But any movement down, and we probably see a little bit of that road, but we don't see ending up back in the median.
Right. So as long as the rate environment remains stable, that historically, I doubt that there's no reason why that shouldn't progress.
Yes. From what we can see, we believe that, that will persist. Wait, was your comment about 10 minutes? I thought you were going to use all 10.
Your next question comes from the line of Brian Klock of Keefe, Bruyette, & Woods.
We're set up for a good next year, right?
We sure hope so. We're not planning afraid yet, but we're certainly hopeful.
Well, I mean, hope is let's bring hope springs eternal on muffle every year, right? So let's hope so. But I think I do have 5 minutes left in the morning. I think that's what Saul was referring to before we say good afternoon. But just had few real quick follow-ups. I know you've had all kinds of questions today on both of these topics. So just I wanted to clarify a little bit on the margin guidance of 10 basis points, Darren?
Yes.
So is that all liquidity-driven 10 basis points? Or I think you guide, whether it was late December, early January, I think you redeemed some debt. So is that kind of factored into that sort of 10 basis point NIM improvement into the early part of 2020?
It is. It's impact is, in the grand scheme of things, relatively small on the NIM impact. The main drivers are the cash and securities.
Got it. Got it, makes sense. And again, on expenses. This is a 2021 question. But like you mentioned here, the core expense run rate, call it less than 1% inflation in 2020 on a core basis. And it feels like with all those tax expenses kind of consolidated and coming out, like you said, in recycling, do you think 2021 is one of those where expenses are flat? Or is it just maybe normal M&T expense inflation out into 2021?
Well, your -- I'm just recovering from doing the plan for 2020, let alone, 2021. So haven't quite looked that far ahead yet. But I guess, I'll remind you of who we are and how we run the bank, and that is to be very careful with our expense growth to make sure that we see a path. If we make those investments to bring it back down or that there's offsetting revenue. Like we did with the mortgage business this year.
The low single-digit increase, as I mentioned before, is primarily the result of salary inflation, knows where wage inflation ends up through 2020. The unemployment rates stay this low, who knows where we'll end up. But we continue to believe that in banking business, efficiency matters and being cost-effective matters. So we pay a lot of attention to that. And of course, if we can drive that growth down to something less than 1% or even negative, we will look to do that. But too early for me to make comments really about where that will be in 2021.
Thank you. I will now return the call to Don MacLeod for closing comments.
Again, thank you all for participating today. And as always, if any clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at 716-842-5138. Thank you, and goodbye.
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