Good morning. My name is Samantha, and I will be your conference operator today. At this time, would like to welcome everyone to the M and T Bank Q3 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Don McLeod, Director of Investor Relations. Please go ahead.
Thank you, Samantha, and good morning. I'd like to thank everyone for participating in M and T's Q3 2019 earnings conference call, I will now turn the call over to Samantha. 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, I will now turn the call over to the operator. Thank you. And 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 MRT Bank
I will now begin
the call. MT encourages participants to refer to our SEC filings, including those found on Forms 8 ks, I will now turn the call over to our Chief Financial Officer, Darren King.
Thank you, Don, and I will now turn
the call over to Tom.
As noted in this morning's earnings press release, M and T's results for the Q3 include several items On net interest income, although we recognized an additional valuation allowance on our mortgage servicing rights, which how mortgage loan originations can act as somewhat of a partial hedge for the mortgage servicing business. Loan growth I'm pleased with net charge offs stable at rates well below our long term average. A further decline in criticized loans was accompanied by an increase in non accrual loans, primarily the result of 1 large loan previously reported as criticized. Let's take a look at the specifics. Diluted GAAP earnings per common share were $3.47 for the Q3 of I'll now turn the call over to the operator for the Q2 of 2019 and $3.53 3rd quarter results produced an annualized rate of return on average assets of 1.58 percent and annualized return on average common equity of 12.73%.
This compares with rates of 1.6% and 12.68%, respectively, I'll now turn the call over
to the operator for the Q
and A session. Included in the GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $4,000,000 or $0.03 per share or per common share, little change from the prior Consistent with our long term practice, M and T provides supplemental reporting of its results on a net operating or tangible basis I will now turn the call over to the operator for the Q3, which I'll now turn the call over to Tom. Thank you, Sam. Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you. Our next question comes
from the line of I will now turn the call over to Chris for closing remarks and $531,000,000 in last year's Q3. Diluted net operating earnings per common share I would like to turn the call over to the operator for the Q3 compared with $3.37 in 20 19 second quarter and $3.56 in the Q3 of 2018. Net operating income yielded annualized rates of return I will now begin the call for the Q2. The comparable returns were 1.68% and 18.83% in the Q2 of 2019. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non GAAP results, I will now turn the call over to Tom.
Thank you, Tom. Thank you, Tom. Thank you, Tom. Thank you, Tom. Thank you, Tom.
Thank you, Tom. Thank you, Tom. Thank you, Tom. Thank you, Tom. Thank you, Tom.
For the Q2 of 2019, we're impacted by a $48,000,000 write down of M and T's investment in an asset manager, I will now turn the call over to the operator for the Q and A session. Which have been accounted for
using the equity method
of accounting. The write down amounted to $36,000,000 after tax effect I will now turn the call over to the operator for $0.27 per common share. In July 2019, M and T agreed to sell its investment in the asset manager, which had been obtained in the 2011 acquisition of Wilmington Trust Corporation. The sale was consummated in late September. There were no such noteworthy items in 20 eighteen's Q3.
Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $1,040,000,000 in the Q3 of 2019, I will now turn the call over to Chris. Thank you, Chris. Thank you, Chris. Thank you, Chris.
Thank you, Chris.
Thank you, Chris. Thank you, Chris. Thank you, Chris. Thank you, Chris. Thank you, Chris.
Good morning, everyone. On the positive side, a more favorable mix of interest earning assets, I'll now turn the call over to Chris. Specifically, a higher proportion of loans added about
2 basis points to the margin.
A higher level of cash on deposit at the Fed I'll now turn the call over to Tom. We estimate that lower short term market rates, primarily LIBOR, accounted for some 8 basis points of the decline. This is consistent with our expectations of a 4 to 9 basis point decline And by implication, LIBOR. A higher cost of interest bearing deposits, primarily mortgage escrow deposits, accounted for approximately 5 basis points of the decline. We continue to see inflows of these escrow deposits, a result of higher prepayment the total cost of interest bearing deposits would have been approximately flat as we manage deposit rates lower.
As expected, the migration of deposits into higher yielding categories, notably commercial deposits into interest checking and on balance sheet sweep has slowed And rates offered on new certificates of deposit have declined. Average loans grew by 1% compared with the previous quarter. Originations remain solid, while payoffs and paydowns remain consistent with levels we've experienced in the first half of twenty nineteen. Looking at the loans by category on an average basis compared with the linked quarter. Commercial and industrial loans were roughly flat Compared with the linked quarter, as the usual seasonal softness in loans to auto dealers to finance inventories was offsetting growth in other categories.
Commercial real estate loans grew 1% compared with the 2nd quarter. Residential real estate loans declined by less than 1.5% compared with the linked quarter. As was the case last quarter, the continued comparatively steady pace of paydowns of mortgage loans acquired in the Hudson City transaction was partially offset I will now turn the call
over to the operator by higher levels
of loans originated for sale. Holding originations for sale aside, we expect the portfolio of acquired mortgage loans I will now turn
the call over to Tom to continue its low double digit rate of principal
amortization in future quarters. Consumer loans were up 4% As growth in recreation finance loans continues to outpace declines in home equity lines and loans. There were no particular standouts positively or negatively in our community banking regions commercial mortgage banking were particularly strong. Average core customer deposits, which exclude deposits received at M and T's Cayman Island office and CDs over $250,000 grew an estimated 3% compared to the 2nd quarter. This primarily reflects the escrow deposits we referenced earlier.
Turning to non interest income. Non interest income totaled $528,000,000 in the 3rd quarter compared to $512,000,000 in the prior quarter, mortgage banking revenues were $137,000,000 in the recent quarter compared with $107,000,000 in the linked quarter. Residential mortgage loans originated for sale were $835,000,000 in the quarter, up from $723,000,000 in the 2nd quarter, reflecting a new wave of refinancing activity in the face of lower longer term in the face of the lower I'll now turn the call over
to the operator for the Q3.
Total mortgage banking revenues, including origination and servicing activities, we're $88,000,000 in the 3rd quarter, improved from $72,000,000 in the prior quarter.
To clarify that's residential mortgage banking revenue.
Thank you, Don. In addition to higher gain on sale revenues, the increase reflects reaching the run rate of the residential loan servicing and subservicing that we acquired in the 1st and second quarters. Commercial Banking revenues were $49,000,000 in the 3rd quarter compared with $35,000,000 in the linked quarter, reflecting notably stronger origination activity. The $30,000,000 or 20 8 percent increase in total mortgage banking revenues brings with it higher expenses, Notably, dollars 5,000,000 of compensation costs as well as the $14,000,000 valuation allowance recorded during the quarter on our mortgage servicing rights. Trust income was $144,000,000 in the recent quarter, unchanged from the previous quarter.
Recall that the 2nd quarter results include $4,000,000 of seasonal fees earned assisting clients with their tax filings, I will now turn the call over to the operator. Trust income continues to grow in the upper single digit range over the prior year. Service charges on deposit accounts were $111,000,000 up from $108,000,000 in the 2nd quarter. The recent quarter included $4,000,000 of securities gains, representing valuation gains on equity securities, while the Q2 of 2019 included $9,000,000 of similar valuation gains. Turning to expenses.
Operating expenses for the Q3, which exclude the amortization of intangible assets, were $873,000,000 I'll now turn the call over to Chris.
Thank you, Sam.
Thank you, Sam. Thank you, Sam.
Thank you, Sam.
Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam. The 2 most recent quarters' results reflect an addition to a valuation allowance on our mortgage servicing rights I will now turn the call over to the operator for questions.
Thank you, Sam.
Thank you, Sam.
Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam.
Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam. Thank you, Sam.
Thank you, Sam. Good morning, everyone. As noted earlier, those same lower rates have prompted a notable uptick in residential mortgage Loan originations and associated gain on sale revenues. Salaries and benefits our press release were $477,000,000 up $21,000,000 from $456,000,000 in the prior quarter. Contributing to the increase was one extra compensation day in the 3rd quarter amounting to $5,000,000 as well as $5,000,000 of compensation costs I will now turn the call over to the operator for questions.
In addition, the 3rd quarter results I'll now turn the call over to Chris. Include another $10,000,000 of costs that we would not expect to recur in the Q4. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 55.9% in the recent quarter, relatively unchanged from 2019 Q2. The ratios for both quarters include the additions to I will now turn the call over to the MSR valuation allowance, while the 2nd quarter figure includes the write down of the investment in the asset manager. Next, let's turn to credit.
Overall, credit quality remains consistent with our recent experience, given the continued strength of the economy, annualized net charge offs as a percentage of total loans were 16 basis points for the 3rd quarter, little changed from the 15 basis points in the first half of twenty nineteen. Non accrual loans I'll now turn the call over to Chris. Increased by $140,000,000 at September 30 compared with the end of June, reflecting 1 large commercial loan to a wholesale distributor That was previously included in criticized loans. The ratio of non accrual loans to total loans rose to 1.12% at the end of the quarter. Notwithstanding the increase in non accrual loans, total criticized loans decreased further from the levels seen at the end of June.
The provision for credit losses was $45,000,000 in the recent quarter, exceeding net charge offs by $9,000,000 The excess provision primarily relates to the non accrual loan to the wholesale distributor, net of the decline in other criticized loans. The allowance for credit losses increased to $1,040,000,000 at the end the ratio of the allowance to total loans increased by 1 basis point to 1.16%. Loans 90 days past due, on which we continue to accrue interest, excluding acquired loans that had been marked to a fair value discounted acquisition, were $461,000,000 at the end of the recent quarter. Of those loans, $434,000,000 or 94% were guaranteed I will now
turn the call over to the operator.
M and T's common equity Tier 1 ratio was an estimated I'm pleased to report that we are in the range of 9.81% at September 30 compared with 9.84% at the end of the second quarter. The modest 3 basis point decline reflects the net impact During the quarter, M and T repurchased I'll now turn the call over to Chris. Thank you, Sam. Thank you, Sam. Thank you, Sam.
I will now turn
the call over to the operator.
As we enter the final quarter of 2019, our guidance for the year remains little changed from our prior comments. We continue to expect growth in total loans in 2019 To be at the low single digit pace with continued runoff in residential mortgages more than offset by aggregate growth in the other loan categories. The reductions in short term rates implied by the forward curve will continue to pressure both net interest income and the net interest margin. However, we still expect modest year over year growth in net interest income for 2019. All else being equal and holding aside volatility in escrow deposit balances and associated cash balances placed at the Fed, each hypothetical reduction of 25 basis points in the Fed Funds target should result in 4 to 9 basis I'll now turn the call over to the operator for questions.
The servicing and sub servicing acquisitions we completed, combined with the strong third quarter origination activity in both our residential and commercial mortgage banking operations, I'm going to be growing at a little better than a mid single digit pace. We would not expect mortgage banking results for the 4th quarter, I'll now turn the call
over to the operator.
The remaining fee businesses continue to perform in line with our expectations, growing in the low single digit range. Expenses for the year have grown a little more rapidly than we previously indicated, driven by 2 primary factors: growth in the mortgage business and investments in the bank, notably IT staff higher expenses associated with the servicing and subservicing acquisitions as well as from the compensation expense associated with strong mortgage originations activity drove expenses above our initial expectations. We also continue to expect to see some offsets to the year to date additions to our IT staff through lower contractor and consulting expenses starting in the 4th quarter. We expect 4th quarter expenses to be lower than our outlook for credit remains little changed. While sentiment about a potential recession Building, we are not seeing or hearing signs of a slowdown.
Our customers' largest concern is their ability to find enough workers I will now begin the question and answer session. As noted, criticized loans will be down this quarter from the end of June. That said, the specific reserve taken on the wholesale distributor we mentioned could result in a notable charge off in the coming quarters. Regarding the new loan loss accounting standard known as CECL, we've completed our 2nd parallel run and expect to disclose I'll now turn the call over to the operator for the Q3. Thank you, I expect the allowance for losses on loans and leases to increase by approximately 5% to 15% upon adoption of the accounting standard.
That in turn I will now turn the call over to our capital ratios of less than 10 basis points. Regarding capital, we expect to continue to execute the capital plan that we've previously outlined. 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 Samantha will briefly review the instructions.
Your first question comes from the line of John Pancari from Evercore.
Good morning. Good morning, John. On the expense outlook, I just want to get an idea. I know you had indicated that the 4th quarter expenses should not it should be down from the 3rd quarter level. Just trying to understand How we should think about the magnitude of that decline?
I know your previous expectation had been that the second half expenses would be similar to first I have. So that would imply if that still holds, that would imply a pretty sharp drop off in 4th quarter. So just want to get an idea what type of decline we can expect. Thanks.
Sure. So as we look at the Q4 and think about some of the things that happened in the Q3, I'll start with that. The mortgage business obviously had a great quarter, and there was about $20,000,000 of expenses associated with that, Which we didn't account for, to be honest, because we weren't sure where rates were going to be when we gave the guide. And so that $20,000,000 is I would just I'm going to add it to the guide, but let's not forget that there was $30,000,000 of revenue that came along with that. And then, there was about I'm going to turn the call over to Timna to discuss the financial results.
Okay. Thank you. Thank you. Thank you. Thank you.
Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from the line of Chris Raffat.
Thank you. Thank you. Thank you. Our next question comes from the line of Chris Raffat. Thank you.
Our next question comes
from In the 4th. And so, we're at that point, we're a little bit above what the guide was, but we wouldn't expect things to be necessarily equal in terms of each quarter in the second half Being exactly the same. So we think that there's some room for the expenses to come down and get down to the level that would have been implied On an average basis in the guide that we gave before.
Okay. And then on that same topic, on the You mentioned that obviously the higher mortgage related costs were a factor, but also higher costs than you had expected in your technology investments. Can you give us a little more color there? What surprised you there? And How should we think about that when we look at 2020 and if it could be a factor again as you forecast
Sure. I guess in the IT space, there's a few things, I would like to turn the call back to the operator. Some of which I would describe as timing related in the quarter. When you see in the other software or other processing and software line, Well, there's some annual licensing expenses that came in, in the quarter. We wouldn't expect those to repeat.
When you look in I'm happy to take the questions. The other cost is where a lot of the professional services expenses. And in there, we talked about before the pace at which the contractors roll off as the new staff comes on and there were some projects that extended maybe 30 days or 45 days, a little bit longer than we thought to bring them to completion, we've seen those roll off as we get to the end of the quarter, and that's why we feel confident that we'll actually start to I see that the impact of the adds to staff and the reduction in contractors as we go into the 4th quarter And start to recognize that into 2020.
Okay. Thank you.
Your next question comes from the line of Ken Zerbe from Morgan Stanley.
Great, thanks.
Good morning. Good morning, Ken.
Actually, I just had a quick question.
In terms of the mortgage banking business, obviously, with the servicing that you've taken on, obviously, this This quarter was a really good result. But if we think about the ongoing run rate from this, I know you said Q4 is probably not going to be as high as 3Q, but what is I'm Kind of the right level, if that's if you can kind of sort of pick a number. I'm just trying to get a sense, are we at some meaningfully sustainably higher level given the servicing assets. Thanks.
Sure. So we're At a higher level, than where we would have been if you compared to the Q3 of last So the Q3 of this year would reflect pretty much a full quarter's run rate of both the servicing rights that we acquired as well as the subservicing, and that should be fairly stable. Of course, servicing is a declining asset, and so the fees come down a little bit each quarter based on the unpaid balances. And then really the volatility that we wouldn't expect To repeat, but it's also a bit of a function of rates, it's just the origination activity. And right now, I'm talking specifically on the residential side.
Now one of the things that does tend to happen when you buy servicing rights is, as you take the impairment Or set up the allowance for prepayments. When those things prepay, oftentimes, it shows up down the road in gain on sale, and that was I will now
turn the call over
to Mark. Part of the uptick in this last quarter. In the commercial space, we had just a fantastic Q3. I think it was the highest origination quarter I'm pleased to report that in our history in commercial mortgage, driven off the originations. I think you saw a lot of activity in the marketplace where rates had come down and where there was some concern about the amount of business that Fannie and Freddie might do.
Towards the end of the quarter, they reaffirmed their appetite for the coming 5 quarters. So probably take a little bit for the pipeline to rebuild, but it should be a solid quarter, but what I would consider a more normal I'd like to turn the call over to the operator for questions. Okay. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Our next question comes from Some of the things that were a little bit outsized in the mortgage business in the Q3 of this year was really about originations As opposed to servicing, and servicing should be pretty consistent as we go from here.
Okay, great. And can you just remind Like what is the dollar amount roughly that the acquired servicing and the sub servicing rights contributed to this quarter's earnings?
When we talked about it in March, we talked about an additional $60,000,000 of I'm happy to take your questions. So We're probably in the range of $17,000,000 to $20,000,000 somewhere in there, maybe closer to $17,000,000 than In terms of what the run rate is on that acquired servicing, I guess I'll just reiterate that you earn a fee based on the unpaid principal balance, and each month those decline As people make their payments, so as those decline, that fee income will move down at a similar pace. Thank you.
Your next question comes from the line of Matt O'Connor from Deutsche Bank.
Hi, guys. I just want to follow-up on expenses a little bit. It's been a pretty busy day. Just as I kind of try to add in the comments that you made Expenses in the Q4 are backing out the $30,000,000 and kind of coming to the maybe average of what you were thinking before. What does that I'm
I guess if you do the math And you look at what we would have implied in the guide, it would have been right around $830,000,000 $835,000,000 a quarter, and You're probably in that range for the Q4.
Okay. And then that's helpful. And then A follow-up, it was asked earlier, but as you think about the underlying expense growth at the company, obviously mortgage was unusually high and you I'll talk to some lumpiness in the investment. But as you think about kind of whether it's full year 2020 or a Medium term underlying expense growth, where is that? And where I'm getting to kind of the next question is, I think there is I'm concerned that banks your size may not have some of the scale that you need, and that's why we're seeing un expense pressure versus the big guys And obviously with the rate headwinds out there, pressuring revenues on that side, it's just more I'm sorry, potentially.
So if you could just address those 2, those topics. Thank you.
Yes. I guess I'll try and remember them all. You said a lot there, man. I guess, overall, when you look at the expenses at the bank, this year was a year of growth that was very atypical for M and T. Obviously, a bunch of it was related to the mortgage business and the servicing that we acquired.
That was $40,000,000 we've so far added about $22,000,000 to the allowance, the valuation allowance, which we might not have anticipated When we first agreed to acquire those loans back almost a year ago, and so those have driven the expenses up. And then the other thing that's been happening obviously is the investments we're making to change the way we deliver IT at the bank. And I think IT is probably one of the big things that is talked about In terms of scale and what we're doing is, I think we're positioning ourselves to actually better compete with our competitors, Both regional and large national players, by the investments that we're making. And so by shifting I think more of the resources, more of the team, the IT team on staff, we think we can increase capacity in terms of what we're able to deliver for the same expense base, and that's part of why we're making that move and also I'd like to move to more agile approaches, which should bring new capabilities to market a little more quickly than what we may have done in the past. And so part of the shift is to make sure that we're competitive.
And in the time that you're building that capability, you've got other projects going on. And we've talked a little bit before about the kind of double expense that you incur while you're making that transition, it'll happen a little bit each quarter as we go through that. But we'll start to see some of the payoff of that in the coming quarters, and we think we'll start to see it in the Q4 with And so when you think about where expenses are, and have been for M and T over time, We'll give you our thoughts on 2020 when we get to January. But really, when you look at M and T through time, we've been a low nominal expense growth player, Generally kind of 2% a year or less. And we certainly think that we're in an industry where that's warranted, and we think about that all the time.
And given the growth this year and investments that we've made, we'll look to see if we can't be in or below that range as we go into 2020. But like I said, we'll give you more details on that in the January call. But I don't think we need to run at this kind of expense rate on an ongoing basis, And we absolutely have some ways to improve productivity based on the investments that we've made, which will help us stay competitive. And obviously, we'll react To the changing rate environment, which we've done successfully in the past.
Your next question comes from the line of Frank Schiraldi with Sandler O'Neill.
Good morning. Just wondering on the if you could Darren, if you could give a little more color on the credit that moved into non accrual in terms of industry, geography, collateral. Any color you could give would be interesting. Thanks.
Yes, sure. Obviously, we're not going to talk about specific customers per se. But when we look at this one customer, they're a wholesaler, and so some of the financing is tied to inventory and receivables, and they've had some challenges internally With their management, and that's put them in a bit of a cash bind. And that's why we've kind of moved it from criticizing the non accrual. And the question will be the value ultimate value of the receivables and collectibility of those as well as the inventory.
We obviously don't think it's 0, but we do expect that there will be likely some loss On that as we work our way through. Obviously, given the magnitude of this relationship And the industry was in. We went through all of our relationships over $100,000,000 Which fortunately, I can count them on both hands, and looked through them, and they're not in Similar industries and are in fact quite healthy, and we looked through for other wholesaler and distributor type relationships, and we didn't find any others that had the similar situation. So when I look through the loans that went into criticized Through the first and second quarter, this was one of them when we talked about it at the time. We looked for any common themes In those criticized loans, either in terms of industry, geography, or the like, and we couldn't find anything Other than they tended to be situational specific and oftentimes related to management, and I would describe this As in that same ilk.
Okay. And then as a follow-up, you clearly mentioned you're not seeing broader weakness in credit. Just wondering if Any areas that you're seeing as becoming more frothy areas you guys are shying away from in your various geographies?
Nothing in particular. We've obviously we've paid a lot of attention all the way along to some of the office space Ella, things going on recently in the industry, but we don't have much there. When we look around, there's nothing in particular I would point to that is what I would describe as very frothy. There continues to be Lots of competition for lending. Pricing seems to be fairly reasonable.
When I look at our spreads, They've been fairly consistent for the last three quarters. They did drop after tax reform. You kind of saw a resetting of The industry after you saw resetting of margin after tax reform, but that's stabilized since then. And overall, things seem really good. Structures haven't really changed much from what we've been dealing with over the last Few quarters.
And as we look, obviously, New York City is the place we pay a lot of attention to, and we don't see anything there that causes us So, there's nothing is really standing out right now, which Which always makes you wonder what's going to pop. So we're continuously looking through the portfolio to see Street or loan type, be it C and I, permanent mortgages, construction, where we have Any concerns?
Yes. All right. Thanks for the color.
Your next question comes from the line of Ken Usdin from Jefferies.
Thanks. Good morning. Darren, can we talk a little bit more about the net interest income? I heard your comments about the year over year growth expected still for 2019, but to the points about the cuts that have already happened and your guidance about what a cut does, The 4% to 9% on a full year basis. Can you help us understand the pushes and pulls with just the remaining burden from the cuts And then the excess liquidity in terms of how you expect the NIM to traject from here in terms of magnitude of compression as you look to the 4th?
Right.
It's a bit of a moving target these days, isn't it Ken,
with the
pace of LIBOR and where the Fed might go. And that's really why we try to help give you guys the guide by talking about the 4 to 9 I'll take a look at the numbers and I'll take a look at the numbers and I'll take a look at the numbers and I'll take a look at I'll now turn the call over to the operator. When you look over the last two quarters at the margin compression, the print It doesn't sound it doesn't seem great, obviously, but when you look at net interest income, it was down $9,000,000 last quarter and down $12,000,000 this quarter. And when you look at some of the things going on underneath that might take you beyond the 4% to 9%, you look at increases in cash balances And the cash balances carry a positive spread, albeit small. So they don't I will not harm net interest income, but they certainly harm the margin.
And you would see the same thing with the escrow balances that have grown last quarter and this quarter as well, I would like to turn the call over
to the operator for questions.
That they're basically slightly positive, and in some cases, slightly negative carry, and so they don't have much of an impact on NI and net interest income, but they do on the margin. And so, as we look forward, The 4% to 9% per 25% seems fairly reasonable to us. The actual margin will move around a little bit Depending on what happens with escrow balances, which can be as much a function of the rate environment and prepayments, as well as Other cash balances at the Fed. So there's a bunch of That are moving there, but at its core, it's 4% to 9%. The one thing that I think is encouraging Growth this quarter, we would have seen the increase in interest bearing deposit costs be basically 0, and we would start to see I
will now turn the
call over to Tom. I will now turn the call over to Tom. Thank you, Any further decreases in LIBOR, but it still keeps you within that 4% to 9% range as we go forward. And then Yes.
Yes. So just that I guess my follow-up would just be then to your point about the modest downward trajectory of NII dollars. Is that the trajectory that you'd still expect given and I hear you on all the moving parts of it, but do we still Just you have to expect that modest slide in NII as you go forward from here or is there something that can change with regards to that trajectory?
The Trajectory, it might move around a little bit in any given quarter depending on the pace of deposit repricing, But those are over a 12 month, average is kind of the 4% to 9%. And then obviously, the biggest driver is Just LIBOR and how fast LIBOR moves down and how many rate cuts we get. Of the most of the 2 we had this quarter are in there. There's probably a little bit of residual from the last cut, just because of when it happened in the quarter. But, so we'll see some of that in the Q4, And then we'll see what happens with the LIBOR and the Fed over the coming meetings.
Okay. Last quick one. Just you mentioned that How much higher are the escrow deposits priced versus, I guess, the average interest bearing deposits at $85,000,000 to your point that The 85 would have been closer to flat without the escrow. So can you just give us an understanding of the difference between where the escrow deposits are coming on versus Where your kind of average is underneath?
Yes, sure. So round numbers, when you look The escrow balances, they're priced off an index either off of Fed funds or off of LIBOR. So they're kind of around 180, these days. And when you look through the rest of the portfolio, it's primarily commercial interest checking that is driving, the interest expense on that line. And within there, there's a range of rates.
Those are individually negotiated with each customer based on the relationship and the magnitude of it. And my recollection is that the average there is around 70, 75 basis points. So it So you probably double, in terms of what the escrow balances are earning versus what The other ones are. The nice thing about the escrow balances is because they are linked to the index, as the index moves, so too does the cost of those.
Understood. Thank you, Darren.
Your next question comes from the line of Steven Alexopoulos from JPMorgan. Steven, your line is open. Steven, you might have yourself on mute. Okay. Your next question comes from the line of Marty Mosby with Vining Sparks.
Well, thank you. I wanted to touch base with you just to summarize these moving pieces because when you think about your expenses, you really have 1, the mortgage valuation, if I'm getting you right, in other expenses, typically that kind of gets netted out in the revenues, So you wouldn't see that grossed up expense. So that's driving your expenses higher this particular year. You've got this Transition going from external technology support to internal technology support, so we're right in the middle of that doubling up of expenses. You're seeing the benefit of those two things rolling off as you kind of guided towards a $40,000,000 to $50,000,000 reduction in expenses as you go from the 3rd to 4th quarter.
As you go into next year, If you kind of take that dynamic forward, it seems like your expenses could actually drop as you go into 2020 once you get the benefits of not having the And you don't have the let's say the long term rates are flat, so you don't have this valuation situation.
So I guess if you look forward, Marty, I think the way you're thinking about it is exactly the way we're I'm seeing it and thinking about it. And really, the only thing that would be a timing difference on when we might The expenses actually drop versus the growth rate drop very dramatically. The latter, we're definitely expecting. I'd like to ask you to see actual decrease. We still got the transition going on with that tech team.
That's going to continue through 2021. And We're looking to bring on a large number of folks, and they've come on in chunks of probably 100 to 150. And That kind of happens consistently over maybe a quarter to every 4 months. And when you're in that time period, you're bearing the double cost. And so we've started down that path.
We did our first wave this year. Probably took us a little bit longer to get up to speed and a little bit longer to get some of the contractors out than we might have anticipated going on. We are going into it, but we're getting smarter at how we do that and better able to match the timing. We shouldn't carry it quite as long as we did this year, but we will continue to see that, the cost of that transition happen through 2020, and really start to see the benefit in 2021. On the mortgage side, like you pointed out, that stuff should wash I'll take a question and answer session.
And as we go through 2020 compared to 2019 in the mortgage portfolio, holding the valuation reserve to the side, That should start to normalize itself, and the expenses will obviously move in relation to how the unpaid balances are performing. And then when we watch some of the other costs and some of the other professional services, there were some other activities that we had going on this year that we wouldn't expect to repeat, and so those should help expenses. The offset there is just I'll hand over
to Scott to discuss the
compensation costs for folks that have been added to the team and just give people raises that raises your run rate And you got to offset that. So there's a couple of things going on back and forth. But when you think high level, Over the next couple of years, the way you're thinking about it, Marty, is exactly the way we're thinking about it.
And then on the credit side, because really the variances in this particular quarter are in my mind are expenses and then up in the credit side. The $9,000,000 you have put into the allowance and you put some into it last quarter as well, has that You have covered what you expect to see in the charge off from this large relationship that might get charged off in the next couple of quarters. So have you kind of We funded that and so when we see the event, you'll actually just be drawing down reserves to pay off the expected loss?
What happened there, Marty, was that loan was obviously criticized before, and we started to reserved for it at that point. There were some other criticized loans that either paid off or became performing. And so What we had put aside for them will help cover the increase in the one that went non accrual And then we added to it. And so based on what we know today, it's in the provision, and we feel good about it. But This one is a little bit more of a fluid relationship just because of the nature of the collateral.
And so depending on how things move with that organization, the collateral values could move around a little bit on us, and that's why we moved it to non accrual and why we set up or added to the provision or added to the reserve, and I'll let you guys know that we'll probably have something in the future, but the exact magnitude and timing is still a little bit But outside of that, as you pointed out, we criticized coming back down and the rest of the portfolios and we look at the delinquencies and what has been happening with the charge offs. Knock on wood, everything has been fairly stable and predictable. And I would expect that as rates come down, that would help debt service coverage ratios and customers' ability to pay, Which wouldn't lead you to believe that the charge offs might tick up. The counterargument obviously is that if GDP slows and growth slows that Well, the interest costs might come down. You got to keep an eye on revenues and the ability to service the debt from that side of the equation.
Thanks.
Your next question comes from the line of Chris Spahr with Wells Fargo.
Thank you. I have a balance sheet question and a tech follow-up question. So for the balance sheet, the long term debt has been trending down for the past 3 to 4 years. Is that going to stabilize? Or do you think that can continue to run off as your liquidity kind of get kind of smoothed out unless you have another deal?
Okay. So if you look at the long term debt, it's been coming down, but there's been a bit of an uptick in short term and then obviously an uptick in some of the deposit balances in the last little while, particularly driven by escrow. And so the mix of long term and short term, we will now start to I will reevaluate given that LCR has the ruling has been finalized. So we were kind of using more short term borrowing, to manage the liquidity coverage ratio and our investments in HQLA, while we are waiting for the rule to be finalized. And so now that there's a little More certainty there, we'll look at how much securities balances we want on the balance sheet and look at the funding mix of those.
But we've also got some long term debt that is going to roll over next year, And obviously, we'll look to replace that, but subject to, where we see the balance sheet going. But we think we've got some opportunity there to manage The securities portfolio, now that the rules have been finalized and given how we feel about the strength of the organization.
And regarding tech, so I believe when I've talked to you in the past, it's around 10% or so of your revenues are spent on technology. It's around maybe a little less than $700,000,000 with about sixty-forty run the bank, I'll change the bank. And as you bring more staff in house, do you see either
one of those changing?
No, I guess, we haven't I don't think disclosed or talked about what the tech budget is in specifics. I think that the 10% to 12 percent that you might be referencing as we talked about the compound annual growth rate of that part of the budget. And then the mix Between kind of run the bank versus improve the bank, build the bank, whatever you want to describe, sixty-forty is probably a reasonable estimate that can move around from year to year depending on what's going on. When we're making investments in New regulations like FDIC 370 or CECL, I don't know whether we would call that build a bank or run the bank. We're probably splitting hairs there.
But at the end of the day, the total tech budget in the short term is running a little bit higher because of the transition that we're making, our belief is that we will, all else equal, I'll be happy to answer your questions. Juste:] We'll be happy to answer your questions. Juste:] We'll be happy to answer your questions. Juste:] We'll be happy to answer your questions. Juste:] We'll be happy to answer your questions.
Juste:] We'll be happy to answer your questions. Juste:] We'll be happy to answer your questions. Juste:] Okay. But would probably continue to run at a rate slightly above the bank average, and that the investments we're making in technology would be offset by cost reduction somewhere else as we gain productivity improvements from the tech spend.
And the new staff that you're bringing on, are they focused on besides the FDIC and CECL, Digital delivery, AIML, back office, cloud transitioning apps to the cloud, where Are you putting this to work?
Well, we've got a whole host of things that we're working on, a bunch of Obviously, some of the regulatory changes have been a big consumer of our tech team this year as we get ready for FDIC 370 and CECL. But at the same time, we've been making consistent investments in a lot of the systems that are used either by our customers or by our employees who interact with our customers, we've been doing that in the commercial loan origination space. We've been doing it in the treasury management and merchant space, in the commercial part of the bank. We've been doing it in some of the M and A Support that we do in our institutional client services business, we've been doing it in customer facing things, both in our wealth management business as well as in the consumer business. We continue to make investments in cybersecurity, in data, and so it runs a whole host.
We are starting to migrate some applications to the cloud. Some of the newer ones often run on the cloud, and we're I'll take some of that. So, we've got a host of, a whole range of places where we're investing, I'm happy to take your questions.
But it always kind of starts with
the customer, works backward and looks at where we and in the competition and where we need to make sure we're positioning the bank and then also looking for ways that we And obviously improve productivity or efficiency.
Thank you.
Your next question comes from the line of Brian Foran with Autonomous.
I think it's a little it's easy to get lost because it hits so many line items and everything like has a lag and timing issues. I guess if you just step back, like was this a good acquisition like accretion or return on invested capital, however you want to measure it? If you just set aside the quarter to quarter stuff and where rates are in these escrow deposits like, did this all work?
Ask that again, Brian. The first part of it, we missed.
Just the mortgage servicing, like it's hard to really parse apart everything. Like if you just think about it on a net basis, has the acquisition and the resulting business it built, did it work? Is it accretive? Is it going to be good for 2020? Or is there some underlying slippage?
It's just hard to there's so many moving parts and hit so many line items.
Sure. I think the short answer is we are still happy with the acquisition of the mortgage servicing rights. It's Probably not quite the return that we thought when we first did it, and that's affected by the timing of some of the charges that we're taking. But overall, we feel it's accretive and above our long term cost of capital, which is how we kind of evaluate everything. So we had some I'm going to have a wiggle room built in, which you always do given the volatility of this business.
And when we look at it, to your point, stepping back, We still feel good about it and are happy we did it.
Great. Thank you.
Your next question comes from the line of Gerard Cassidy with RBC.
Hi, Darren. Good morning, Gerard.
Quick question. There seems obviously to be concerns about your IT spending and maybe not keeping up With some of the bigger banks, what measure would you recommend investors look at to show that you are I'm not as competitive as the big banks. Obviously, the big banks can be splashy with the dollar signs that they're spending and yours will be a lot less Because you're a smaller bank, but is deposits the preferred area? Look, I should deposit growth year over year was better than many of the big banks, but can you share with us what we should be looking at?
Sure. It's a great question, Gerard. I guess, I think the best place to look at is customer based measures. So I would look at customer growth rates, customer attrition rates, satisfaction rates. So it could be J.
D. Power, it could be Greenwich in the commercial and small business world, it could be some of the thoroughly research in the wealth space. But I mean, at the end of the day, the number one thing you're investing in technology for is to help provide a great experience I'll make sure that you're on par with everyone else on things that are just kind of what we would call hygienics are expected And look for places where you can differentiate what you're doing. And one of the things to keep in mind when you compare the regional banks to the large ones is the large Thanks, Heb. Broader based businesses than we do.
We don't have trading operations, Which would consume a lot of dollars, and I can't speak for everyone else, but what I can speak for M and T is through all the acquisitions that we've done, we've never maintained duplicate systems. And so there's not we're not carrying that expense, and we don't need to incur the cost of running them or consolidating them. And so a lot is made of how much you spend. I think most important is, are you giving your customers the I'll turn the call back over to the operator. And I'll turn the call back over to the operator.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from the line of The only thing she's got to watch for, in my opinion, on deposits is you can move the deposit balance number, with rates A lot faster than you can with technology. And the one that's really hard to fake is transaction accounts or operating accounts, whether they're consumers, I will now turn the call over to the operator for the call. Small business or commercial entities. And when we think about our tech investments, we're always thinking Those parts of the customer experience and how we can make it better.
Great. Thank you.
Your next question comes from the line of Saul Martinez from UBS.
Hi, good afternoon. Thanks for taking
So, I guess, I want
to parse through a lot of the moving parts Around the NIM guidance, Darren, and try to figure try to put a dollar sign around it. And I know there's a lot of uncertainty about rates and whatnot, but 4 to 9 basis points of NIMs pressure for every 25 basis point reduction On the short end, looks like the 4th quarter 1 month LIBOR, the average should be, I don't know, I probably have to sharpen my pencil here, but Maybe 40, 50 basis points lower than what it was on average in the Q3, especially if we see an October cut. It's I mean 4 to 9 basis points. I mean it seems like is it fair to say that it's going to be hard Not to see some degradation and reduction in net interest income in the 4th quarter on a nominal dollar basis versus what you posted in the 3rd quarter.
Yes, I think that's right. So the actual margin, you've got the math right in I'm looking at where Fed funds and LIBOR might be over the quarter. The NIM the print of the NIM might move around a little bit from that Depending on where cash balances end up and how much more escrow comes on, but you're in the right ballpark. And then when you look at the dollar impact, it's going to come down. When you look at the guide that we've given, I think you I should be able to figure out where we think it's roughly going to be, in the Q4.
And the other wildcard I'll now turn the call over to the operator. Yes. But like we mentioned, we feel good about the progress that we made this quarter in I'm sending over deposit pricing, and we should start to see that come down this quarter. And then the other thing that's a little bit tricky to gauge is just the pace of loan growth in the quarter, In particular, because the Q4 always seems to have some uptick. And then the question there is when does it occur, right?
You should start to A little earlier in the quarter in the floor plan, auto floor plan balances, but oftentimes, we see a big December, and you kind of wonder what drives seasonality. It's year end, and people look into closed deals for the tax year. And we always seem to see a spike in some of the loans that book in December. And obviously, that will, Depending on the timing impact, the dollars of net interest income.
Got it. I guess if I could just get one more in, a little bit more of a broader question. The downside of having sort of best in class profitability efficiency deposit franchise is that it does leave you more vulnerable when the environment starts to turn a little bit worse. I guess the question is Just how do you think about sustaining profitability and creating value in that environment? How do you think about And I guess the gist of the question though is can you do that On a standalone basis, can you really or do you need to do something more strategic to really be able to
I appreciate the question Because it's a really good one. And the strength of the franchise, as you point out, is both a blessing and a curse. And when you look at how we run the bank and how we think about the bank, we've always started with returns. And so to talk about the returns, I was pleased to hear you say that because that's our focus. And that thought process is what has I've kept us out of trouble and what has helped us make a lot of the investment decisions that we've done through time.
And sometimes it was acquiring servicing or subservicing business, because the returns made sense based on what was going on in the industry. It's helped us I will now turn the call over to Tom to decide when to make loans and how to structure them because if the returns don't make sense to us, we've tended to step away. And it's helped us I'll now hand over to Chris to discuss the financial results. And I'll now hand over to Chris to discuss the I will now turn the call over to the operator for questions. And so when you look overall, one of the key things for us is making sure that we maintain those returns.
And if that means we need to be patient in time and have a little bit less growth. We're okay with that because we would rather make sure we protect I will now turn the call over to Sam. And the ability to generate capital, so that we can make some of the investments that we're making. And if you look at really the last I will now turn the call over to Mark for questions. Thank you.
We had some outsized increases in the net interest margin because of the positioning of the balance sheet and the runoff of the Hudson City portfolio, which allowed us to grow the loans, deploy capital and increase the margin, and We took advantage of that, and we upped the investment that we were able to make in the franchise. So the reverse is true, and that as we see rates come down And our net interest margin relative to the peers kind of resumes its more normal position of slightly above the median. We should be able to bring and anticipate bringing the expenses down commensurate with that. You kind of you look across the different alternatives that you have of making loans, investing in other businesses, buying other banks we're deploying excess capital to shareholders and think about the returns. Obviously, the first place we want to invest is in the business And in our customers.
And this year, we've been able to do that a little bit more with the loan growth that you've seen, and we think we can continue to do that. We don't feel pressure to have to get to a certain size or to buy Some growth or either in the form of poor pricing or in poorly or ill conceived acquisitions. We'll continue to focus on returns and being patient and making sure that we're running a good bank, and that will leave us, we believe, with opportunities
there are no further questions. I would now like to hand the conference back over to Don McLeod for any additional or closing remarks.
Again, thank you all for I'm participating today. And as always, if any clarification of any of the items in the call or news release is necessary, please contact our Investor Relations department at 716
This does conclude today's conference call. You may now disconnect your lines.