Welcome to the M&T Bank 4th Quarter and Full Year 2018 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, everyone.
To take your questions.
I'd like to thank you all for participating in M&T's 4th quarter and full year 2018 earnings conference call, both by telephone and through the webcast. To take your questions. 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, to take your questions. .Com and by clicking on the Investor Relations link and then on the Events and Presentations link. To take your questions.
Also before we start, I'd like to mention that comments made during this call might contain forward looking statements relating to the banking industry and to M&T Bank Corporation. To introduce our SEC filings, including those found on Forms 8 ks, 10 ks and 10 Q for a complete discussion of forward looking statements. Now I'd like to introduce our Chief Financial Officer, Darren King.
Thanks, Don, and good morning, everyone. To introduce our Q1 results. These include further expansion of the net interest margin, growth in net interest income, growth in non interest revenues with trust fees remaining a highlight, expenses that continue to be well controlled and a credit environment that remains solid. To take your questions. One positive aspect of the 4th quarter's results was a notable pickup in commercial and industrial lending, which contributed to aggregate net loan growth for the quarter.
Highlights for the full year of 2018 include 7% growth in taxable equivalent net interest income, driven by rising asset yields coming as a result of further increases in short term interest rates initiated by the Federal Reserve, to provide a manageable pace of deposit price increases. Credit improved from the already strong levels seen over the past to be with net charge offs as a percentage of loans, the lowest since 1987. While loan growth did not meet our expectations, to introduce our shareholders. For the year, to report that we will be able to review our financial results. That resulted in a 146 percent payout ratio for the year.
The repurchase program resulted in a 5 point for the Q4. Diluted GAAP earnings per common share were $3.76 for the Q4 of 20 to be here. Net income for the quarter was $546,000,000 compared with $526,000,000 in the linked quarter and $322,000,000 in the year ago quarter. On a GAAP basis, Amity's 4th quarter results to introduce an annualized rate of return on average assets of 1.84% and an annualized return on average common equity of 14.8 to take this comparison. This compares with rates of 1.8% and 14.08% respectively in the previous quarter.
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 common share, down slightly from the prior quarter. To be with you. Consistent with our long term practice, 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
to be with you on the call.
M and T's net operating income for the Q4, which to disclose intangible amortization was $550,000,000 compared with $531,000,000 in the linked quarter and $327,000,000 in 20 seventeen's Q4. Diluted net operating earnings per common share to be clear. We're 3 $0.79 in the recent quarter compared with 3 $0.56 in the Q3 of 2018 to return on average tangible assets and average tangible common shareholders' equity of 1.93% 22.16% in the recent quarter. The comparable returns were 1.89% and 21% in the Q3 of 2018. To take your questions.
In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation to introduce our financial results, including tangible assets and equity. Both GAAP and net operating earnings for the 4th quarters of 2018 2017 were impacted by certain noteworthy items. Included in the 4th quarter 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 in 20 eighteen's Q4 was a $15,000,000 reduction and M and T's provision for income taxes arising from an IRS approved change in tax treatment of certain loan fees, which was retroactive to 2017.
To discuss this also amounted to $0.11 per common share. Included in the Q4 of 20 seventeen's results were $21,000,000 of realized gains on investment securities, which amounted to $14,000,000 after tax effect or $0.09 to share. Also reflected in the Q4 2017 results was a contribution to the M and T Charitable Foundation of $44,000,000 which amounted to $27,000,000 after tax effect or $0.18 per common share. To introduce our M and T's provision for income taxes for that quarter was increased by approximately $85,000,000 to be here, amounting to $0.56 per common share as a result of those tax law changes. As a reminder, for 2018.
Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $1,065,000,000 in the Q4 of 2018, up $30,000,000 from the linked quarter. The net interest margin improved to 3.92%, up 4 basis points from 3.88 to be in the linked quarter. We estimate that the shorter or excuse me, we estimate that higher short term interest asset interest rates following the Fed September December rate actions added a benefit to the margin of as much as 6 basis points. Cash interest received on acquired loans combined with a slightly higher level of prepayment fees added an estimated 2 basis points to the 4th quarter margin.
A higher average balance of funds placed on deposit with the Fed had an estimated 4 basis point dilutive effect on the margin. The higher cash balances were primarily the result of increased trust demand deposits and the continued slow pace of reinvestment of cash flows from investment securities. Average loans increased less than 1% compared with the previous quarter. The ongoing to introduce our financial results. Run off of residential real estate loans, primarily acquired Hudson City mortgage loans, was more than offset by growth in other loan Which increased $754,000,000 or 1.1 percent from the 3rd quarter.
We're about 3% higher than in the prior quarter. This included a $275,000,000 seasonal increase in loans to auto dealers to finance their inventories, combined with a $411,000,000 increase in other C and I loans. Commercial Real Estate loans were down less than 1% compared with the 3rd quarter, with modest growth in construction loans, offset by a lower level of commercial mortgage loans as a result of pay downs and a decline in loans held for sale. Residential real estate loans, which are largely comprised of mortgage loans acquired in the Hudson City transaction, continued were up 2% with growth in indirect auto and recreation finance loans outpacing continuing declines in home equity lines and loans. Regionally, in addition to the multi region seasonal rebound in floorplan lending, to be here.
Pennsylvania and our metro region, which includes New York City, Philadelphia and Tarrytown, realized the strongest growth in C and I loans. New Jersey was the bright spot for CRE loans. Average core customer deposits, which exclude Deposits received at M&T's Cayman Islands office and CDs over $250,000 were up about 4% annualized compared with the Q3. The higher levels of trust demand deposits I mentioned previously were the primary driver of the increase. Turning to noninterest income.
Noninterest income totaled $481,000,000 in the 4th quarter compared with $459,000,000 in the prior quarter. The quarter's results included $4,000,000 of security valuation gains on our remaining portfolio of GSE preferred stock compared with a $3,000,000 loss in the 3rd quarter. Mortgage banking revenues were $92,000,000 in the recent quarter compared with $88,000,000 in the linked quarter. Residential mortgage loans originated for sale were $412,000,000 in the quarter, down about 24% compared with the 3rd quarter. To take a look at the results.
A decline in origination revenues was partially offset by higher residential servicing fees attributable to a subservicing portfolio we onboarded during the Q3. Total residential mortgage banking revenues including both origination and servicing activities were $57,000,000 compared with $59,000,000 in the prior quarter. Commercial mortgage banking revenues were $35,000,000 in the 4th quarter, up from $29,000,000 in the to take the quarter. Trust income was $135,000,000 in the recent quarter, to be up slightly from $134,000,000 in the previous quarter and up 4% from $130,000,000 in 20 seventeen's 4th quarter. New business generation continues to be strong, while the weakness in equity markets during the quarter was a modest headwind.
Service charges on deposit accounts were $109,000,000 essentially unchanged from the prior quarter. Trading and FX gains were $17,000,000 improved by $11,000,000 from the prior quarter, largely reflecting to discuss customer interest rate swap activity coming as a result of the improved pace of commercial lending. Turning to expenses. Operating expenses for the Q4, which exclude the amortization of intangible assets were $797,000,000 As I mentioned earlier, the 4th quarter's operating expenses reflected a $20,000,000 contribution to the M and T Charitable Foundation. Excluding the contribution, operating expenses increased by $7,000,000 from $770,000,000 in 20 eighteen's Q3.
That increase reflects higher salaries and benefits to performance. The remaining expense categories in aggregate were essentially flat with the prior quarter with the elimination of the FDIC's large bank surcharge being partially offset by higher other costs of Securities gains or losses from the denominator, but which does include the charitable contribution, was 51.7% in the recent quarter, increased slightly from 51.4% in the previous quarter. The ratio was 54.7% in 20 seventeen's 4th quarter. Next, let's turn to credit. Our credit quality continues to be largely in line with the trends seen over the past few quarters, indeed consistent with the trends seen over the past few years.
Annualized net charge offs as a percentage of total loans to be clear. We're 17 basis points for the Q4 of 2018 compared to 7 basis points in the Q3. Recall that the 3rd quarter's results included a sizable $13,000,000 recovery on a previously charged off CRE loan. The provision for credit losses was $38,000,000 in the recent quarter, essentially matching net charge offs. The allowance for credit losses was $1,000,000,000 at the end of December and the ratio of the allowance to total loans was 1.15% at the end of 2018.
Non accrual loans increased by $23,000,000 at December 31 compared with the end of the prior quarter. The ratio of non accrual loans to total loans increased by 1 basis point ending the quarter at 1 to exercise loans during the quarter, primarily driven by a couple of large loans with unique circumstances. 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 $223,000,000 at the end of the quarter. Of these loans, dollars 192,000,000 or 86% are guaranteed by government related entities. Turning to capital.
M and T's common equity Tier 1 ratio was an estimated 10.13% compared with 10.46% at the end of the 3rd quarter. The decline reflects Retention the decline reflects earnings retention during the Q4, share repurchases and the impact of the improved loan growth, which in turn led to higher end of period risk weighted assets. M and T repurchased $500,000,000 of its common stock during the quarter. As noted earlier, for the full year of 2018, M and T repurchased 12,300,000 shares of its common stock valued at $2,200,000,000 and paid $508,000,000 of common dividends to our shareholders. This resulted in a 1 and 46 percent payout ratio for the year.
Next, I'd like to take a moment to cover the key highlights of 20 eighteen's to report full year results. GAAP based diluted earnings per common share were $12.74 up 46% from $8.70 in 2017. Net income was $1,920,000,000 improved from $1,410,000,000 in the prior year. These results produced returns on average assets to discuss the income, which excludes intangible amortization was $1,940,000,000 improved from $1,430,000,000 in the prior year. Diluted net operating income per common share was $12.86 also up 46% from $8.82 in 2017.
Net operating income for 2018 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1 net operating earnings included a sizable benefit from lower U. S. Corporate tax rates. However, the year over year improvement, Notwithstanding lower taxes was significant. Pretax GAAP and net operating income both improved by 8%, while diluted common shares declined by 5.5% as a result of the repurchase activity.
Now turning to the outlook. Looking forward into 2019, our outlook is fairly consistent with the one we shared on this call last January. To be with you. While GDP growth may slow from the pace seen in 2018, we still expect it to be at a level consistent with the average annual rate of growth to be in the last seen since the last recession ended. Unemployment remains very low and both consumer and commercial customers' Financial positions are healthy.
Consumer confidence remains relatively high, although commercial customers are slightly more cautious. In addition, there continues to be measurable progress toward a regulatory approach tailored for banks like M and T. However, with the usual caveat that events never unfold entirely in the manner you expect, here are a few thoughts for the upcoming year. Loans outstanding declined on a full year average basis in 2018, to be here. But we're up at the end of 2018 by about 1 half of 1% from the end of 2017.
This reflected to have a 13% decline in residential mortgage loans offset by 4% aggregate growth in the other loan portfolios. Average total loans for the Q4 of 2018 were down about 0.5% from the Q4 of 2017 average, with the 13% decline in residential real estate loans offset by aggregate 3% growth in the other portfolios. Over the past 2 years. Paydowns continue to be a wildcard. Our pipeline as we enter 2018 2019 is consistent with or perhaps slightly better than it was at this point last year.
The CRE market remains somewhat active, most notably in the multifamily and healthcare sectors. As was the case in 2018, CRE loan growth for the coming year will be dictated by the rate at which existing construction projects are funded, demand for new construction financing as well as for permanent financing and construction project as construction projects reach completion. We expect continued runoff of the residential real estate portfolio, likely at a consistent low double digit pace, although the dollar amount of the decline will continue to lessen as that portfolio gets smaller. And we continue to see attractive pricing and underwriting standards in the consumer area. Given these trends, Our expectation for 2019 is that average total loans will grow on a full year basis at a low single digit pace.
If the improved to be clear. The pace of C and I lending that M and T experienced in the Q4 continues, including slower paydowns, we couldn't exceed that rate. To take your questions. As has been the case, since the Fed began to raise interest rates in late 2015, to take our next question. Our outlook for the net interest margin is dependent on further rate actions.
A flat scenario should still lead to some expansion of the margin from 3.92% in the 4th quarter as the benefit from last year's September December Fed actions extend over a full calendar year. To to take your questions. As the Fed slows or halts its pace of short term rate increases, there is a likelihood that deposit pricing pressures will continue for a period of time. That outlook excludes the potential impact from cash balances brought in through Wilmington Trust, Which usually have an impact on the reported margin, but would have a lesser incremental effect on revenue. The level of cash on deposit at the Fed was higher at year end than the average for the Q4.
Based on the current level of interest rates and reflecting the impact of the interest rate hedges we entered into last year, our estimate for a hypothetical future 25 basis point increase and short term interest rates will bring a more modest benefit to the net interest margin than we've seen previously, perhaps in the area of 2 to 4 basis points. This embeds a series of assumptions on resultant deposit pricing reactivity. Based on those balance and margin assumptions, We expect year over year growth in net interest income. The higher interest rate environment will likely continue to challenge residential mortgage banking in 20 to begin with. Specifically, with respect to residential mortgage loan originations.
As we've noted previously, we have the capacity and appetite for additional owned MSR servicing or subservicing business. This could offer a potential offset to slow originations. The outlook for the remaining fee businesses remains consistent with our experience in 2018 with growth in the low single digit range with the exception of trust revenues, which have been growing in a mid single digit or better Excluding the $135,000,000 addition to the litigation reserve from full year 20 eighteen's operating pleasure. We expect low nominal growth in total operating expenses for 2019 over last year. To take this.
This includes the full year benefit approximately $40,000,000 from the elimination of the FDIC surcharge. To remind you that we expect our usual seasonal increase in salaries and benefits in the Q1 of 2019, which primarily reflects In each of the first quarters of 2017 2018, we realized a benefit to our provision for income taxes when prior year equity grants vested at stock prices higher than the price at the grant date. Pleasure. For each of the past 4 years, we've cautioned that the trend can't continue and that losses will tick upward, although not approaching long term averages. I'll reiterate that outlook this year.
Eventually, I'll get this right. There continue to be some modest pressures on non performing and criticized loans, but there are no apparent weaknesses in particular industries or geographies. Regarding taxes, our outlook for the effective tax rate for 2018 in the range of 25% to 20 to be conservative. An approximate rate of 25% is more appropriate for 2019 unless some discrete items occur during the coming year. As to capital, while the Fed implements its amended capital and stress testing rules for banks of our size, we'll continue to execute our 2018 capital plan through the end of this year's Q2.
We expect final rules from the Fed in time for our 2019 capital plan. We expect to continue to manage our capital levels toward the lower end of our peer group as we believe our consistent approach to underwriting credit and the resultant low earnings volatility argues for maintaining our capital levels toward the lower end of that range
to be maintained by our peers.
Of course, as you're aware, our projections are subject to a number of to take some questions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ to hear from what actually unfolds in the future. Now let's open the call to questions before which Laurie will briefly review the instructions.
To ask that you please pick up your handset before asking your question. Our first question comes from the line of Ken Zerbe of Morgan Stanley.
Great, thanks. Good morning. Good morning, Ken. I guess maybe just starting off in terms of the very strong growth that we saw in C and I lending this quarter, Presumably some of the seasonal like the auto dealer piece that you mentioned. But when you think about like going into 2019 or even where we stand today, to take your questions.
Is the environment changing? Is the dialogue with borrowers getting meaningfully better? Or is there something particularly unusual with this quarter That may slow in future quarters. Thanks.
Sure. So there was normal seasonal uptick to take our auto floor plan balances, which we had talked about on the Q3 call, from a couple of large relationships that we onboarded during the quarter. So we'd expect that number to stay around where it is, at least for the first to take your questions. When we look outside of Floorplan and we look at other C and I lending, We typically see a little bit more activity in the Q4 than we do in the other quarters because year end tends to drive things to completion. But when we look across industries and we look across geographies, it was broad based, the uptick, which for us was encouraging and that it wasn't one sector or one geography driving the growth.
And so I think there's to take your questions. I would say there's comfort from our customers' perspective in the economy, but still a little bit of trepidation. And to take your questions. We're hopeful that the dialogue that we saw in the Q4 continues into the first and second and through the year. But I guess remains to be seen, it's tough to draw conclusions off of just 1 quarter.
And as we look underneath, We continue to see solid activity as it regards to payoffs and paydowns. And so, it was really new originations to drive a lot of the growth in the quarter. And as we enter 2019, the pipelines are to be reasonably consistent, maybe even slightly above where they were last year. So, we're guardedly optimistic about C and I in 2019.
All right, great. And then just my other question I had. In terms of the trust demand deposits, obviously, the non interest bearing grew to be here quite a bit this quarter, which is great. How sustainable are those or what's the typical pattern, if there is a typical pattern for those. Thanks.
Sure. So you're right, trust demand deposits were up, sizably in the Q4. We often see a little seasonality in those balances as well towards the end of the year. At least we've seen We saw that I think 2 years ago. Many of those will leave the balance sheet in the Q1.
Those tend to fluctuate depending on market activity to be clear on that. So we expect those will be down closer to the levels that we saw in the 3rd and second quarters of 2018 as we enter the first half of twenty nineteen.
Okay, perfect. Thank you very much.
Your next question comes from the line of John Pancari of Evercore ISI.
Good morning.
Good morning, John. To take your questions.
On the back to the loan growth, regarding the 4th quarter trends, how much of an impact did you see in the quarter on the commercial side from The capital markets drying up a bit in December. And then separately, just trying to think about how to model out that commercial growth. Would you say that 6% end of period year over year growth that you saw in commercial to be clear. Is something that could tail off a little bit from that? And is that baked into your guidance?
Or could it be to turn it back towards the low single digit reach. Thanks.
So to take your questions. When we look at C and I in the Q4, I guess starting with the question about the capital markets, we did see a little bit of a to freeze up in some of the capital markets activity, but it didn't seem to affect our payoff and pay down levels in the 4th quarter. So my take on that is that many of the funds that are supplying credit, that are non banks Still had money and they were still lending and that any of the activity that was going on would have been new money that would have gone into the funds, that isn't yet spoken to be here. Except at the larger end of the customer range, which is typically above where we would compete. When we look at the growth in the Q4.
As I mentioned, there always is a little bit of extra activity that seems to happen in the Q4. So 6% to me feels really high, and we're not anticipating that rate of growth would continue in 2019. To be clear. We expect that to come down. We also expect to see some balances come off the balance sheet in the first half of the year.
And so We're a little bit more moderated on our outlook for commercial balance growth in the year, closer to kind of The low single digit growth that we've been talking about all the way along.
Got it. Okay, that's helpful. And then separately on the to take the operating leverage side. I know you indicated that you still expect operating leverage for 2019. We saw, I guess, on what we view as a core basis, Maybe 3.50 to 400 basis points positive operating leverage for 2018.
What type of what magnitude of
So when we talk about operating leverage, I guess, it's to make sure that we're all on the same page in what we're talking about and seeing. So when we talk about modest positive operating leverage, we to exclude from the year over year calculations the $135,000,000 that we added to the litigation reserve in 20 eighteen's Q1. If you're looking on a GAAP basis, then expenses will be down. But when you factor that out, which we do, Then we expect some modest expense growth, even factoring in the FDIC, but we expect revenue growth to be to be slightly above that. And so, we'll expect some modest operating leverage.
Now obviously, depending on rates that could be hot more or less, But based on this, we look forward right now, we think it's slightly positive.
Okay, got it. Thank you.
Your next question comes from the line of Steven Alexopoulos of JPMorgan.
Hey, good morning, Darren.
Good morning.
To start on the NIM. So it's pretty clear you guys will benefit in the Q1 from the December hike. But given your comments for December deposit pressures
to persist. The Fed does go on hold.
How do you think NIM progresses for the rest of the year?
So as we look forward, Alex, we think the Q1 NIM gets a little bit of benefit, as we mentioned before, from the full to be back up the hike in December. And then you've got to remember, I guess, there's a couple of things. We expect some of the cash balances to come down. So those impact the margin and will impact it positively, as well as the day count in the Q1, also helps the margin. So with those to take the 3 factors.
We're expecting an increase in the margin in the Q1. From there, to take the questions. When we look forward with no further actions by the Fed, we would expect to kind of be within a couple of basis points, plus or minus, of where we end the Q1, through the rest of the year. And then the question is obviously how the market reacts From a deposit pricing perspective, in absence of any Fed increases, typically deposit pricing continues for a little bit after the Fed stops. And so we're anticipating some of that.
The caveat, which I think is a little bit different is for many banks. They've got excess securities balances that we can look to, given the change in LCR that we anticipate from the new regulations. To take your questions. And always the question is how loan growth behaves. And if it continues like the Q4 for everyone, it'll probably be a little more deposit pricing Pressure, if it comes back to where we have seen in the 1st 3 quarters of the year, then there's probably a little bit less pressure.
So I don't know whether that gives you lots of things to think about and a lot of things that are on our minds. So it's not exactly a straightforward question.
No, to take your questions. That certainly helps. And then regarding the strong growth in C and I, quite a few other banks are pointing to their customers using their cash balances, right, to fund expansion too. Can you give us a sense if we put the impact from the trust related deposits aside? Like what did you see in non interest bearing deposits this quarter?
Thanks.
Yes. So if you hold trust demand to the side, our non interest bearing for the quarter was flat to maybe slightly down. And if you look underneath, there is some seasonality in non interest bearing balances that we see at M and T because of the commercial, the magnitude of the commercial non interest bearing that we hold. And typically, the commercial customers will hold deposits through the end of the year and into January in anticipation of making distributions to their principals and paying taxes. So we also typically see a little bit of to take an outflow of non interest bearing in the Q1 in the commercial side for those reasons and then they slowly grow over the course of the year.
So Outside of trust, we're actually encouraged by the non interest bearing that we saw in the 4th quarter.
Okay. But are you also seeing customers use non interest bearing deposits to fund expansion?
Yes, we're seeing some of that. We're also seeing them use their lines as a way to fund growth as well. I guess My take on it is the behavior is they've got the line, and rates are still relatively low. So they'll fund something on the line and then make a about making it into more permanent term debt or using their cash to eliminate it. And so we've seen a little bit, but not a of use of the cash to invest.
We've seen more if we see cash flowing Out of accounts, it tends to be going from non interest bearing into interest bearing accounts Either on balance sheet or off.
Okay, great. Thanks for all the color.
Your next question comes from the line of Julian Lee of Loomis Sales.
Hi. I have a question about middle market lending competition. In the past, you've talked about frothiness in this area In terms of spreads or terms and conditions, how are you seeing things now?
I don't think we've seen a material decrease in the competitiveness of the lending environment. I think we saw to be here. As an industry in the Q4, a couple of things. I think we saw a lot of activity that was pent up that was trying to get done by the end of the year, to take your questions. As well as maybe a slight pause in the non bank markets, but as I mentioned before, we didn't see a material slowdown in payoffs and paydowns.
Pricing to have been dropping. When we look at our pricing and spreads for the last couple of quarters, they seem to have leveled off. So our take on that is that it was to see the impact of the tax reform kind of working its way through pricing, and it seems to have stabilized. And really when we see changes, we're seeing to take your questions. We continue to see covenant light things out there.
If we see things on structure, we're seeing longer interest only periods and maybe slight moves up in LTVs, but it was minor. So from our perspective, The Q4, it didn't get worse, but it didn't really get better. Okay. Thank you.
Your next question comes from the line of Erika Najarian of Bank of America.
Hi, good morning. I wanted to ask Darren a little bit more about the flexibility on the securities portfolio if you didn't have to adhere to LCR. I'm wondering if you could help us understand what the potential yield benefit would be or would you shrink your balance sheet and that would still be spread accretive?
So within the securities portfolio, I think if you look at what our securities portfolio is today, it's still Higher than where we were before liquidity coverage ratio became a requirement. And We would never take that down to 0 because we do want that liquidity. But there's an option to look at that as one source to fund loan growth. And given the spreads that you are on securities versus the spreads on loans, shifting that mix Would be a positive for our margin. If you look at what we've been doing with that book over the last to take a few quarters as longer dated mortgage backed securities have paid down.
We've held that money in cash or invested in shorter term to take your questions. Treasury is just given where the rate environment has been. But we look we don't have a specific to plan for that portfolio this year per se, but we consider it amongst our options versus overnight funding versus broker deposits versus to take your questions. Bank debt and obviously customer deposit growth as an avenue to fund loan growth, and we're always thinking about to take the impact on the duration of the balance sheet as well as the cost of funds
as we consider all those options.
Thank you for that. And just as a follow-up, as we think about the revenue outlook for 2019, to take it. If somehow it falls a little short of your budget, is there flex in your expense outlook or expense budget to be able to create positive operating leverage even if the revenue outlook is a little bit softer than, what we're expecting today.
Sure. Good question. I think the positive operating leverage comment, there's a number of things that could impact that. The biggest one is what happens with rates with the Fed, and if they turn from raising to decline. If rates stay flat, then we should be okay on positive operating leverage.
But to answer their question, there is some flex in our expenses. It doesn't happen it doesn't turn on a dime. To take your questions. But over the course of a couple of quarters, there are things that we have an ability to do to manage the pace of the expense growth. But We're going to balance that off against the investments that we're making for the long term of the bank.
And if we have to sacrifice to take a little bit of operating leverage in the short term to make the investments we need to for the bank for the future. We're not going to worry about that too much.
Got it. And just one last question on the deposit repricing delay. To take. How many quarters typically does it take after the last Fed rate hike in terms of the repricing for the repricing to cease or significantly die down.
Well, if you use the past as an indication of the future, It's usually 2 to 3 quarters that it can continue, but it also depends on what the reactivity has been up to that point. And so there's a lot of things that go into that. And then the other question, of course, is how much loan demand is there and need for those funds. So That's kind of what we've seen in the past. I think there's reason to believe that there are a couple of differences, one positive and one negative to to hear that history in the current environment, but that's kind of what we've seen in the past.
Got it. Thank you.
Your next question comes from the line of Peter Winter of Wedbush.
Good morning, Dan. Good morning, Peter. To ask about Credit Quality. Obviously, it's very strong, but you've got non performing assets that increased a little bit 2 quarters in a row, you mentioned the criticized loans increasing. I'm just wondering if you can just give a little bit to take some color there.
And then secondly, with the outlook for better loan growth next year or 2019, would you expect to start adding to reserves?
Sure. So I guess I start at the high level and look at delinquency and where delinquency trends have been. We haven't seen anything that gives us cause for concern in any of the books. We've seen a little bit of an increase, as you noted, in year end, in nonperformers and the allowance actually, the allowance is pretty flat, in non performers. And when we look under the covers of what's going on there, we continue to not really see any Particular industry as it relates to C and I, any particular class of real estate as it relates to CRE, Any particular geography from a consumer perspective that causes us concern.
Now that said, we're M and T and I'm paranoid, so we're going back through the book again to see if there's anything that we're missing. But generally, as we've gone through The non performers, there are also a couple of larger non performers and couple of larger criticize that we that I mentioned before. They're very specific situations. So We're comfortable with where things are, but we're M and T, so we're paranoid.
Okay. And then just the to be possibly adding to reserves with a better outlook for loan growth this year? Yes.
I mean, obviously, we go through our allowance every quarter, and we've got Obviously, if we have a little higher loan growth, it would be reasonable to expect that the provision would go up with it.
Got it. Thanks, Darren.
Your next question comes from the line of Jeffrey Elliott of Autonomous Research.
Hello. Thanks for taking Another one on those criticized loans. Can you give us a bit more to have a sense of the magnitude of the increase just to give us a feel for how significant or not significant It is. And then anything on the industry, the types of loans, any kind of color around those that would be helpful. Thanks.
Sure.
It's going to be a couple of $100,000,000 increase in the quarter compared to 3rd quarter. And within there, there's 2 or 3 large loans over $50,000,000 that we've got our eye on. And it's a variety of industries and various different reasons why. In one case, to take a look at the company that has a debt service coverage ratio that got a little close to to take our trigger. And but when we look at that company and we look through its income statement and we work with them, we can see that they have opportunities to change their expense profile and to rectify that situation.
When we look at another one, we see some excessive leverage that was helped by some of the nonbank financials. So there's a story to each one, and there are paths for them to not remain on that criticize list, but because we're doing our work and we're watching what's going on. We put them on that list to make sure that we pay attention to it and try to keep them from becoming defaults.
Understood. Thanks very much.
Your next to come from the line of Frank Schiraldi of Sandler O'Neill.
Good morning. Good morning. Just one question. Just on the This might be splitting hairs, Darren, but just in terms of the December rate hike that we already got, you talked about 2 to 4 basis points of benefit and if we to get any additional rate hikes perhaps in 2019. And in the past, you guys talked about 5 bps to 8 bps, I think, of benefits.
So just wondering, does the December rate hike to benefit you're likely to get in the Q1 from it. Is that somewhere in between or is the 2 bps to 4 bps a good number to use there?
That's not a bad number to use, because we have gotten some benefit of it already, right? And we talked about 5 to 8 before. So That's probably a good number to use.
Okay, great. Thank you.
Your next question comes from the line of Gerard Cassidy of RBC.
Hi, Darren. How are you? Good. How are you, Gerard?
Good. Thank you. On your C and I loan growth that you saw this quarter. When you look at it, what percentage of it came from existing customers versus new customers that you won in the quarter?
That's a great question. If you if we look at our loan book, We generally get the majority of our loan growth from our existing customers, just because on a Percentage basis of the portfolio, that's where a lot of the growth comes from. We did see some new customer adds, to take your questions. Particularly in New Jersey, we noted New Jersey is a strong growth market. I'll remind everyone once again that it It continues to be basically a de novo, so it's off a small base.
But it was a really nice add in terms of what we refer to as prospect conversions in the quarter. But when you look in aggregate, the bulk tends to come from the existing customer base.
Very good. And then speaking of New Jersey, I think you said in your opening remarks, you saw some good commercial real estate loan growth in New Jersey. Was that construction or commercial real estate term mortgage? And just what types of properties were you able to to finance.
So I don't have the specifics for New Jersey on those ones, Gerard, but the trend that we saw in The quarter and I've seen for much of the year is activity in multifamily and in hotel space. So I would expect that in New Jersey, we saw some of that. But just given our presence in New Jersey and the fact that we're growing, I think it's a little bit broader That we would see some permanent mortgage business there as well.
And then lastly, obviously, M and T has always distinguished itself on your ability to manage your capital very effectively granted the post financial crisis has to change that a bit. But once you come out of CCAR, what are the advantages that you guys are Thinking you're going to have in terms of managing your capital once you don't have to go through the annual CCAR test?
So we're still waiting for final word on what all of this is going to mean, both in terms of what the process is with the regulators as well as whether the new stress capital buffer framework comes into effect. To take your questions. I guess what we're hopeful for is that we start to end up in a place a little bit like the LCR or where the LCR seems to be evolving And that it's part of your normal supervisory process that you're reviewing your position with the regulators, But you have a little bit more flexibility to manage that part of the balance sheet without some of the to discuss the specifics of what you can do and how much you can do in any given time period. And I think we just for growth if they need support, and we want to be there to provide lending to help them grow their businesses. And when they're not able to do that, we want to be able to to take that capital that we can't put to use in the business and return to the shareholders and kind of not have as many restrictions on how much we can return in any quarter that we can be a little bit more dynamic in how we manage the balance sheet.
Great. Thank you.
Your next question comes from the line of Matt O'Connor of Deutsche Bank.
Hi, good morning. To take
your questions. Good morning.
I was wondering if you could
talk about how other bank CEOs are thinking about the stocks, to see the environment. Obviously, you've taken a lot of capital you've been acquiring in the past. Just wondering if the sell off in stocks and risk assets in general and to take your questions. Increased macro concerns may be bringing some people to the table or thinking a little bit differently than,
So I guess, I haven't spent a lot of time with other bank to know exactly what they're thinking. But when you look at the market And what's happened with bank stocks and with multiples, the whole industry is rerated down basically together. No, I think we had a better December than some others did, but we're still all relatively down. To take your questions. For someone to think about selling or for acquisition math to work, it's about the difference between the buyer and the seller in some cases.
And The relative differences hasn't changed from what it was a few months ago. And I don't think we've heard too much Where people are capitulating and thinking that the world is coming to an end and it's time to sell my bank.
Okay. Thank you.
Your next question comes from the line of Christopher Spahr of Wells Fargo.
Hi, thank you. The Treating line item, it was a pretty good pickup quarter over quarter actually compared to actually the last few years on a quarterly basis. And you attributed to pickup in C and I lending. Given your commentary on C and I lending Going forward or just loan growth going forward, do you think that trading level is sustainable or will you kind of revert back to what we've seen the last few years in trading?
Yes. The trading tends to go in lockstep with originations. And it's not just C and I lending originations that happened to have to take a big impact on the balance sheet this quarter, but originations continued in the quarter in both CRE and C and I. And both of those to take your questions. Sectors will use swaps to manage their interest rate risk.
And so The trading account should move in lockstep with loan origination activity. And so as that moves up or down, the Trading revenue should move up or down as well.
And just as a follow-up, The commentary on fee revenues excluding kind of the trust, that takes into account kind of that kind of outlook, correct?
Yes.
All right. Thank you.
Your final question comes from the line of Brian Klock of Keefe, Bruyette, Woods.
Hey, good morning, Darren.
Good morning, Brian.
So I wanted to kind of follow-up on maybe you had a discussion earlier about some of the LCR And sort of thoughts going forward and managing your liquidity. I guess looking at Page 14 in your press release and the year over year 2018 versus 2017, The securities portfolio has come down quite a bit since 2017.
Yes.
And just thinking about it's now on an end of period basis at the end of the year, It's even below the 4th quarter average of $13,000,000,000 So I know you've had deposit runoff too, some of that's in City Time deposits, etcetera. I guess, how do you think about that level of the securities portfolio in 2018? To take your questions. Do you think this is I guess you guys have used this just with other hedging and other telco strategies, but is this an area where this will grow from here or this where do you think it might stabilize at on the security side?
Sure. So on that page, Brian, when we look at securities in the portfolio, we look at it in combination with the top line there, interest bearing deposits at Thanks or cash to the Fed. And when we have been seeing payoffs and paydowns of the securities portfolio, Depending on where rates were, we've been holding some of that in cash because the rate we're getting in cash is within 10 or 15 basis points of what you could get at 1 year treasuries. And within our securities portfolio, we've kind of had a bit of a barbell, if you will, between at mortgage backed securities being kind of longer dated for rate and then the shorter end to manage duration. And so we've been just allowing some of the securities portfolio to
go into
cash, and that's why you see some of those cash balances increasing. Some of it was Absolutely, because of growth in trust demand, but some of it is also just shifting between securities and cash. And so if you look at the combined, They are down a little bit, but it's not as quite as dramatic as what the securities might look like on its to
take your questions.
Got it. So if I think about average earning assets in 2019 versus 2018, so that anything outside of loans, whether it's The interest bearing deposits Fed fund security, that's going to be around $19,000,000,000 on average, which it seems like it's been the last 2 years. So the earning asset growth could be higher than whatever you put into loan growth will grow your earning assets from the 106.8 that you had for 2018.
Maybe, maybe not. You could see to switch between categories, right? You could see, just within the loan book switch between mortgage versus The other categories because of that continued rundown. And then within the asset, on the asset side of the balance sheet between securities and loans. So Aggregate earning asset growth might be flat to slightly down depending on How we choose to fund some of the loan growth.
Okay. And just a real follow-up quick follow-up question on the fee income guidance. So when you talked about trust being mid single digit because there's good momentum in that business. So would the mortgage banking be to be included with all the other in that low single digit guide? Or is mortgage banking expected to be a little softer because of some of the headwinds on originations?
To turn the call to Don McLeod for any additional or closing remarks.
Again, thank you all for participating today. And as always, if to clarify if any of the items on the call or news release is necessary, please contact our Investor Relations department at area code 716-842 to take your questions.
Thank you for participating in the M and T Bank 4th quarter and full year 2018 earnings conference call. You may now disconnect.