Welcome to the M&T Bank First Quarter 2019 Earnings Conference Call. It is now my pleasure to turn the floor over to Don McLeod, Director of Investor Relations. Please go ahead, sir.
Thank you, Laurie, and good morning. I'd like to thank everyone for McCollum. Thank
you, Mr.
McClain. 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, McCollum. Www.mtb.com and by clicking on the Investor Relations link and then on the Investor Events and Presentations link. McLean. Also before we start, I'd like to mention that comments made during this call might contain forward looking statements relating to the banking industry and to M and T Bank Corporation.
McClain. Emiti encourages participants to refer to our SEC filings, including those found on Forms 8 ks, 10 ks and 10 Q for a complete discussion of McCall for forward looking statements. Now I'd like to introduce our Chief Financial Officer, Darren Cain.
Thanks, Don, and good morning, everyone. McClain. M and T's results for the Q1 largely reflect another quarter of solid financial performance. As noted in this morning's press release, some highlights include McClain. Commercial loans, both real estate and middle market, which showed a 2nd consecutive quarter of solid growth on the back of strong originations McClain.
And subdued payoff activity compared to last year. The net interest margin remains strong, thanks to the December rate action by the Fed as well as some seasonal factors. The mortgage business was buoyed by the late quarter move in the 30 year rate, which combined with the impact of our purchase Mortgage servicing rates during the Q1 position the business for a better year in 2019. Trust revenues Slowed slightly in the past quarter, mainly due to market volatility, impacting balances and keeping some customers on the sidelines. McClain.
Expenses remain generally well controlled despite our investments in technology, both in talent and hardware, which are being somewhat front loaded in 2019. Now let's look at some of the specific numbers. Diluted GAAP earnings per common share were $3.35 McCall. Thank you, John. Thank you, John.
Thank you, John. Thank you, John. Thank you, John. Thank you, John. McCall.
$0.23 in the Q1 of 2018. Net income for the quarter was $483,000,000 compared with $546,000,000 in the linked quarter $353,000,000 in the year ago quarter. On a GAAP basis, M and T's 1st quarter results produced an annualized rate of return on average assets of 1.68 percent McClain. And an annualized return on average common equity of 13.14%. This compares with rates of 1.84% McClain.
In the recent quarter, we're after tax expenses from the amortization of intangible assets amounting to $4,000,000 or $0.03 McLean. Consistent with our long term practice, McClain. M and T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur. McClain. M and T's net operating income for the Q1, which excludes intangible amortization, was $486,000,000 McClain.
Diluted net operating earnings per common share were $3.38 for the recent quarter compared with $3.79 in 20 eighteen's Q4 and $2.26 in the Q1 of 2018. McClain. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity McClain of 1.76 percent 19.56 percent for the recent quarter. The comparable returns were 1.93% and 22.16 percent in the Q4 of 2018. In accordance with the SEC's guidelines, This morning's press release contains a tabular reconciliation of GAAP and non GAAP results, including tangible assets and equity.
Both GAAP and net operating earnings for the 1st and 4th quarters of 2018 and the Q1 of 2019 McClain. Our results for the Q1 of 2019 include a $37,000,000 Cash distribution from Bayview Lending Group reflected in other revenues from operations. This amounted to $28,000,000 after tax effect McClain for $0.20 per diluted common share. Also included in results for the Q1 was an addition to our reserves of $50,000,000 relating to a subsidiary's role as trustee for customers' employee stock ownership plans. This amounts to $37,000,000 after tax effect or $0.27 per diluted common share.
McClain. Included in the Q4 2018 results was a $20,000,000 contribution to the M and T Charitable Foundation. That amounted to $15,000,000 after tax effect or $0.11 per common share. Also included McClain. In 20 eighteen's Q4 results was a $15,000,000 reduction in M and T's provision for income taxes arising from an IRS approved change in McCall.
Treatment of certain loan fees, which was retroactive to 2017. This also amounted to $0.11 per common share. During the Q1 of 2018, M and T received a cash distribution of $23,000,000 from Bayview Lending Group. This amounted to $17,000,000 after tax effect or $0.11 per diluted common share. Also during last year's Q1, M and T increased its reserve for litigation matters by $135,000,000 to reflect the status of then current litigation.
That increase on an after tax basis reduced net income by $102,000,000 McCollum for $0.68 of diluted earnings per common share. And lastly, included in the Q1 of 20 eighteen's results With a $9,000,000 tax benefit amounting to $0.06 per diluted common shares related to the vesting of equity compensation that reduced M and T's effective tax rate for the quarter. Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $1,060,000,000 in the Q1 of 2019, McLean. Down by $9,000,000 from the linked quarter.
This reflects the impact of 2 less interest accrual days in the recent quarter as well as the lower balance of cash placed on deposit with the Federal Reserve Bank of New York. Partially offsetting that McClain. With expansion of the net interest margin to 4.04%, up 12 basis points from 3.92% in the linked quarter McCarron. The increase in short term interest rates Resulting from the Fed's December 2018 rate action, combined with an improved mix of earning assets and funding on the balance sheet, added a benefit to the margin of about 4 basis points in 20 nineteen's Q1. McClain.
A lower level of average balances of funds placed on deposit with the Fed had an estimated 5 basis point positive effect The lower cash balances were primarily the result of reduced levels of trust demand deposits combined with seasonal volatility in commercial balances. As is usual, the shorter first quarter compared with the previous quarter reflected an estimated 3 basis point benefit to the margin arising from the impact of earning assets with a 30 over 3.60 interest rate basis. Average loans Grew more than 1% compared with the previous quarter. Improved customer sentiment during the Q4 appears to have carried through to the recent quarter Looking at loans by category, on an average basis compared with the linked quarter, Commercial and industrial loans increased 3% compared with the linked quarter. Commercial real estate loans Also grew 3% compared with the 4th quarter with a slightly different mix between construction loans and permanent financing.
McClain. Residential real estate loans, which are largely comprised of mortgage loans acquired in the Hudson City transaction, continued their planned runoff. The portfolio declined by some 3% or approximately 11% annualized consistent with the pace Consumer loans were up a little less than 1%. Activity here is also similar to what we've seen in recent quarters with growth in indirect auto and recreation finance loans McLean. Outpacing declines in home equity lines and loans.
Regionally, we saw our best growth in our metro region, McLean, which includes New York City, Philadelphia and Tarrytown, the New Jersey region and the Mid Atlantic, Which includes Baltimore, Washington and Delaware. Average core customer deposits, Which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000 declined an estimated 2% compared with the 4th quarter. This primarily reflects the decline in trust demand as well as seasonal factors in commercial deposits I mentioned earlier. Foreign office deposits increased by $279,000,000 In today's higher rate environment, Commercial customers are seeking to earn a yield on excess funds in demand accounts by sweeping them into short term interest bearing deposits. McClain.
Turning to noninterest income. Noninterest income totaled $501,000,000 in the first quarter McClain. 18's final quarter included $4,000,000 of similar valuation gains. As I noted, Included in other revenue from operations for the recent quarter is a $37,000,000 distribution from Bayview Lending Group. Mortgage banking revenues were $95,000,000 in the recent quarter compared with $92,000,000 in the linked quarter.
Residential mortgage loans originated for sale were $422,000,000 in the quarter, up about 2% McClain. We're $66,000,000 in the Q1, improved from $57,000,000 in the prior quarter. Most of the increase was the result McCall. Commercial mortgage banking revenues were $29,000,000 in the McCall. 1st quarter compared with $35,000,000 in the linked quarter, reflecting seasonally lower originations activity.
The comparable figure was $25,000,000 in the Q1 of 2018. Trust income was $133,000,000 in the recent quarter, McLean. Down slightly from $135,000,000 in the previous quarter, but slightly above $131,000,000 in last year's Q1. Results for the Q1 were dampened by the Q4 sell off in the equity markets. Service charges on deposit accounts were $103,000,000 down from $109,000,000 in the 4th quarter.
The decline from the linked quarter reflected lower levels of consumer activity, much of which is seasonal. Turning to expenses. Operating expenses for the Q1, Which include the amortization of intangible assets were $889,000,000 As previously noted, the recent quarter's operating expenses included approximately $60,000,000 of seasonally higher compensation costs relating to accelerated recognition McClain. The impact of annual incentive compensation payouts on the 401 match and FICA payments as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an approximately $56,000,000 increase in salaries and benefits McClain in last year's Q1.
As usual, we expect those seasonal factors to decline significantly as we enter the 2nd quarter. Excluding those seasonal factors, salaries and benefits were a little changed from the prior quarter. The year over year increase reflects the salary adjustments we made in conjunction with the Tax Cuts and Jobs Act as well as a somewhat higher headcount as we've been deepening our bench for IT talent, which will allow us to reduce the use of contractors over time. McClain. The increase in equipment and occupancy expenses compared with the linked quarter primarily reflects equipment upgrades that will improve McCall.
The efficiency ratio, which Excludes intangible amortization from the numerator and securities gains or losses from the denominator was 57.6% in the recent quarter compared with 51.7 percent in 20 eighteen's Q4 and 64% in the Q1 of 2018. McClain. Those ratios in the 1st quarters of 2018 2019 each reflect the seasonal compensation expenses as well as the legal related accruals. Next, let's turn to credit. Overall, credit quality continues to be very strong, better than our somewhat conservative expectations.
Annualized net charge offs as a percentage of total loans were 10 basis points for the Q1 compared with 17 basis points in the 4th quarter. The provision for credit losses was $22,000,000 in the recent quarter, matching net charge offs. The allowance for credit losses remained at $1,000,000,000 at the end of March, while the ratio of the allowance to total loans was also unchanged at 1.15%. Non accrual loans declined by $12,000,000 at March 31 compared with the end of 2018. The ratio of non accrual loans to total loans improved by 2 basis points, McClain.
Ending the quarter at 0.99%. Loans 90 days past due, on which we continue to accrue interest, McClain. Excluding acquired loans that had been marked to a fair value discounted acquisition were $244,000,000 at the end of the recent quarter. McClain. Of these loans, dollars 195,000,000 or 80% were guaranteed by government related entities.
McClain. Turning to capital. M and T's common equity Tier 1 ratio was an estimated 10.05% compared with 10.13% at the end of the 4th quarter and which reflects the net impact of higher loans, earnings retention and share repurchases. During the quarter, M and T repurchased 2,200,000 shares of common stock McClain. At an aggregate cost of $366,000,000 Now turning to the outlook.
McClain. Based on the Q1 results, our outlook for 2019 remains largely consistent with what we shared with you on the January conference call. Just to reiterate those thoughts. We expect 2019 overall to look slightly better than 2018 with growth in total loans McClain. At a low single digit pace, with continued runoff of residential mortgages more than offset by aggregate growth in other loan categories Comments by several of the Federal Reserve Governors As well as what's being reflected by the forward curve seem to be implying that the likelihood of any change in the Fed funds target Either up or down is low for the remainder of 2019.
Based on specific factors I mentioned earlier, including the day count and the impact McCall. Of a lower level of cash on deposit with the Federal Reserve, the net interest margin we reported in the Q1 is higher than what we view as the run rate. McClain. Over the remainder of 2019, we expect a degree of stability in the net interest margin consistent with the expectation of no further changes in rates. Following the Fed's December rate action, we took further steps to hedge our asset liability position Based on those balance and margin assumptions, we continue to expect low single digit year over year growth in net interest income.
While mortgage rates have rallied recently, we're uncertain whether that can lead to a sustained uptick in residential mortgage loan originations. So our outlook for mortgage banking revenues remains cautious. We noted at a conference last quarter that we'd be bringing on a book of owned servicing plus a subservicing contract that should lead to some $60,000,000 of residential servicing fees over the full year of 2019. We also anticipate seasonal improvement in commercial mortgage banking revenues as the year progresses. The outlook for the remaining fee businesses remains unchanged McClain.
With growth in the low single digit range, with the exception of trust income, which should be in the mid single digit range, McClain. But as we've recently seen, can be impacted by market volatility. Excluding last year's addition to the litigation reserve As well as the recent accrual, we continue to expect low nominal growth in total operating expenses in 2019 compared with last year. McClain. As noted, we expect the seasonal surge in salaries and benefits we report in the Q1 to normalize in the Q2.
McClain. The servicing business I referenced should add an additional $40,000,000 of full year operating expense above that guidance. Our outlook for credit remains little changed. We are cautious as to our and the industry's McClain's ability to report the 6th consecutive year of relatively benign credit costs, but there continue to be no apparent significant pressures McClain. We're seeing some upward pressure on criticized loans, but given our conservative underwriting, Stress on borrowers doesn't necessarily portend a meaningful acceleration in losses.
McClain. M and T's capital allocation philosophy and policies remain consistent with what we've discussed previously. To summarize, We believe that our current capital levels are higher than what is necessary to operate in a safe and sound manner given our history of solid credit underwriting And low earnings volatility. As such, our intention remains to manage our capital to a more appropriate level over time. As most of you know, the Federal Reserve following the Crapo Bill has proposed rules that group the larger U.
S. Banks McCollum. The proposal slots M and T McCallum into Category 4, which calls for biannual stress test instead of annual. As a result, for the 2019 CCAR cycle, McCollough. Covering the Q3 of 2019 through the Q2 of 2020, Category 4 banks were given an option McClellan.
Up to a maximum amount of capital based on a predefined template calculation. That calculation reflects the distributions that would have been permitted in last year's supervisory stress test adjusted for changes in a bank's capital ratios during 2018. McClain. Alternatively, Category 4 banks may opt into the full CCAR process, which would involve a stress test administered by the Federal Reserve Based on our analysis, the amount of capital that we could return under the template approach McClain. Might not be materially different from the likely outcome of following the full 2019 CCAR process.
We will continue to manage capital McCollough. According to our long standing philosophy, while monitoring any further regulatory developments on the capital front as we look forward to CCAR 2020. McClain. 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, McCallum, which may differ materially from what actually unfolds in the future. Now let's open up the call to questions, before which McClain.
Laurie will briefly review the instructions.
McCollum. Your first question comes from the line of John Pancari of Evercore.
McLaughlin. Good morning. Good morning, Don. Just on the net interest margin front, I know you had indicated that it's not We're at the $404,000,000 level, it's not at the what you would consider a normalized rate. So does that imply that the Q2 you'll see some McClain.
Compression off of that level then stable, so more like a 395 level or is it stable from here? Just wanted to clarify that.
McLean. No, thanks for clarifying. If you look at the day count and adjust for that as well as cash balances McClain. Normalizing somewhat, those two factors should bring the net interest margin down. And from that level, we We expect to be fairly stable over the course of the remainder of the year based on what we see today reflected in the Fed's Statements as well as what the forward curves are implying.
Okay. All right. And then separately on the expense side, McClain. You indicated something in your prepared remarks that some front loading on the IT side. Could you give us a little bit more color there?
And McClain. Would that have any impact on your nominal expense growth expectation as you make these investments?
McClain. Yes, sure. On the expenses, in aggregate, there's a couple of things going on related to our investments in IT. So if you look first in the Furniture, Fixtures and Equipment line, you can see that it moved up fairly Sizably, I guess, from where our normal run rate has been and that reflects some investment in hardware that we're making for our colleagues. You kind of get a blip in that and it's just that number should start to come back down.
And then the other thing that we are doing, which we've been talking a lot about is Bringing much of the IT talent in house from using outside contractors. And as we do that, we bring on the folks on our team and it takes about 90 days to 120 days to McClain. Get them in a position where we can then reduce the professional services or the contractor expense on the other side. So there's a little bit of a carrying cost as you make that transition, and we expect that to happen a couple of times during the year. We were just happen to be very successful in recruiting and adding some folks to the team in the Q1, a little faster than we thought, and that's why you get a little bit of the front loading that I mentioned.
McClain. Okay. All right. That's helpful. One more follow-up there.
So does, do you still expect modest positive operating leverage for 2019 given that? And then
McCallie. So I'll talk about the last one second. We don't McClain. To talk about what the size of our IT budget is specifically because it crosses a bunch of categories, but obviously it's something we pay a lot of attention to make sure that we're Making the appropriate investments that we need to make sure the bank is safe and sound and more competitive. When you look at the operating leverage McCall.
We expect to be modestly positive. Some of that obviously is going to depend on what happens with rates as well that rates moving around can move that in one direction or the other, but we expect to be modestly positive.
McClain. Got it. Thanks, Darren.
Your next question comes from the line of Ken Usdin of Jefferies.
McClain. Thanks. Good morning, Darren. On the loan front, I heard you say that you're still expecting modest average loan growth for the year. And I was wondering, could you help us understand what's the expected pace of decline on the resi real estate side From here, are we getting to a point where the burden is getting less bad?
Sure. McClain. On the loan growth, when you look at the rate of decline McClain. The rate is maybe slightly lower than what it had been. I think we've been running about 13% annualized McLean.
For the last several quarters, with some of the movement up in rates, that dropped slightly to about 11%. But the bigger factor McCollum. The size of the portfolio continues to decline. And in the Q1, I think it was about $430,000,000 McClain. And if you went all the way back to 2015, early 2016, when that McClain.
The book first came on our balance sheet, that was probably more like $900,000,000 So the ability to add in other loan categories to outrun McClain. The payoff and pay down activity in the resi book is getting a little bit easier in dollar terms. And so that's part of why we expect to see some low nominal growth in balances over the course of the year.
McClain. And to expand upon that, on the commercial side, you had good average loan growth because of the good period end December, but the March 31 period end was Flatter, flattish. Can you just talk about pipelines, seasonality and just where you're expecting that McConnell. Kind of net positive growth to be coming from to offset the resi side? Thanks.
Yes. So I guess when you look across the other categories, McClain. We don't expect any one category to be a standout in terms of where the growth will come from that will offset that. We continue to see McClain. Strong activity in the consumer loan book, that the pace of home equity payoffs McClain.
We continue to be strong as well as we see some small growth in our credit card portfolio. On the commercial loan side, when you look at real estate McClain. In Commercial Real Estate, we've seen we had a nice quarter in some permanent mortgage activity. And I think we mentioned in the Q4 earnings call We have had some good origination in the construction side of things, and those balances will continue to grow over the course of the year as those projects And then in the C and I space, it's kind of a combination of some new customer growth McClain. In the dealer commercial services business as well as growth in more traditional middle market, which we see some nice pockets in healthcare McClain.
And other sectors. So I guess I would say it's fairly broad based, and both in terms of The line items on the balance sheet as well as some of the industry sectors and geographies where we expect to offset The declines in resi real estate.
Okay. Thanks a lot, Darren.
Sure.
Your next question comes from the line of Ken Sarbi of Morgan Stanley.
Okay. Thanks. Good morning.
Good morning, Ken.
I was hoping you guys can just talk a little bit about deposit gathering. I didn't I don't think I heard anything about that McCall. And your outlook comments, but obviously you had decent loan growth this quarter, but is it getting harder to fund the loan growth with deposit growth? I mean, it seems Like security balances were a little lower even though some of it was planned, but I wanted to know how you think about that.
McClain. Sure. So when we look at the deposits and you look at the deposits on the balance sheet, there's a set of deposits McClain. As you've seen through time, tend to have a little bit of volatility to them and those are some of the trust demand deposits. So much like you would think about McClain.
Non interest bearing or indeterminate deposit accounts, we look at those and have a kind of tranching that we know a McCall. Certain amount will be on the balance sheet and we think about that when making our lending decisions. When you hold that to the side and you look What's going on in total deposit balances? What we see is more of a remixing McClain. Then a real decrease in the balances.
And so when we look at the consumer portfolio, McClain. The balances have been pretty stable. We're seeing some mix shift where we're seeing people move money from money market accounts into the time accounts. McClain. And you can kind of see that reflected to some extent in the average cost of time deposits.
I think it was up about 30 odd basis points this quarter McClain. And a large chunk of that was remixing and that customers are going from money market and not into short term CDs, but into McClain. 1 year to 2 year and as that mix happen, that's driving up that interest rate cost. But in total, the balances are staying on the balance McClain. When we look at our commercial customers, we see again a remixing.
We see some movement from non interest bearing McClain. And we see some move into sweep, both on balance sheet and off balance sheet. I think when you look McClain. It's our deposit information. And you look at what's referred to as deposits at the Cayman Islands office, That's really where our on balance sheet sweep is and you can see that movement there.
So again, in aggregate, the balances are relatively flat. They're just remixing. McClain. And so we're able to trade off a little bit. If we have loan growth, we can fund some of it from the residential real estate runoff and then a little bit McClain.
Out of the securities portfolio. And overall, when we look at our loan to deposit ratio, it was relatively flat quarter over quarter. So McClain. There's nothing that we are worried about at this point in our ability to fund loan growth.
Got you. Understood. I guess and then just taking that to the NIM though, I'm not sure if I caught sort of your expectation for how much you think NIM McCall. Should be lower in Q2, but presumably the deposit mix shift puts further pressure on the NIM outlook. Is that the right way to think about it?
McClain. Yes. There's a little there will be a little bit of pressure on that going forward, but there will be a little bit of offset in remixing on the asset side as well, right, that we'll be trading. We expect to continue to see some trade between residential mortgage and some of the other loan categories that tend to carry a little bit of a higher yield as well as a little bit of movement McCollum. And the securities portfolio, which is a lower yielding asset as well.
So based on some of those changes in the composition of the balance sheet, McClain. It's our expectation that the NIM should be fairly stable. It might move a couple of basis points in either direction off of McClain. A level that reflects the cash balances and the day count, but should be fairly stable around there.
McClain. Gosh, I'm sorry. And just to ask a very specific question though, was it the NIM, if we back up the cash balances, I think that was 5 basis points and then day count Was what, 3 basis points. And correct me if there's anything else, but that's 8 basis points. So NIM in 2Q sort of stable around 3.96 McCollum.
Is that what you were thinking?
Yes, I think you're in the right ballpark area. I mean, you can move around a little bit obviously with those cash McLean. They can move back up, which could drop, but they could stay low, which could keep it high. So there's a little bit of volatility, McClain. Couple of basis points here or there around that around those numbers and really the big thing is balanced growth.
Got you. Okay, perfect. Thank you very much.
Your next question comes from the line of Steven Alexopoulos of JPMorgan.
Hey, good morning, Darren.
Good morning, Steve.
So I want to understand the NIM guidance too on the stability point. If we look at deposit costs, they've been going up somewhere around 9 or 10 basis points a quarter for at least the last few quarters. Do you see that materially dropping off
In terms
of the rise in deposit costs you've been seeing?
Well, I guess, dropping off, No. Lower, yes. I guess the thing that we've got our eye on is how much How fast deposits are moving across categories, and then how fast each Category itself is moving up or down. And what we saw in the Q1 was a little bit of a slowdown McClain. In movement of rates in any category, that because of where the Fed was that there was a little bit less McClain.
Competitive pressure on deposit pricing in any given category. And now the big impact to the McClain. Deposit costs will be the remixing and the pace of remixing that we might see On a go forward basis. And usually, there's some degree of that, that continues after the Fed stops hiking. McClain.
The offset is what I mentioned before and some of the potential remixing on the asset side of the balance sheet McClain. And how that might impact the overall yield on our loan book as well as changes we might make to the securities Portfolio. So we think we've got some ability in the short term to offset some of those a little bit, and that's why we feel Confident that we can maintain the margin, absent any changes in the Fed, around a relatively stable place Over the course of 2019.
Okay. That's helpful. And then on the expense side, Darren, I believe in the past you defined the low nominal growth rate in the 2% to 3% range. Is that still the case for expense growth for the year
McClain. Yes, that's typically how we would think about things in low nominal is McClain. And some of this obviously that we saw this quarter's timing McClain. And then some of the investments that we're making in the business. And we talk about our expense growth McClain.
At the overall level as opposed to any individual category because we see some movement within the expenses across categories and we don't try to McClain. Don't worry about any one category, but more watch the pace of our overall expense growth, might move around a little bit as you can see, from quarter to quarter. McClain. But overall, that remains our expectation for the year.
Okay.
And of course, absent the $40,000,000 that I mentioned before from the servicing. Yes.
If I could just ask you one on credit. You said you saw upward pressure on criticized loans. Which portfolio is that? McClain. Is there anything to note there?
Thanks.
Yes, sure. I guess, the most interesting thing on credit is that McClain. The criticized are up, but there is nothing to note in terms of specific industries or geographies. So, we pay a lot of attention to that obviously and we often You criticized as a classification to help make sure that within the bank, we have lots of eyes on things McCollum. And to jump on it quickly and make sure that between our credit folks, our frontline folks and our McClain.
Workout folks that we're paying attention to early warning signs. And as we kind of pointed out in the prepared remarks, McClain. That doesn't necessarily mean that there's going to be a charge off, but what our history has been is if we focus on things and get on top of them early, McClain. We can actually prevent that from happening. And so we're very aggressive at moving things where we see Even small size of trouble into that criticized portfolio.
Okay. Terrific. Thanks for all the color. Sure.
McClain. Your next question comes from the line of Frank Schiraldi of Sandler O'Neill.
Good morning. Darren, just on I think you touched on it last quarter, but just thinking through the relief, I think we're still expecting you'll get on the LCR. What that might mean for the balance sheet in terms of is it just an uptick in yield in the securities book? Or could we see some contraction along with Greater buybacks, just wondering how you think about what M and T's reaction could be? McClain.
Sure.
So with the changes to potential changes to the LCR, we will look at our total balance sheet. McClain. And number 1, we'll make sure that we feel like we've got the right liquidity for the bank and for our customers McClain. And look at that in relation to, how the economy is, how charge offs are, as well as loan growth. And if you look at our bank through time, we've always made sure we had the right amount of liquidity, but that's also tended to run a little bit at the lower end of the peer group.
McClain. And we're lower than the peer group right now, but above where we have historically been. And we'll continue to look McClue. And make those trade offs between holding liquidity to make sure the bank is safe versus using that liquidity fund loan growth and provide access to capital for our customers.
Okay. McClain. And then on the I know you mentioned the tax benefit last quarter, but was there a tax benefit related to the vesting of equity comp McClain. This quarter and is 25% still a reasonable place to be on the effective tax rate going forward?
McClain. So the impact of the equity vesting this Q1 was nominal, which is why we didn't mention it. It was McCollough. And remember that the impact can be positive or negative to the tax line depending on how the stock price McClain. The vesting date compared to the price at the issue date.
And so the 1st couple of years with the stock price where it was, McClain. It resulted in a big tax impact, because the price was higher than what it was granted at when people received their award. McClain. In this past year, it was down from where things were issued last year. So there's always going to be some movement around in that number.
But if it's Meaningful, we'll let you guys know what it is. And then what was the other part of the question? Sorry, I forgot the
Just on the tax rate go forward.
Tax McLean. Right, sorry. On the tax rate, I think the guide we gave in the first call this year was 24.5% to 25% and that's still a good place to be.
Okay, great. Thank you.
Sure.
McClain. Your next question comes from the line of Peter Winter of Wedbush Securities.
Good morning, Darren. Good morning. McClain. So the loan to deposit ratio at 98%, are you guys comfortable letting that go above 100%. And I know you've got some flexibility with the funding from the runoff of resi mortgage.
So it's a measure that we pay attention to, but I wouldn't say that we run the bank based on. McClain. So we would be comfortable with the loan to deposit ratio going over 100% for a quarter, maybe even 2% or 3%. We obviously we don't expect to run at nor do we choose to run at the kind of levels we were at before the crisis. We don't think that's practical anymore.
But as we look at the balance sheet and go quarter to quarter, McClain. We definitely have enough liquidity to fund loan growth, at least the loan growth that we would expect to see, McClain. And we're always paying attention to how we fund it. And if things get a little more active as we go through the year, McClain. Then we'll figure out how to make sure we've got the right amount of funding to manage that loan to deposit ratio.
But in any given Quarter or a couple of quarters, it's not something that we would worry a lot about.
Okay. And then just a quick follow-up. I was looking at Average earning asset growth, which was down both year over year and sequentially. Do you guys think you'll grow average earning asset growth this year?
So average earning assets can be a tougher one to predict. McClain. And the reason it's tougher to predict is just because of the movement in the trust demand deposits and in that line about cash that we have with the Fed. McClain. So that's why we try to break down the pieces and help you guys think through the pieces because that's how we look at it.
And so we first and foremost look McClain. It's a loan balances and make sure that we're taking care of our customers and providing funding as they need it. McClain. And over the course of the last several years, while loans in absolute have been down slightly, it's all been quite intentional McClain. In bringing down that mortgage book, but while growing C and I as well as CRE and some of the other consumer segments.
McClain. And then really the difference is some of the cash balances that might move on and off our balance sheet That relate to that trust demand deposit that tend to come with our institutional business. And those can move around a little bit, McClain. As well as some of the balances that might be associated with mortgage servicing. So when we look at that, we look at where we are over the course of the year, McClain.
We think it could be plus or minus 1%, but we're not expecting big movements in either direction.
McClung. Got it. Thanks, Darren.
Sure.
Your next question comes from the line of Brian Klock of Keith, Bruyette, Woods.
McClain. Hey, good morning guys. Good morning, Brian. Hi, Darren, I wanted to just follow-up on that same sort of line of questioning after Peter's Questions on the average earning assets. I think your NII guide for the year was to be low single digit growth year over year.
McClain. Is that right? Did I have that right?
That's right, yes.
And if I don't have any if I don't put any growth in for your average earning assets and I use a NIM at 3.98, which would Kind of do the math you said of just getting down, take the adjustments out of the Q1 and run that flat. That's 4% growth year over year. But I kind of think that even if you get a little bit better growth in average loans and 2% average loan growth, I mean, it feels like it's more like Mid single digit growth in NII. So I just was wondering if that's that math seems to work and is that, I guess, what you're expecting with that guidance.
From what we've McClain. Looked at and forecast over the course of the year, we would be kind of McCollum. Right in the range that we talked about earlier. We wouldn't see that being materially higher than that. We do expect to see some movement McClain.
In the net interest margin, as we go through the next part of the year, kind of along the lines of what we had talked about earlier, McClain. It might be a couple of basis points up or down in any quarter from where we think we ended the Q1 on an adjusted basis. McClain. And then the thing, Brian, that's probably the hardest to predict is just what those earning assets are. And if we McClain.
Maintain the position, in particular in the trust demand balances where we ended the Q1, And you probably got earning asset growth that's more like slightly down than flat or slightly up. And then the pace of growth in In commercial balances and what they've been, as you know, we're probably a little more conservative in how we think about things and how fast we might see McClain. Those assets grow especially given the history of the last nine quarters and looking at we feel good about things after the last two But the prior 6 were tough. So we might not be at the McClain. Upper end of where loan growth might be than others might have.
All right. Okay. Thank you for that. And maybe just McClellan. I know that you had some comments about LCR.
Earlier you mentioned the CCAR. I guess What are you guys planning on doing with your capital plan announcements for the Q3 of this year, the Q2 of next year, now that you're not part of the official McCollum. I guess, when can we expect to hear your capital plans for that period? And McCollum. How are you guys thinking about what sort of target CET1 ratio you might get to?
You had one of your peers talked about getting to an 8.5% target McClain. On Friday, and given our strong quality balance sheet and underwriting M and T has, I think that that's McClain. A possibility for you guys in the future too. So maybe you can just let us know your thoughts on that.
Sure. So I guess as it relates to announcements, McClain. We would expect to announce at some point during the Q2 what's going on from a capital perspective. McClain. We submitted something to the Federal Reserve, as well as to our Board for approval.
McLean. The Fed probably needs the loan information to come on the schedules before they finalize things, but our expectation is we'll be out Before the end of the quarter, hopefully not quite as late as last time, with what the capital plans are. McClain. I guess, I don't have a comment necessarily on what other folks have as a target capital level McClain. And what its impact may or may not be on us.
But we've been fairly consistent With our thought process on where we think capital should be for M and T. And we think that's towards the low end of the peers and that's McCollough. It's a bit of a moving target. The challenge is how fast you can get there and really what the governor is on that is McCollum. And so I guess my answer to the question depends a little bit on what happens with the stress test framework and whether or not we start McClain.
To see the SCB thought process emerge, how capital distributions McClain. And asset growth are handled under stress in the next CCAR scenario because those tend to be some of the things that actually restrict a company's ability to get from where they are to where their target might be. And McClain. Those are a bunch of things that we pay a lot of attention to and are factors in our considerations in our capital distributions. But McClain.
I guess in the short term, I think if you use the template and did the math, as you're going forward, McClellan. You'd probably be in the ballpark on unlikely capital returns for the 3rd Q4 this year and the 1st two quarters of next year.
All right. Thanks for your time, Darrin.
Your next question comes from the line of Marty Mosby of Vining Sparks.
McClain. Hey, wanted to follow-up on the capital template that you talked about. I got a couple of moving pieces I want to make sure that when McClain. You think about how that worked. The stress losses would remain constant because you're not running a new stress test.
So the losses kind of come from last year's numbers. You don't have to rerun them. You already know what that is. You then would probably add in your new level of capital. So whatever your capital was at year end this year, You would put that in there versus your stress losses.
And then you would also have to change to the higher level of earnings. So I just want to make sure that as they went through that template, some things changed like where your capital was versus is now and where McCarroll. Earnings were versus is now, while the risk is the one component that stayed the same from last year.
So Generally, in the right ballpark, the losses carry over and will be the same and you adjust the start point McClain. Of your capital ratios and capital levels from where you are to December of 2018 versus December 2017. And then earnings Are the same as last year is kind of the way that works.
And last year meaning 2018 or what you had in the CCAR process? Because When you did the CCAR process, you didn't have the full benefit from the tax reform. So now that you had a full year of 2018, it would McClain. It would kind of be the run rate there. Just wanted to make sure that we're getting the benefit of the higher earnings when we start thinking about payout ratios.
McClain. It's really 2018 numbers that are the basis for the earnings and the tax reform Was by and large baked into the 2018 numbers already.
Right. And the what you had in your reported 2018 earnings, But not in the CCAR because when you were kind of doing that, that was before
you didn't have a full year of that just quite yet. Yes. CCAR 2018 would have been based on 2017 McLean. For sure. But the losses that we would have had in last year's CCAR will be the losses that McCollough.
The capital ratio will be the 2018 December start point and the earnings would be based on the 2018 earnings. McLean. Perfect. All right. Thank you.
Yes.
Your next question comes from the line of Erika Najarian of Bank of America.
McClain. Hi, good morning. Just two points of clarification on the capital question. So if we're plugging in all those numbers, we're getting to capital McCall. Of $2,069,000,000 which is in line with what you had asked for.
And I'm wondering if that's the ballpark. And McClain. If it is the ballpark, what is the decision tree between going waiting to resubmit or waiting to go through the full process next this year, given how punitive the CRE losses seem to be last year to M and T relative to what this year's parameters look like.
McCall. So I guess to start with, Erica, on the ballpark, you're in the right range, Might be a little bit light on what our math would say, but basically in the right ballpark. And McClain. The decision to submit or not submit was really we look at what we thought the template would be and then what The pluses and minuses are going through the full CCAR process and how close those 2 might be. And when we looked at it, McClain.
The 2 look like they would end up in a pretty similar place. It really didn't have anything to do with the real estate losses from last year, There is always some part of the portfolio that gets stressed. Commercial real estate might be a little bit harder for us. And there is always some uncertainty McClain. In the CCAR process and in terms of how the models might work and how operational losses might be impacted, how PPNR might be.
So there's a bunch of unknowns, whereas with the template, there's a little bit more certainty about how things might work. That said, McClain. We still maintain our CCAR apparatus at the bank. We run a full stress test on M and T scenarios And we think about idiosyncratic risk, and that's a process that we will continue to go through every year just because we think It's good governance and a good practice and makes us feel more certain about our thoughts on capital distributions. McClain.
And obviously, you need to make sure that you're ready for the CCAR process that will happen on an every other year basis. So McClain. We'll go forward from here.
Got it. And just my last follow-up question has to do with some of the Mix shift dynamics that you were referring to earlier. One is, what are you where are you reinvesting your securities Cash Flows today. And I also noticed that short term borrowings were a little high at about $1,000,000,000 on an average basis. McCollough.
And in Q1 of last year and Q4, this ran closer to $300,000,000 I'm wondering if that was also McCollum. Episodic and at 2.49%, if it rolls off, that's clearly going to be supportive of NIM.
McLaughlin. So just kind of going through some of the pieces. In the securities portfolio, we have McClain. Kind of a barbell of investments in there. Some of it's mortgage backed securities, which is the longer dated, and treasuries, U.
S. Treasuries, which we tend to do McClain. Either 1 year or 2 year. And so as those mature, they create cash. And depending on where rates are right now McClain.
Or at the time that things mature, we tend to look at where the curve is and what the difference might be between 1 year treasuries and holding McClain. That money in cash at the Fed. And so you'll see some movement between those two categories and we tend to look at them as one as opposed to as 2 unique McLean. And some of the cash or some of the rundown in the securities We'll sit in cash. Some of it we might buy more treasuries and then some of it can be used to fund loans for customers.
And so it's not a given that we're going to be at a certain ratio of securities to McClain. Total assets, but more we're looking at the trade offs across those categories. And that's what gets us comfortable that we
And just quickly on the short any comments on
McCall.
Yes. So if you look at towards the end of last year, We redeemed bonds that were going to come due at the end of the year, and we redeemed them early because McClellan. And so we redeemed them early and did a short term, borrowings, Which you would have seen on the balance sheet for part of the Q1 and then go away. And so kind of what you got in there, some of the average over the quarter, But they weren't there at the end of the quarter and that just helped with the FDIC insurance benefit.
I see. Got it. Thank you.
McLean. Your next question comes from the line of Kevin Barker of Piper Jaffray.
Thank you. You guys have navigated the current rate cycle better than most. McCall. Your NIM has expanded dramatically, probably better than almost all your peers. When you think out, given like McClain.
Where the rates are today, how the cycle is playing out, and then the layer on the swaps that you put on, How long do you think you can maintain your guidance for, I guess, somewhere between 3% 9% and 4% NIM,
McClure. Yes. So I guess given the outlook from both the Fed and the forward curves There's not a lot of movement in the swaps that we put on. We think we will be fairly McClain. Stable over the course of 2019.
And that's obviously a bunch of things that are going on in there. Some of it is the swap and the hedging activity that we've done. Some of it is how deposit pricing might react From a competitive perspective over the course of the year, which I think to some extent will depend on how strong loan growth is in the industry. McLean. As you pointed out, we've been taking steps to try and protect the margins that we've built because of where it is.
McClain. And you'll see when we file the Q that some of our asset sensitivity has come down, McClain. And you'll see that in the numbers and it's because of that work that we've done to try and lock in The margin or keep it protected at a level close to where it is.
What percentage of your swaps mature within like the next year and then what's the weighted average duration of the swap?
So the McClain. When you look at the notional amount that will be disclosed, it's probably going to be around $30,000,000,000 to $35,000,000,000 and that's They're not all in effect right now. The notional amount that's kind of out there right now is about $15,000,000,000 $16,000,000,000 and it's a combination of McLean. Some swaps on our debt as well as some cash flow swaps against the loan portfolio. And the extra McCollum.
The kind of doubling of the notional amount is to extend the swaps that have been put in place earlier that are expiring. And the idea is to kind of have about 2 years forward in terms of the swaps that are in place. McClain.
Okay. Thank you very much.
Your final question will come from the line of Gerard Cassidy of RBC.
McClain. Hi, Darren. Good morning, Gerard.
Quick question for you. Some of the bigger banks have given us their day one increase in McCall. I may have overlooked it if you talked about it already today, but have you guys disclosed that? And if you haven't, do you have a Kind of a target date of when you might disclose that number?
Sure. You didn't miss anything, Gerard. So as usual, you're right on top of things. McClain. We're going through right now parallel runs of the existing ALL process and the new CECL and going through Making sure that we can run at scale.
We haven't made that announcement yet. We expect to probably as we get towards the end of the year, McCall. We'll start to be a little bit more definitive about what the exact impact will be. But from the work that we've done to date, McClain. What I've said before and it still holds is that the impact on our capital ratios will be fairly nominal.
McClain. Very good. And then just another quick question. You mentioned about credit quality being so strong, which we all acknowledge. Is there any evidence McCall.
Underwriting pressure from competitors that could lead to credit issues a year or 2 from now because they're underwriting more McCall. Progressively today and you guys are passing on competing at that level.
I guess, Gerard, I wouldn't say that The competitive environment isn't any more intense than what it has been for the last little while. If anything, I think we saw some of the McClain. Outside the regulated system participation slowed down a little bit with the disruption in markets in December McClain. That carried a little bit into the Q1, which I think is why we saw, payoff and pay down activity moderate. We do continue to see competitors McClain.
In the market and when we look at the source of funds for payoffs and paydowns this Q1, McClain. A little bit more came from competing banks than came from non banks, so that's kind of an interesting data point. McClain. But in terms of pricing and or structure, there hasn't been a notable move this quarter compared to what we would have seen McClain. Over the course of last year, I think more it's who is in the market and being aggressive, it's a little bit more bank competition than what we've seen outside of the banking.
But that said, I think it's more an absence of the non banks as it is an increase in activity by the banks.
McLeod. Very good. Thank you very much.
Thank you. I'll now return the call to Don McLeod for any additional or closing remarks.
McClain. Thank you all for participating today. And as always, if clarification of any of the items on the call or news release is necessary, Please reach out to our Investor Relations department at 716-842-5138.
McClain.
Thank you for participating in the M&T Bank First Quarter 2019 Earnings Conference Call. You may now disconnect your lines and have a wonderful day.