Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank 4th Quarter 20 19 Earnings Conference Call. Questions following the presentation. 9. Optimal Sound Quality. I will now turn the call over to Don McLeod, Director of Investor Relations
nineteen. Thank you, Laurie,
and good morning. I'd like to thank everyone for participating in M and T's 4th quarter and full year 2019 9 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may 9. We will now begin the presentation. We will now begin the presentation.
We will now begin the presentation. 9, 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 9 relating to the banking industry and to M&T Bank Corporation. M and T encourages participants to refer to our SEC filings, including those found on Forms 8 ks, 9 ks and 10 Q for a complete discussion of forward looking statements. Now I'd like to introduce our Chief Financial Officer, Darren King.
9. Thank you, Don, and good morning, everyone. As noted in this morning's release, M and T's results for the Q4 closed out a year of solid performance, which included 9.8% growth in earnings per common share, 11% growth in non interest revenues with mortgage banking and trust fees leading the improvement, 19. A stable year over year net interest margin, notwithstanding the interest rate volatility we experienced in 2019 9. A credit environment that remains favorable, which although non accrual loans increased slightly, reflected the 6th consecutive year of 9.
Credit losses below 20 basis points and industry leading returns on shareholder capital with return on equity for the year 9.7% and return on tangible common equity exceeding 19% for the 2nd consecutive year. 9. We'll review the numbers for the full year in a moment, but first, let's turn our attention to the results for the Q4. 9. Diluted GAAP earnings per common share were $3.60 for the Q4 of 2019 compared with $3.47 in the Q3 of 2019 and $3.76 per share in the Q4 of 2018.
9. Net income for the quarter was $493,000,000 compared with $480,000,000 in the linked quarter $946,000,000 in the year ago quarter. On a GAAP basis, 9. M and T's 4th quarter results produced an annualized rate of return on average assets of 1.6% and an annualized return on average common equity 9.5%. This compares with rates of 1.58% and 12.73% 9.
Included in GAAP results in the recent quarter were after tax expenses 9 from the amortization of intangible assets amounting to $3,000,000 or $0.02 per common share, down slightly from $4,000,000 $0.03 per common share in the prior quarter. Consistent with our long term practice, M and T provides supplemental reporting of its results 9. On a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets 9 as well as any gains or expenses associated with mergers and acquisitions when they occur. 9. M and T's net operating income for the 4th quarter, which excludes intangible amortization, was 496,000,000 9 compared with $484,000,000 in the linked quarter and $550,000,000 in 20 eighteen's 4th quarter.
19. Diluted net operating earnings per common share were $3.62 for the recent quarter compared with 3.50 19's Q3 and $3.79 in the Q4 of 2018. Net operating income yielded 9.7% 19.08 percent in the recent quarter. The comparable returns were 1.66 19.85 percent in the Q3 of 2019. In accordance with the SEC's guidelines, 9.
This morning's press release contains a tabular reconciliation of GAAP and non GAAP results, including tangible assets and equity. 9. Both GAAP and net operating earnings in the Q4 of 2018 were impacted by certain noteworthy items. 9. Included in the Q4 2018 results was a $20,000,000 contribution to the M and T Charitable Foundation.
9. That amounted to $15,000,000 after tax effect or $0.11 per common share. Also included in 20 eighteen's 4th quarter 9.5000000 dollars reduction in M and T's provision for income taxes arising from an IRS approved change 19. We expect to continue to be in the tax treatment of certain loan fees, which was retroactive to 2017. This also amounted to $0.11 per common share.
19. Turning to the balance sheet and income statement. Taxable equivalent 9. Net interest income was $1,010,000,000 in the Q4 of 2019, down $21,000,000 9.4000000 dollars in the linked quarter. The net interest margin declined to 3 point 9, down 14 basis points from 3.78% in the linked quarter.
9. A higher average balance of funds placed on deposit with the Fed had an estimated 4 basis points dilutive effect on the margin. 9. The higher cash balances were a result of elevated escrow deposits, seasonally high commercial deposits 9 and increased trust demand deposits. We estimate that the lower short term interest rates 9.
The Fed's July, September October rate actions pressured the margin by as much as 10 basis points. The linked quarter 9.38 basis point decline in 1 month LIBOR was another factor in the decline. Included in that 10 basis 9 basis points impact of lower rates was a decline in the overall cost of interest bearing deposits, the cost of which declined by 9 basis points 9 compared with the linked quarter, which provided a benefit to the margin of about 2 basis points. Average loans increased 100 and $67,000,000 compared with the previous quarter. The ongoing and planned runoff of residential real estate loans, primarily acquired 9 or 0.7 percent from the 3rd quarter.
Looking at the loans by category
9. On an average basis compared with the
linked quarter, commercial and industrial loans were about 1% higher than in the prior quarter.
This
nineteen. We have a very strong quarter with an almost equal increase
9 and
other C and I loans. Commercial real estate loans were down less than 1% compared with the 3rd quarter, 9, reflecting payoffs as well as completed construction loans, which did not roll over into permanent financing and a lower level 9. Residential real estate loans, approximately half of which
9.2% were acquired in the Hudson
City transaction continued the expected pace of paydowns and that portfolio declined by about 2% $342,000,000 Consumer loans were up 3% with growth in recreation finance loans and to a lesser extent indirect auto loans 9. On an end of period basis, loan growth was stronger in the commercial portfolios 9. 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 9. Average consumer deposits, which exclude deposits received 9.5% at M&T's Cayman Islands office as well as CDs over $250,000 were up about 3% compared with the 3rd quarter.
9. As noted earlier, elevated escrow deposits, seasonally high commercial deposits and higher levels of trust demand deposits were the drivers of that increase. 19. Turning to noninterest income. Noninterest 9.
Income totaled $521,000,000 in the 4th quarter compared with $528,000,000 in the prior quarter. The quarter's results 9.2% included $6,000,000 of securities valuation losses on our remaining portfolio of GSE preferred stock 9 compared with a $4,000,000 gain in the 3rd quarter. Mortgage Banking revenues were $118,000,000 9.5% in the linked quarter. Residential mortgage loans originated for sale 9 were $697,000,000 in the quarter, down about 16% compared with the 3rd quarter. Nonetheless, origination revenues improved $3,000,000 to a total of $26,000,000 as a result of higher gain on sale margin.
Residential servicing revenues were a little changed 9 from the previous quarter. Total residential mortgage banking revenues, including both origination and servicing activities, $91,000,000 compared with $88,000,000 in the prior quarter. Commercial Mortgage Banking revenues $27,000,000 in the 4th quarter compared with what was a record $49,000,000 in the linked quarter. Trust income 9.2% was $152,000,000 in the recent quarter, improved from $144,000,000 in the previous quarter and up 12% nineteen. We expect to be strong 9, while the strength in equity markets has been a modest tailwind.
Service charges on deposit accounts were $111,000,000 9.5% essentially unchanged from the prior quarter. Trading and FX gains were $17,000,000 9.2% improved from $16,000,000 in the previous quarter, primarily reflecting customer interest rate swap activity 9. 9. Operating expenses for the 4th quarter, which exclude the amortization of intangible assets, were $819,000,000 9, down from $873,000,000 in the 3rd quarter. Salaries and benefits declined by $8,000,000 9 to $469,000,000 from the prior quarter, reflecting a lower headcount and seasonally lower benefit 9.
Other costs of operation for the recent quarter reflect a $16,000,000 reduction in the valuation allowance on our mortgage servicing rights. 9. Recall that there was a $14,000,000 addition to the allowance in the 3rd quarter. Excluding the changes in the valuation allowance, 9. Other costs of operations declined by $825,000,000 driven largely by lower professional services expense.
9. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, 9 was 53.1 percent in the recent quarter, improved from 55.9% in the previous quarter. 9. 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.
9. Annualized net charge offs as a percentage of total loans were 18 basis points in the Q4 of 2019 compared with 16 basis 9.5% in the Q3. The provision for credit losses was $54,000,000 in the recent quarter, exceeding net charge offs by $13,000,000 9. The excess provision primarily reflects loan growth. The allowance for credit losses was $1,050,000,000
9 at the end of December.
The ratio of the allowance to total loans was 1.16% 19, unchanged from the end of the 3rd quarter and up one basis point from the end of 2018. 9. Non accrual loans declined by $42,000,000 at December 31 compared with the prior quarter end. The ratio of non accrual loans to total loans fell 6 basis points to end the quarter at 1.0 9%. Loans 90 days past due on which we continue to accrue interest, excluding acquired loans
9.5% that had been marked to
a fair value discounted acquisition were $519,000,000 at the end of the quarter. Of those loans, 9.480,000,000 or 93% are guaranteed by government related entities. We'll address CECL in a few moments 9 during the discussion of our outlook for 2020. Turning to capital. 19.
M and T's common equity Tier 1 ratio was an estimated 9.72% at the end of 2019 9 compared with 9.81 percent at the end of the 3rd quarter. The decline reflects earnings retention during the quarter, share repurchases 9 and the impact of loan growth, which in turn led to slightly higher end of period risk weighted assets. M and T repurchased 1,700,000 shares of 19.7% of the prior year. 19. Next, I'd like to take a moment to cover the key highlights of 20 nineteen's full year results.
GAAP based diluted earnings per common share were 13 $9.75 up 8% from $12.74 in 2018. Net income was 9.3000000000 dollars improved from $1,920,000,000 in the prior year. These results produced returns on average assets 9.7 percent and 12.87 percent, respectively. Net operating income, which excludes intangible amortization, 9 was $1,940,000,000 up slightly from the prior year. Net operating income for 2019 expressed 9.
As a rate of return on average tangible assets and average tangible common shareholders' equity was 1.69% 19.08%, respectively. Average diluted common shares declined by 7% 9 as a result of repurchase activity, while the total payout ratio, including common stock dividends, was 102%. 19. Tangible book value per share grew to $75.44 at the end of 2019, up 9% 2019. As we reflect on our 2019 performance through the lens of relative 9 performance against our peer group of large regional banks.
We are particularly gratified by our growth in earnings per common share, 9. 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.
19. Can we just backtrack a second for a minute, Darren? Going back to the other cost of operations, 9. There was a decline of $825,000,000 It is $25,000,000
Thank you, Don. Not sure what I was looking at when I read that, 9. Thank you for the clarification. Okay. So let's turn to the outlook.
9. Looking forward into 2020, our outlook is 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. 19. 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 19. Unemployment remains very low and both consumer and commercial customers' financial positions 9.
Consumer confidence remains relatively high, although commercial customers have remained cautious as ongoing and unpredictable global events, 9, including disagreements over tariffs have led to sustained levels of uncertainty. We were pleased to see progress 9. We are awaiting final approval for the capital regulations, 9. Including the stress capital buffer for banks in the Fed's Category 4 like M and T. It's still unclear whether those rules will be in place 2019.
However, with the usual caveat that events never unfold entirely in the manners you expect, 19. Here are a few thoughts for the coming year. As we share our outlook on net interest income and the net interest margin, 9. We'll start with the caveat that what unfolds will likely be impacted by actions taken by the Federal Reserve as to short term interest rates. 19.
After a year of volatility, including 3 rate cuts over the course of 2019, the markets have calmed somewhat. 9. The markets currently are signaling an additional rate cut in 2020 towards the end of the year. The 4th quarter net interest margin 9.6 4 percent is a good starting point to think about where we're headed for 2020. We expect a lower combination 9.5% of cash at the Fed and Investment Securities as we enter the Q1 and for that lower level to persist over the course of the year.
9. This reflects a decline in escrow, commercial and trust demand deposits from seasonal highs in the 4th quarter 9, as well as a further repositioning of our portfolio of liquid assets as the Fed's tailoring rule for liquidity becomes 19. The result will be a beneficial impact on the reported margin compared with the 4th quarter, which could be as much as 10 basis 19. Loans outstanding grew 2.4% on a full year average basis in 2019 and were up a similar 2.8 9% on a year end basis. As has been the case for the past few years, this reflected a 9.1% decline 9 in residential mortgage loans on a full year average basis, offset by 5.4% aggregate growth in other loan portfolios.
19. Lending activity in the Commercial Bank in 2019, both commercial and industrial and commercial real estate, 19 was characterized by better originations and a reduced level of payoffs and paydowns than was the case in 2018. 19. We expect those trends to continue in 2020. As has been the case for the past 9.
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. 9. However, the rate of decline on both the percentage and absolute dollar basis will slow compared to prior years as the portfolio of loans 9.7% of the total. Given these factors, our expectation for 2020 is that average total loans 19. 19.
Taken in aggregate, our outlook for 2020 reflects a lower level of earning assets, 19, which improves our return profile. Combined with some improvement in the margin 9. From what we reported in the Q4 in a flat rate scenario, we expect a low single digit decline in net interest income 9 on a year over year basis. We entered 2020 with a higher run rate in residential
19.
19. The outlook for residential originations is less clear with long term rates above the low point 19. The commercial mortgage banking business had a record year 19. Matching or beating that will be difficult, but that's our goal for 2020. The outlook for 19.
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, 9, which have been growing at a solid mid single digit pace. The 4th quarter's operating expenses, 9, excluding the reduction in the MSR valuation allowance are a good indication of a starting run rate for modeling 2020. 19. Last year's GAAP results included approximately $100,000,000 of items we do not expect to recur in 2020. 9.
The write down of our investment in the asset manager and the settlement of the ESOP litigation. That implies that total expenses nineteen. The capabilities we added to our IT division 19 should enable us to continue to reduce professional services in the coming year as well. Other than normal wage 9. We don't foresee the need to accelerate expenses beyond the current run rate.
We'd remind you 9. We expect our usual seasonal increase in salaries and benefits costs in the Q1 of 2020, which primarily reflects annual nineteen. Equity incentive compensation as well as a handful of other items. Last year, that increase was approximately $60,000,000 9. Based on the proceeding, we expect to be able to produce neutral to slightly positive operating leverage for the year.
19. Our outlook for credit remains balanced. Just as we completed our 6th consecutive year of net charge up experience below 20 basis points. At the risk of sounding like a broken record, 9. I'll caution you again that this trend can't continue and that losses will eventually tick upward.
There continue to be some modest pressures 9.5% on nonperforming and criticized loans, but there are no apparent weaknesses in any particular industries or geographies. Our adoption 19. The new loan loss accounting standard, known as CECL, was effective January 1, 2020. Our expectation, 19. Based on forecasted economic conditions and portfolio balances, as of December 31, 2019, is that the adoption nineteen.
Will result in an overall increase of approximately $140,000,000 or 13% to our reserves. 9. With total commercial reserves being down slightly, reflecting shorter contractual maturities and residential mortgage and consumer reserves increasing 9. For regulatory capital purposes, we have elected to phase in the CECL transitional amount 19. Therefore, the effect of the adoption on the capital ratios will be recognized in a uniform manner, 9, resulting in a reduction to the CET1 ratio by approximately 3 basis points over each of those 3 years.
19. CECL also impacts the accounting for loans previously acquired at a discount that are on our balance sheet. 9. Acquired impaired loans will transition from 90 days past due and accruing to their current performance status, 9, whether accrual or nonaccrual. Approximately $170,000,000 of the acquired impaired loans will transition to nonaccrual status.
9. The income from these loans will only be recognized on an as cash is received basis consistent with originated nonaccrual loans. 9. Lastly, in the future, our loss provision will reflect expected net charge off activity plus CECL reserves 9.5% for loan growth by category, plus or minus changes in our reasonable and supportable forecast. 19.
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 9% in the area of 25%. As to capital, we'll continue to execute our 2019 capital plan 9 through the end of this year's Q2. Our capital allocation philosophy remains unchanged 9. With investments in our business at high returns being our first priority while paying a dividend that's sustainable through economic cycles. 9.
After that, we seek but don't reach for acquisitions that make sense and add value to our shareholders, 9. When those aren't forthcoming, we return capital to shareholders. We have little appetite for warehousing capital 9. We'll now take our next question from the line of Chris. Hi, and welcome to the M and T Bank 4th quarter 20 nineteen.
Thank you, Steve. Thank you, Steve. Good morning, everyone. Thank you, Steve. Good morning, everyone.
9.5% and other macroeconomic factors, which may differ materially from what actually unfolds in the future. Now let's open up the call to questions, 9, before which Laurie will briefly review the instructions.
Thank you. 19 9. Our first question comes from the line of Ken Usdin of Jefferies.
9. Hey, thanks. Good morning, guys. Hey, Darren, just on the expense front, I'm wondering if you can just 9. Clarify a little bit on the point that GAAP expenses you expect to be down because they had that $100,000,000 And you mentioned that the 9.
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
9. Sure. So I guess if you look at the full year 9. On a GAAP basis, you've got about $100,000,000 of one times 19. 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 9. 1% or less.
Got it. And then can you talk about the puts and takes just in that 1% or less? So 9. 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 9.
1% or less relative to the growth that we've seen in the last couple of years. Thanks.
Yes. When we look at the trajectory we've been on, 9. Remember that a big portion of last year's growth in expenses was related to the mortgage business and the 9. That we both acquired and took on in the form of subservicing, so we had to add expense to support that revenue. 9.
And then the rest of what was happening was this transition of our IT capabilities from professional services to salary benefits. 9. And we started to see those professional services come down in the 4th quarter, which we expected, and we expect that trend to continue into 2020. 9. And so as we go forward, the gains in efficiency that we will get or expenses from reducing 9.
Special 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 nineteen. We feel confident that the run rate that we're at now, we can basically run at that ex 9. Normal increases that happen in salaries and benefits as you go from year to year.
Got it. Thanks, Darren.
9. Your next question comes from the line of John Pancari of Evercore.
Good morning. 19. On that same line of questioning, so your operating leverage comment that you expect 9. 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 19. 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.
19. And then in terms of your ongoing IT and franchise investments, 9. 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
19. Well, we're continuing on the transition that we've talked about. 9. And that really is building up our internal IT capability. And we had the uptick in 19 that got that process started.
But from where we end the year, we're now in a place where we're seeing 9. Professional services come down that offset the salaries and benefits costs that we're adding as we're making those conversions. 9. 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 9 without having to have meaningful growth. As we get to the other end of it, obviously, it's our expectation that we'll continue nineteen.
We used those internal team members to improve the expense run rate into 2021 and 2022, but 9. Obviously, we'll give you more details on that when we get there. But for the purposes of 2020, we think we're at a place where we can operate 9. Basically at the level that we're at now with some modest growth from here.
Okay, got it. Thank you.
9. Your next question comes from the line of Erika Najarian of Bank of America.
Hi, good morning.
9. Good morning, Erica.
I wanted to inquire a little bit more about the potential for the margin beyond the Q1. 9. I heard you loud and clear that balance sheet action is going to be quite accretive in the Q1. If the curve stays or the curve forecast stays 9. How should we think about the net interest margin trajectory beyond the Q1?
And also as we think of earning asset growth, 19. 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?
9. Sure. So in the Q1, we expect the net interest margin to increase at least what the printed margin is 9. 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. 9.
And those lower levels, we expect to persist throughout the year. So when you get to the Q1 margin 9. And assuming, as you pointed out, a fairly stable rate environment, we would expect that margin that we end the Q1 with to be fairly consistent throughout the year, 9. Assuming that, that forward curve, in fact, occurs, maybe plus or minus a couple of basis points along the way, 9, but relatively stable. We anticipate that the average earning assets will start the year lower and then come 9.
As the year goes on, as we see the loan growth that we talked about in the forecast that overall, it's 19. Kind of low single digits along the lines of what we saw in 2019 as we go through 2020.
9. 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 9. We're getting it right. So as we think about the run rate for 2020, if we take $100,000,000 out of GAAP, that's 3 point $368,000,000,000 and you're saying growth of 1% or less that includes any nominal increase in salaries and benefits.
9. So in total, core should go up 1% or less from that $3,368,000,000 base.
That's right. Yes. 9.
Perfect. Thank you.
Your next question comes from the line of Peter Winter of Wedbush Securities.
Good morning.
9. Good morning, Peter.
I was just curious on the capital. You ended the year at 9.72%. I'm just wondering where you think
9. So where we'll end 2020 is a little bit tough to predict, 9. Just depending on what happens with the tailoring rules and SCB as we go into CCAR this year, 9, which will have an impact obviously on where we might bring the capital ratios to. And then the other thing that we're paying attention to is just the pace of loan growth and in particular risk 9. But if you look at where we've been over the course of the last actually kind of 5 or 6 quarters, 9.
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. 9. 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, 9. And we'll continue a measured and thoughtful move down towards the range that we've discussed for some time now. 9.
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 9. In the capital plan that we discussed or disclosed in July, 9. It's around $750,000,000 $800,000,000
Okay. And just given you're doing some of the work on remixing 9. The balance sheet to help the margin. I'm just wondering any updated thoughts on the hedging strategy?
9. Nothing that is different from what we've talked about in the past. If you look at where we've been, 9. Our notional amount has grown, but what's actually outstanding has been relatively consistent. In terms of notional dollars, it's nineteen.
$14,000,000,000 $15,000,000,000 of cash flow hedges plus another $4,000,000,000 $5,000,000 of debt. And what we've been doing is just 9. Extending some of those out into future years to have that same amount of protection in place for a little bit longer.
9. Okay. Thanks, Dylan.
Your next question comes from the line of Frank Schiraldi of Piper Sandler.
Good morning. 19. Just on to try to ask the capital question in another way, just curious, and I know you got the CCAR cycle coming up, 9. But given how little impactful little impact CECL has to the regulatory capital levels here, just curious nineteen. 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 9. Continue to return 100 percent plus capital of earnings?
9. 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 9. And what our risk weighted asset growth will be and looking at what capital we think we need to fund or to support that loan growth 9. And make sure that we're running an organization that is very safe and sound. We continue to believe that we can move 9.
The current ratio down, and we'll continue to do it at the pace that we've been on for the last several quarters, 9. Being consistent in terms of what that decline is. Any quarter, you might see some difference between 9. What the change is in the ratio based on primarily asset growth 9. 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
19. As we go
through the first part at least of 2020 is just how the new CECL 9. Impacts earnings on any given quarter, which will be impacted by the mix of loan growth in that quarter and just making sure that 9. We're thoughtful with those capital returns. But as you pointed out, given where we are, we were pleased that the impact 9 on our capital ratios from CECL was fairly nominal. And so we can continue on the trajectory that we've been on.
9.
Okay. And then just sort of a ticky tack question on the provision. Given if the environment if the credit environment stays as is 2019. 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 nineteen.
Just modeling to assume a provisioning goes up by sort of that 13% number, all else equal.
9. I guess, I haven't done that math. The way I tend to think about it is, you've got charge offs that will happen. And then if you 9. Look at net growth in loans and look at the new allowance rate and multiply those 2, that probably gets you 9.
And of course, if you look in any quarter, 9. 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, 9. We wouldn't anticipate any meaningful mix shift in terms of where the growth is coming from on a percentage basis, 9, which would give you that allowance percentage is a reasonable starting point. As I said, it could move around a little bit 9.
Within that quarter, but over the course of the year, I would expect it to be within a few basis points of that number.
Okay. 9. All
right, great. Thanks, Darren.
Sure. Thanks.
Your next question comes from the line of Steven Alexopoulos of JPMorgan.
9. Hi, Darren. How's everything?
Good. How are you, Stephen?
Good. I want to start. So regarding the anticipated decline in liquidity in 1Q 'twenty, 19. If we look at 1Q 2019, quarter over quarter you're down $1,400,000,000 Do you think you're going to have a similar decline in 1Q 2020 or is 9. 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 9. The trust demand business was probably the primary driver if you look back in prior years plus a little bit of the commercial. 9. Commercial balances tend to move up in the 4th quarter and then these companies as they prepare to make their distributions to their owners, 9. That's why you see them come down in the Q1.
And so that's pretty typical. I think nineteen. They're still having a little bit more of their cash sitting in operating accounts versus in interest bearing. 9. And then the other thing that's happened this year for us, obviously, is we've increased the escrow balances, and there is some seasonality to those.
So when you put all those 9. Factors together, you probably get a bigger decrease there. And then we'll be looking at the securities portfolio 9. And that will probably come down a little bit too as we react to the new changes in the LCR. 9.
Okay. Got you. And then on the trust income, which came in much stronger than the original guidance call for and it didn't sound like market appreciation was a big factor. 9. Give more color on why that was so strong this year?
So there's
a couple of things that happened there. We have 9. Within there, a business that is holds retirement assets. And when you add to 9. When you add clients to that, you can they can come in, in big chunks.
And we had one big 9 retirement fund 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 9 as well as in our, what we call, our institutional client services business. There seemed to be a little bit more activity in that business as 9. The back half of the year went on, which helped with the trust fees. And obviously, when I talked about that retirement business, 9.
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 19. It continues to add team members and add clients and has had a strong year.
Okay. That's helpful. Maybe just one final one on 9. I appreciate the color on the 1% expense growth in 2020, given the reinvest in some of the cost saves. But what is expense 9.
What's the natural organic growth rate of expenses? Thanks.
9. When I think about our natural organic growth rate and you look at us through time and you hold 9. Some of the things that have happened with various litigation expenses or mortgage servicing rights 9 or the write off that we had. We're kind of a low single digit grower and it's mainly driven by compensation costs 19 year over year. Last year was just kind of outside because of the mortgage the growth in the mortgage servicing 19.
And then step 1 in our transformation for technology. But generally, when you look at how we run the bank, 9. We pay a lot of attention to our growth rate and expenses because we know we're in a tough industry. And so we're always looking for ways to manage those 9. And keep them in aggregate, growing at low single digits and making investments and finding offsets 19 to cover the cost to keep it at that pace.
And that philosophy hasn't changed.
Okay. That's helpful. 9. Thanks for
all the color. Sure thing.
Your next question comes from the line of Gerard Cassidy of RBC.
9. Good morning, Darren.
How are you Gerard?
Good. Can you give us some color on that residential mortgage portfolio? You indicated it was down, I think 9. The runoff that is down about 9%. You expect it to be less this year.
It looks like you're raising mortgages at the end of the year just over 19,000,000,000 or 18 percent of total loans. What do you see that eventually bottoming out? When does the runoff from 9. The deal that you've done and we have a stabilized number from that 9.
Sure. It's a good question, Gerard. As we watch the portfolio nineteen. When you look underneath there, it's down to about half legacy Hudson City Mortgages and half 9. Legacy M and T Plus new originations.
We're allowing that Hudson City 19. And we'll continue to just because of the return profile of the mortgage business. And the rate 9. The rate of decline in aggregate in the mortgage portfolio is slowing just because the Hudson City 19. 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, nineteen. Especially some of that comes from the servicing business, but you're not going to see it hit a steady state likely in 2020. 9. The only thing that as we work through the new liquidity rules after the tailoring 9. That we're contemplating is what role the mortgage portfolio plays in overall funding since the mortgages are pledgeable with 9.
For funding on a short term basis. So there's a number of considerations that go into 9. Where that portfolio ultimately ends, but we probably continue seeing it move down, but in a smaller dollar amount over the course of 2020.
9. Very good. And then, I know the rules are not set yet on the SCV, but from what you understand today 9. And assuming they don't vary dramatically from what we all understand, do you expect any kind of meaningful impact
9. I guess if they incorporate it, it 9. Would be helpful because the threshold that you have to meet would be lower and there will be some opportunity there. 9. There's also been talk of not having to pre fund the dividend and not having an assumption of asset growth 9.
Under stress, which all of those things are positive. The offset to that is what our loan growth 9. Assumptions look like and in particular what the mix is in terms of risk weighted assets that will be an offset. But 9. It's obviously remains to be seen how this will be implemented 9.
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 9. Great. Thank you.
Your next question comes from the line of Saul Martinez of UBS.
9. Hey, guys. Good morning. I guess we have 10 more minutes. A couple of questions.
One, just a follow-up on CECL. 19. By my calculations, your ACL ratio goes roughly from about 115 basis points to about 130 basis points. 9. As I think about the changes in your mix in the loss content on your net 9.
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 life 9. Your growth relative to your back book is the net growth in loans, those with 9. 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 gravitates
9. I guess if your time horizon 9. 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, 9.
In short term, in this case, would be like over the next 12 24 months. You probably don't see much change in that 9. Just because the start point on some of those other portfolios, meaning the other consumer is relatively small as a percentage compared to 9. The resi mortgage, the commercial real estate and the C and I. And that assumes that 9.
We don't do anything to look at those portfolios and look for alternatives, like you've seen some of the 9. 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 9.
On obviously the portfolio and the allowance in there because if you did a securitization, that allowance would come off. So 9. There are a number of moving factors, but I guess the short answer to your question is, your math is consistent with ours. 9. And I think it would take a couple of at least a couple of years 9.
Running at the rate that we're at with no change, to see that number go up.
Okay. That's helpful. 9. Let me just change gears a little bit. At a conference in early November, I think it was a BAB conference, you highlighted 9.
Some of your key metrics versus their long term averages and your NIM, I think you were at 9. Substantially higher than what the premium of your NIM, the delta between your NIM and the peer median 9. It was substantially higher today than it has been historically. I think it was like 50 basis points or something like that. And historically, it's 20 or something in that neighborhood.
9. It seems like from your outlook, you think that really elevated delta 9. And I think you were kind of hinting 9. 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 19. And other than obviously the rate outlook, but am I reading that right that you think you will be able to maintain a
9. I guess I'll break apart your statement into 2 pieces. 9. 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 9. A little higher than what we would normally expect, and especially in this kind of time period. And you can see that 9. The gap between us and the next closest peer in the median has come down a little bit. But really, when you look over the last couple of quarters, 9.
It's been fairly consistent. We would need to see rates come down a little bit further to see that delta compress, but 9. We expect over time that we try to run the bank to have a slightly lower cost of deposits and a slightly higher yield on our loans and 9. We manage our expenses a little bit better in credit, and it's not our objective to be outsized 9. Performance in any one of those categories, but a little bit better in each one.
And over long periods of time, that adds up to consistent 9 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, 9. That's kind of how we try to run the bank to achieve the returns that we do. So we expect 9.
Obviously, given the earlier comments in a stable rate environment, we expect the margin to be relatively stable this year. 9. Given that, we would expect to maintain our premium over the our GAAP, our positive GAAP compared to the next 9. Closest in the median, but any movement down and you'll probably see a little bit of that erode, but we don't see
9. Right. So as long as
the rate environment remains stable, that historically high delta, there's no reason why that should compress? 9.
Yes. From what we can see, we believe that, that will persist.
Okay. All right. That's really helpful. Thank you.
Sure.
9. 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, Rui, Woods.
19. Good morning, Darren and Don. Hey, we're set up for a good next year, right?
We sure hope so. We're not 19.
I mean, hope is what spring hope springs eternal in Buffalo every 9. Right. So let's hope so. But I think I do have 5 minutes left in the morning. I think that's 9.
I just had 2 real quick follow ups. I know you've had all kinds of questions today on both of these topics. So 9. Just wanted to clarify a little bit on the margin guidance, the 10 basis points, Darren. Yes.
Now is that all liquidity driven, 10 basis points? 9. I think you guys, whether it was late December, early January, I think you redeemed some debt. So that kind of factored into that sort of 10 basis
9. It is. Its impact is in the grand scheme of things relatively small on the NIM impact. 9. The main drivers are the cash and securities.
Got it. Got it. Makes sense. And again, on expenses, this is a 20 21 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 tech expenses kind of consolidated and coming out like you said in recycling, 19. Do you think 2021 is one of those where expenses are flat or is it just maybe normal M and T expense inflation out into 2021? 19.
Well, you're just recovering from doing the plan for 2020, let alone 2021. So 19. 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 9. To be very careful with our expense growth and make sure that we see a path if we make those investments to bring it back down or that there's offsetting revenue 9 like we did with the mortgage business this year. The low single digit increase, 9.
As I mentioned before, it's primarily the result of salary inflation. Who knows where wage inflation ends up through 2020. 19. The unemployment rate stays this low, who knows where we'll end up. But we continue to believe that in the banking business, efficiency matters 9.
And being cost effective matters, so we pay a lot of attention to that. And of course, if we can drive that growth down 9. To something less than 1% or even negative, we will look to do that, but too early for me to make
nineteen. That's fair. I thought I'd ask anyway. So but appreciate your time. Thanks.
It was a good try. 9.
Thank you. I will now return the call to Don McLeod for closing comments.
Again, thank you all for participating today. 9. 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
9. Thank you and goodbye.
Thank you for participating in the M and T Bank 4th Quarter 2019 Earnings Conference Call. You may now disconnect.