KeyBanc's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the prepared remarks, there will be a question and answer session. Thank you. I will now turn the call over to Don McLeod to begin.
Please go ahead.
Thank you, Maria, and good morning, everyone. I'd like to thank you all for participating in M&T's Q1 2021 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, By clicking on the Investor Relations link and then on the Events and Presentations link. Also before we start, I'd like to mention that comments made during this call might contain Forward looking statements relating to the banking industry and to M&T Bank Corporation. M and T encourages participants to refer to our SEC filings on Forms 8 ks, Darren King is not with us today and is recovering from the effects of the COVID-nineteen virus.
He expects to rejoin us shortly. In his absence, M and T's CEO, Renee Jones will draw his skills as former CFO and will be our primary speaker on today's call. Now, I'd like to introduce our Chief Executive, Rene Jones.
Thank you, Don, and good morning, everyone. Don, thank you for using the word skills. When I handed over the CFO range to Darren 5 years ago, one of the things that I was happy that went with it was the call. But although Darren is doing well and we expect his return to action shortly, I boldly volunteered to handle the call today. And just so you know, my agenda is that I do a good job, but not such a good job that you won't be clamoring to have Darren back as soon as possible.
Joining me today on the call are Bob Boitak, our Chief Credit Officer and Mike Spycella, our Corporate Controller, whom I'm sure you both know, you know both of. As we noted in this morning's press release, we're pleased with the strong momentum in residential mortgage banking and our Wilmington Trust Group of Businesses. Outside of our usual seasonal first quarter surge in salaries and benefits, expenses remained well controlled and Credit trends are indicative of the state of the loan portfolio and the forecasted improvements in the economy. Diluted GAAP earnings per common share were $3.33 for the Q1 of 2021 Compared with $3.52 in the Q4 of 2020 and $1.93 in last year's Q1. Net income for the quarter was $447,000,000 compared with $471,000,000 in the linked quarter $269,000,000 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 1.22 percent and an annualized return on average common equity of 11.57%. This compares with rates of 1.30% and 12.07% respectively in the previous quarter. Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $2,000,000 or $0.02 per common share, Little change from the prior quarter. Also included in the quarter's results were merger related charges of $10,000,000 Related to M and T's proposed acquisition of Peoples United Financial. This amounted to $8,000,000 after tax or $0.06 per common share.
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 associated with mergers and acquisitions. Net operating income for the Q1, which excludes intangible amortization and the merger related expenses Was $457,000,000 compared with $473,000,000 in the linked quarter and $272,000,000 in last year's Q1. Diluted net operating earnings per share were $3.41 for the recent quarter compared with $3.54 In 2020's Q4 and $1.95 in the Q1 of last year. Net operating income yielded annualized rates of return on average tangible asset and average tangible common shareholders' equity of 1.29% and 17.05% for the recent quarter. The comparable returns were 1.35% and 17.53% in the Q4 2020.
In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non GAAP results, including tangible assets and equity. So let's take a look at some of the underlying details. Taxable equivalent net interest income was $985,000,000 in the Q1 of 2021, Compared with $993,000,000 in the linked quarter, this reflects a higher level of average interest earnings assets, Primarily cash equivalents and a shorter calendar quarter. The margin for the past quarter was 2.97%, Down 3 basis points from 3% in the linked quarter. The primary driver of the margin decline Was the higher level of cash on deposit with the Federal Reserve, which we estimated reduced the margin by 5 basis points That was partially offset by a 2 basis point benefit from the shorter quarter.
Similarly, the $8,000,000 linked quarter decline in net interest income reflects The loss of income from 2 fewer accrual days. Changes in interest rates had a minimal effect for the quarter. Compared with the Q4 of 2020, average interest earnings assets increased by some 2%, Reflecting a 9% increase in money market placements, including cash on deposit with the Federal Reserve and an 8% decline in investment securities. Average loans outstanding grew nearly 1% compared with the previous quarter. Excluding PPP loans, average loans grew 1,100,000,000 or over 1%.
Looking at the loans by category on an average basis compared to the linked quarter, Commercial and industrial loans were essentially flat with increased dealer floorplan balances and other C and I loans partially offset By lower average PPP loans, due to timing of originations and the receipt of payments, average PPP loans declined 4 $3,000,000 from the prior quarter. Commercial real estate loans declined less than 0.5% compared to the 4th quarter, indicative of very low levels of customer activity. Residential real estate loans grew by 4% consistent with our expectations. The increase reflects purchases from of loans from Ginnie Mae pools that we sub service, partially offset by further runoff of the acquired mortgage loans. Consumer loans were up nearly 1%.
That activity was consistent with recent quarters where growth in indirect auto and National finance loans has been outpacing declines in home equity lines and loans. On an end of period basis, PPP loans totaled $6,200,000,000 up from $5,400,000,000 at the end of the 4th quarter. At where customer deposits, which exclude deposits received at M&T's Cayman Islands office And CDs over 250,000 increased 4% or $5,000,000,000 compared to the 4th quarter. That figure includes $4,000,000,000 of non interest bearing deposits. On an end of period basis, core deposits were up nearly $9,000,000,000 Foreign office deposits increased 17% on an average basis, but were essentially sorry, decreased 17% on an average basis, but were essentially flat Turning to non interest income, non interest income totaled $506,000,000 for the Q1 compared with $551,000,000 in the linked quarter.
The recent quarter included $12,000,000 of valuation losses on equity securities, Largely the remaining holdings of our GSE preferred stock, while 2020's final quarter included $2,000,000 of gains. Over the past few years, M and T has received a distribution from Bayview Lending Group in the Q1 of the year. Results for the Q1 of 2020 included a $23,000,000 And a change in the past timing, as you may know, M and T received a $30,000,000 distribution in the Q4 of 2020 As expected, no distribution was received in this year's Q1. Mortgage banking revenues were $139,000,000 in the recent quarter, down $1,000,000 from $140,000,000 in the linked quarter. Our residential mortgage business continued to perform well.
Revenues from that business, including both originations and servicing activities, were $107,000,000 in the first quarter, Residential mortgage loans originated for sale were $1,300,000,000 in the recent quarter, up about 5% from the 4th quarter. Commercial mortgage banking revenues were $32,000,000 in the Q1, reflecting a seasonal decline from $45,000,000 in the linked quarter. That figure was $30,000,000 in the year ago quarter. Trust income rose to 150 $6,000,000 in the recent quarter improved from $151,000,000 in the previous quarter. The increase is the result of growth in assets under management In Wealth and Institutional Businesses, service charges on deposits were $93,000,000 compared with $96,000,000 in the 4th quarter.
The decline from the linked quarter is the result of higher customer balances offsetting activity based fees. Operating expenses turning to operating expenses for the Q1, which exclude the amortization of intangible assets and merger related expenses Were $907,000,000 The comparable figures were $842,000,000 in the linked quarter and $903,000,000 in the year ago quarter. As is typical for M and T's fiscal Q1 results, operating expenses for the recent quarter included Approximately $69,000,000 of seasonally higher compensation costs relating to the accelerated recognition of equity compensation expense For certain retirement eligible employees, the HSA contribution, the impact of annual incentive compensation payouts On the 401 ks match and FICA payments and unemployment insurance, those same items amounted to an increase in salaries and benefits of Approximately $67,000,000 in last year's Q1. As usual, we expect those seasonal factors to decline significantly as we enter the 2nd quarter. Other cost of operations for the past quarter included a $9,000,000 reduction in the valuation allowance On our capitalized mortgage servicing rights, you'll recall that there was a $3,000,000 addition to the allowance in 2020's Q4 and a The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses The denominator was 60.3% in the recent quarter compared with 54.6% in 2020's 4th quarter And 58.9% in the Q1 of 2020.
Those ratios in the 1st quarters of 2020 2021 each Reflect the seasonally elevated compensation expenses that we talked about. Next, let's turn to credit. The overall economy of course The recent quarter continued to highlight the differences between the former incurred loss accounting method and the CECL standard adopted at the beginning of last year. Previously, reported delinquencies and transition of loans from accruing to non accruing status evidenced by financial stress, delinquencies or Defaults by borrowers preceded or accompanied the establishment of loss reserves. Under CECL, we increased Our loss reserves last year based on worsening projected economic scenarios, significant downgrades of Specifically, identifiable credits to non accrual emerged in the Q4 and criticized in the recent quarter The allowance for credit losses amounted to $1,600,000,000 at the end of the Q1.
The $100,000,000 decline from the end of 2020 reflects a $25,000,000 recapture of previous provisions for credit losses combined with $75,000,000 of net charge offs in the 1st quarter. The provision recapture and the resulting reduction in the allowance for the recent quarter continue to reflect the ongoing uncertainty As to the impact of the COVID-nineteen pandemic on economic activity, employment levels and the ultimate collectibility of loans. That said, the improving economic outlook leaves us cautiously optimistic as to the ongoing effects of the pandemic compared with the greater levels of uncertainty in prior quarters. Our macroeconomic forecast uses a number of economic variables With the largest drivers being the unemployment rate and GDP, our forecast assumes the national unemployment rate continues to be at elevated levels On average, 5.7 percent through 2021, followed by a gradual improvement reaching 2.4% by the end of 2022 I'm sorry, 4.2% by the end of 2022. The forecast assumes that GDP grows at 6.2% At an annual rate during 2021 resulting in GDP returning to pre pandemic levels during 2021.
Our forecast considers improved government stimulus, but not any further fiscal or monetary actions. Non accrual loans amounted to $1,900,000,000 or 1.97 percent of loans at the end of March. This was up slightly From 1.92 percent at the end of last December. As noted, net charge offs for the recent quarter amounted to $75,000,000 Annualized net charge offs as a percentage of total loans were 31 basis points for the Q1 compared with 39 basis points in the 4th quarter. Loans 90 days past due On which we continue to interest were $1,100,000,000 at the end of the recent quarter, 96% of those loans were guaranteed by government related entities.
Turning to capital. M and T's common equity Tier 1 ratio was an estimated 10.4% And earnings net of dividends. As previously noted, the People's United merger is pending. We don't plan to engage in any stock repurchase activity while that is pending. Now turning to the outlook, while the economy continues to improve and funds from stimulus programs reach our commercial and consumer clients, We haven't seen enough change in our outlook for 2021 in any significant way from what we shared on the January call.
Aside from the improved credit outlook, As evidenced by the reserves released this quarter, I don't intend to provide any updates. Darren's remarks as Net interest income, loan growth, fees and expenses still hold. And those of course are predate our merger announcement and don't contemplate any impact from the merger. We supply the merger related comments at the time of announcement. Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional Economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
So now let's open up the call to questions before which Maria will briefly review the instructions.
Thank you. The floor is now open for Our first question comes from the line of Ken Zerbe of Morgan Stanley.
Hi, Ken.
Hey, Renee. It's like you never left in terms of giving the prepared remarks. All right. Maybe just to start off, in terms of the reserve release, the way the press release read and even your comments, It sounds like you guys are still applying a fair amount of qualitative overlays that are fairly negative or that you're there's a lot of uncertainty in the market. But you still released reserves pretty meaningfully this quarter.
Is it fair to assume that if the economy continues to get slowly better and some of those qualitative overlays Come off that we could actually see a more material negative provision expense next quarter?
I guess the way I think about it is if you look at how our allowance works at the end of the quarter, We saw releases in the commercial C and I book and in the consumer book. Those are largely reflective of the GDP and unemployment projection improvements that you've seen. And I think the thing to think about is you know that One of the unique things about this period of time is that it's uneven, right? So while we're having Good projections and unemployment is coming down. We've got great projections for GDP.
It's not even everywhere. And so some of the places that are affected by travel and Payment, right, are still lagging behind. So while we've seen things, for example, like higher Scheduled bookings for the summer and the fall, we've really yet to see the improvement, particularly in our CRE and our hotel exposures. So, without using the word overlays, I think that we're looking for signs of improvement in those particular areas, which would be required before we See any reduction in the reserves on those portfolios.
Got it. Okay. That makes sense. And then just as a follow-up question, You're obviously building up a fairly sizable cash position given all the deposit growth. How are you thinking about investing some of that cash into higher yielding securities potentially?
It's a great question. We'll give it a lot of thought. I think our first thought, it starts with the idea that we probably At the end of the quarter, probably had $20,000,000,000 of excess liquidity beyond what we would use and use for our liquidity position. And I think a huge portion of that is clearly related to what I would call Transitory. Now the big issue is how long for the transition?
And so when we first thought that we have is that we hate to invest in low return assets. So we don't it's our job to invest for you all of that cash in securities because you could go do that off on your own, the returns are too low. Having said that, we do have one of the smallest securities book out there. And so we're sort of constantly monitoring This idea of how low do we want to make that go. So I think maybe the more interesting thing long term is What's really hard to see is the growth in activity that may be permanent that's happening over time, the account growth, those types of things And the behavior of customers.
So I think when we do see, which may be for a while may not be for a while, because of More infrastructure spending and things like that. But when we do see a return, I think we may see a higher level of cash balances for quite some time. And as that becomes more clear to us, we would think about investing those dollars, but I think it's a little too early today.
All right, great. Thank you very
much. Our next question comes from the line of John Pancari of Evercore ISI. John?
Good morning, Renee. Hey. I just wanted to maybe touch on loan demand. If you can talk a little bit about where you're seeing any improvement at all, particularly on the commercial side, really interested in what you're seeing on the pipeline front and You're seeing any signs of pickup in CapEx activity and then separately on the consumer side as well where you're seeing? Thanks a lot.
Yes. So in the C and I space, I think I don't know if it's a change, but if you look in the areas of M and A Activity, if you look in the areas of manufacturing, we've seen some progress there. But beyond that, it's very slow. Utilization was either flat to slightly down this quarter. We're seeing very limited, if any growth Really declined in the CRE segment because there's just no demand because of the state of things there.
Having said that, it's interesting as particularly commercial Volumes remain low. If you look back as I did over 4, 5 quarters, you do see a steady Increase in the roll on margin. So the activity that is getting done is at higher return levels. So that should have Some impact as we move further, not immediate impact, but as we as that continues, that should have some positive impact on the margin.
Got it. Okay. Thanks. That's helpful. And then separately on the credit quality side, I wonder if you could update us on the commercial real estate portfolio.
I know you indicated the areas of Stressed by industry, but I know you also noted that there wasn't necessarily a release there on the commercial real estate side. So if you could just remind us the size of that reserve as well, when you give us an update on the trends? Thanks.
Yes. So what I'll say is, No surprise, hotels continue to be the property type that are under the greatest amount of stress in our portfolio. And hotel CRE loans were the largest contributor to the increase in our in both in our criticized book. And the thing to think about is given the duration of the pandemic and its impact on things like travel, it's really not surprising that the hotels kind of face greater stress. So you'll remember that although performance we're seeing some slight improvement, Give me one second.
We're seeing some slight improvement. Most of our hotel portfolios really can't support the contractual debt service payments Without an in place modification or maybe as important support from their sponsors. So what that means Is that while you've seen an increase in classifieds, so this quarter we've seen about $1,000,000,000 increase in our classifieds, about half of that was in the hotel space. Really what that is, is just the length of time. Having said that, we don't expect that those downgrades will contribute to increased risk of loss Because that really depends on other factors like beyond the credit grade, like the strength of the sponsors and the value of the underlying collateral.
You'll notice that we didn't have much of an increase in our performance, for example. In terms of those two factors, The strength of our collateral, first, what we've been doing is we've been on a mission To reappraise all of our hospitality properties that are in excess of $5,000,000 and that are in the classified status. So that reflects a little over 100 properties and that accounts for about $2,300,000,000 in exposure. So the first 2 of those appraisals so far through February have shown as is values that have declined about 15% And stabilized values that reflect about a 6% decline. Keep that in mind that we're starting with 56% LTVs.
And then if you jump to New York City, we've seen a 24% as is decline with a 4% stabilized decline, But that starts with an LTV above 47, right? So that gives you a sense that the migration we're seeing in classifieds in this space is pretty much pretty normal of what we would have expected, But it's not necessarily an indication of lost content. And then finally, last thing I'd say is, In talking to all of our sponsors, they seem to remain strong and capable of supporting the properties until conditions improve. And we really have a low number of properties, maybe something like 12%, 13%, that come due this year And a significant portion that are 2023 beyond, in excess of 60% that are further out. So we think We're in a good position to kind of watch this stuff change.
I don't know if I have the numbers on the specific reserve for you.
Yes, no problem. I can get that later on.
Okay, okay, great.
Okay. All right. Thanks, Renee. Appreciate it.
Our next question comes from the line of Dave Rochester of Compass Point.
Hey, good morning.
Good morning.
I know you mentioned no updates on the guidance front for 2021, but the interest rate backdrop does look a little bit better Just curious what the offsets might be there if it's weaker loan growth or some other area, or maybe you're thinking that range is
Good question. I think We're looking at low single digit year over year change in the margin, decline in the margin. But I would say that we are off to a good start. If you think about how do you outperform that, you kind of your Q1 is probably the toughest because you were on a declining trend. And we're excited that we actually outperformed there.
And I think if the things that we're not sure how long they last, but things like the End of foreclosure moratorium means that we'll be doing less re pooling of the Ginnie Mae's. It means we'll be on the balance sheet longer, Right. So that will produce some results and then the cash balances are relatively high. So I'd just say we feel good and optimistic about At the least meeting our projections.
Okay, great. And then maybe just swing the loan growth front. You mentioned the Ginnie Mae buyouts. I was just wondering, Just talk about how that opportunity looks there going forward. And then maybe just on the overall, just for the PPP production For the quarter and then recognize these would be great.
Thanks.
Just the last part again, last part.
Sure. So the PPP production in the quarter and then what you guys realized from an amortized fee perspective this quarter?
Yes. Okay. So on the Ginnie's, the Ginnie, it would be hard to continue to find places to purchase Ginnie's. We keep working on it. But At the end of the day, particularly again because of the foreclosure modification and the extension going out, we think there's just going to be fewer opportunities to do that.
In terms of the PPP loans $2,500,000,000 Was
it Mike? Yes. We booked $2,500,000,000 in PP2, during the quarter most of that in March and then we had about 1.8 of repayments. So the repayments did push the income up a little bit, but in total, interest income from the PPP was Relatively flat, just slightly down a couple of $1,000,000 from last quarter.
Perfect. How much fees how many in the way of fees do you have now that's left
in terms of total fees?
We haven't disclosed that number, I don't think. I'm not sure, but we were modestly, it did almost no change, maybe it was down $3,000,000 and we don't expect a significant change. That That will progressively move, but by next quarter, we don't expect a significant change on it.
Yes, it depends on the pace of repayments, right?
What I will tell you is that When you take a step back and think about the margin that we have, the excess cash, if you take the $20,000,000,000 that I talked about before, If you didn't have that, that essentially takes your printed margin up over 50 basis points. And if you also exclude All of the PGP activity balances and all the income, that has about a 9 basis point impact in the other direction. So what really is interesting to me is that Aside from those two factors, our margin has held up really, really well compared to historical terms. But it's just a little noisy, you can't see it because of those two items.
Yes. Great. All right. Thanks for all the color.
Our next question comes from the line of Gerard Cassidy of RBC.
Hi, Gerard. Hi, Renee. How are you? I'm doing well.
Good. You haven't lost your touch. It's like riding a bicycle,
I don't know. I'm doing slightly better than Darren.
There you go. Got a question for you. As you touched on already about the high amounts of liquidity that you have on your balance sheet, with the cash sitting at Federal Reserve being up so dramatically, like the entire industry because of quantitative easing and such. I guess one of the questions I have for you is, I can understand why JPMorgan Chase and some of our big money center banks have seen such a surge In deposits because of quantitative easing, can you walk through for us how the flow is coming into your organization in terms of The deposits that's forcing you now to increase your deposits in your reserves up at the Central Bank?
Yes, that's a great question. What you have to do is just to kind of go back prior to the pandemic And think about our operating model. We more than I mean more than most Focus on core operating accounts, right. So we have never had a need to actually do a national What do they call those things? Internet bank that raises money across the network.
We're always raising money predominantly in our customer businesses with operating accounts. And so what you're going to see when that happens with operating accounts, all of the cash from the stimulus, all of the cash from the monetary events that have taken place are actually going into customer accounts. And because our proportion of customer accounts and core operating accounts are higher than most institutions, you see the impact on M and T is outsized. Now that means that we got to manage it very closely. So today, for example, we're very making sure that nobody is renting our balance sheet for free and just parking money that nobody else wants, again, Core operating concepts, but that's the principal reason and you can actually draw a comparison between percentage of both DDA, let's say transaction accounts, if you get that information across institutions and go before the crisis and then look today, you'll see that's the differentiator.
Very good. And then to bring those balances down, it's not necessarily really going to take higher interest rates where they would maybe move the money out. It would be more business activity picking up where they utilize the cash to grow their businesses?
Exactly, exactly. So that's one Which gives us the most uncertainty about loan growth because there's so much cash that's been built up. And then if you start looking at certain factors, it's not just sentiment. Remember, for example, with middle market companies, the supply chains are still Not fully unlocked and back to normal, right? So that's preventing people from maybe building up inventories.
Very classic With the auto industry and so forth. So but you've got that exactly right. I would expect to see that a fair portion of this Starts to increase spending both from consumers and commercial. I also think this is my own opinion that events like pandemics Linger for a very long time. And the idea that customers are going to keep higher ongoing levels of cash as a permanent way of doing business makes a lot of sense to
Very good. And then as a follow-up question and you touched on it in the answer you just gave me. You're one of the better floor plan Financers, financiers throughout the Northeast with autos, can you talk to us to that very issue about the supply chain? There's Quite a bit written about the shortage of semiconductor chips affecting the production of automobiles. What are your dealers telling you and how are they doing right now?
Well, I think the dealerships are all doing fine, right, because the activity there is that it's very difficult to get new cars. But having said that, there's a search around, right, for used cars. And so as things, for example, as your car comes off lease, right, If you don't actually take on and buy that car, they had a nice source of cars into the dealers. And this is one of the principal reasons why used car prices are so high, Right. If you're thinking about the Q3 of last year, we thought were sort of record highs on used car prices.
And we thought that by the Q4 that would start to come down, but those supply chains really haven't unlocked and the prices are just continuing to go up, Which means the dealers are really healthy. This is sort of a nice natural offset for them.
Very good. And if Darren is listening, get better quickly, Darren.
Our next question comes from the line of Matt MacConor of Deutsche Bank.
Hey, Matt. Good morning. Just to push maybe one last time here on the cash part of The discussion, so you definitely seem more confident that some of the cash is going to stick. We've Seeing a pretty material rise in rates, although off of a really low level, and your loan trends are better than peers, which I want to As for my second question, but it's still just very modest growth. Like what are you waiting for to buy some securities?
And If you had loaded up on securities, I'd ask you why you're buying so much. I ask at the extremes because We took all your cash and put it in like some other banks. I think it adds about 10% to earnings. So what are you waiting for?
So this is how it goes, Matt, this is how it goes internally, right? So I call up Darren and I call up Scott Worman and we ask that exact question every month. What are you waiting for? And then what we find out is we're really, really happy when the tenure was at its lows that he didn't respond to us. And but when the tenure It's up to the 170s range.
We've dipped our toe back in the market, but not significantly because we just kind of look through and we think that These bond prices don't make much sense from a long term perspective and we know that, right? So while we could make a little bit more money, we're Constantly focused on risk adjusted returns. Are we making the right decision? So while we might purchase a few more securities, I don't see it being a meaningful move or a meaningful change in the way we position it unless We see better risk adjusted returns on those
portfolios. Matt, the option adjusted spread on pass through has turned negative again. So not being paid to take the negative convexity risk?
Well, some other banks think differently, but Yes, it's a 10 year asset that you're locking in, so very questionable. Agreed. Yes. So just separate question. The loans ticked up a little bit this quarter.
I think the industry overall was down kind of 2% to 3%. You already touched on like the Ginnie Mae purchases, PPP and our big swing factor. You're probably benefiting from not having as much card runoff, But it still feels like ex everything, loan trends are a little more resilient. I'm I'm wondering if you would agree on what's driving that. And then of course, when things pick up, M and T usually doesn't leave the pack in terms of loan growth, but How do you think you'll fare versus the industry from here?
I think that our C and I customers Are more optimistic than they were last quarter and the quarter before. I think that sentiment will continue to change. I But we the trends, if you look at this quarter, it's actually been pretty decent on the C and I space, when you net a PPP effect. So commercial real estate, I don't expect to do much for the near term. I think there's a lot of obviously a lot of pain there, but there's also a lot of resetting going on.
The one place where I think we've talked about and everybody's talked about warehouse and industrial, the issue there though is because it's the only Glass and real estate that prices begin pricing and economics have been commuted away. So it doesn't make any sense from an economic perspective For us to lean into that space. So I think we're optimistic about loan growth for the long term, But it's just going to take some time to start moving in the right direction.
Okay. Thank you very much.
Our next question comes from the line of Bill Carcache of Wolfe Research.
It's good to hear you on the call again, Renee. I know revenue synergies weren't included in your initial guidance post the Peoples United acquisition. But Renee, can you just discuss how Much focused there is ahead of closing and doing everything you can to really hit the ground running in 2022 as You look at some of the opportunities that M and T will have in their legacy markets and vice versa?
Yes. Well, It's kind of the actual just the whole process of integration is really getting at that, right? What I would start by saying is, We sort of set up our transition teams, everybody on each side of the organizations have met. Everything that we've seen, particularly on the businesses that we're not really part of, I have confirmed everything that we saw in due diligence. Number 2, we're super impressed with their talent and their people.
We've done a lot of acquisitions among all of them. This one sort of stands out where the people who are running The business are really capable, including the businesses that we don't have. So there's a lot of dialogue going on just around exactly what you're talking about. And I'll just remind you that we think, for example, from the M and D side, some of the capabilities that we have with Small Business Banking, Our key treasury management capital markets expertise extending that to their customer base is going to provide a significant opportunity. We have M and T Realty Capital Corp, which allows us to meet the needs of real estate clients, but not necessarily use our balance sheet for that.
And that's a new capability for them. And then of course Wilmington Trust combined with their wealth, I think we're going to bring a lot more capabilities Combined than we would individually to the New England markets. If you go the other way, we're very excited and continue to be excited about the equipment finance business And being able to offer that those services to M and T Small Business and Middle Market customers. And so it's not a short list, Right. Which is sort of one of the principal reasons that we felt that we could do a better job for our collective customers together than separately.
Understood. Just to follow-up on, not to beat a dead horse, but to follow-up on the Excess liquidity discussion. Your rationale makes a ton of sense. But I guess, just looking at the numbers we've seen, the securities portfolio go from over 14 of your average earning assets in 2017 to just under 5% this quarter. At some point and you've talked around this, But maybe could you just give a little bit of color on the extent to which you're worried that at some point you're competitively disadvantaged, You have nothing else from the NII opportunity that you're foregoing, even if it comes with some interest rate risk, but maybe a little bit Color around that point.
I'll just simply say, Bill, you're thinking about it the right way, right? I think that we're Very disciplined in that we look at almost every trade, but you really have to step back and look at the overall balance sheet. We're below $7,000,000,000 in And so at some point, you're really only going to go so low. But if you Compare that to when you make that decision and think on average where the 10 year has been, not today, but where it's been, we're really happy with our decision. But at the same time, you're totally right.
Like you got to look at it as a portfolio. And we do believe and we're getting more and more evidence, particularly as new programs come in, like The infrastructure build that you're talking about next, right, it gives us some sense that the risk is lowering and that the cash may be around a little Longer so we'll have to look at that overall portfolio and realize how small can the securities portfolio get?
That's very helpful. Thank you.
Our next question comes from the line of Peter Winter of Wedbush Securities.
Good morning, Renee. Hi, Dan. I wanted to ask about asset sensitivity. In prior calls, Darren has said for each 25 basis point rate hike, NIM benefits 6 to 10 basis points, but the balance sheet So I was wondering, can you just give an update to the impact of NIM from rate hikes? And then secondly, Are there any plans to maybe reduce asset sensitivity with layering in some swaps?
So first of all, the numbers that Darren gave like that you just cited last quarter haven't changed much at all. We're pretty much in the same position. But it's sort of the same topic, right? I mean, so by putting on swaps, Turning a floating rate asset into a fixed rate asset. Said another way, you're adding to your fixed rate exposure.
And you could do the same things with securities, right? But we're really cautious about doing that. And as Don said, locking in negative economic returns. So, it's a good thing. I mean, there's another way to say it is that if you're worried about the negative economic returns, One offsetting factor is that you're actually neutralizing yourselves, right?
Because we all think that rates can't go below 0, but that's not true. And so there is some added benefit to that, but the swap issue is the same as the securities issue to me.
Okay. And then can I just ask about the credit outlook? Just how you're thinking about net charge offs for the remainder of the year, Especially with not expecting much lost content in the hospitality portfolio?
Yes, I think what Darren has talked about is that we'll continue to remain at or maybe slightly above Our historical average, I think our long term average is in the mid-30s, 30 range. I think that If you think about just to give you a sense, if you think about gross charge offs net of recoveries, We're about $122,000,000 last quarter, dollars 123,000,000 this quarter, pretty steady. What was different about this that brought us down to 31 basis points is that we had about $23,000,000 $24,000,000 more of recoveries. One of those, for example, was on a company that's a supplier to the energy business or the fracking business, the supplier of services there. And the rest of them were across the board smaller number of recoveries.
So the consistent trend I think is kind of there underlying that. It's Maybe slightly above and for some period of time our long run average.
Got it. Thanks, Renee.
Hi, good morning. Hey, Renee. Just one question on the fee side. I think you mentioned in your prepared remarks that the residential related fees were up and helped by Higher gain on sale margins, which is a nice bucking of the trend versus most industry peers. Can you just talk us through, was that About timing or about mix, re securitization, just and your forward thoughts on just how the mortgage business should act going forward?
Thanks.
Yes. You got it right. Timing and mix, that's a perfect statement. I think if you were to look at Underlying margins, as you think like purely margin to the customer, those were flat to slightly down, But there was a lot of noise in volume and rates moving around in between. And so that sort of market sensitivity allowed us to capture more economics.
So the overall gross margin was higher. If I saw something that was slightly encouraging, it was that while we had maybe Just under 4% increase in applications, our pipeline at the end of the quarter was up 5.5%. So we kind of ended the quarter with the same momentum that we had or maybe slightly better than we did during the quarter. So that should help as we move into I mean, hard to predict what's going to happen with margin, but that core underlying trend was slightly negative.
Okay, got it. And then just on the trust income line, another good performance there, up sequentially. Did you have any incremental Burden from money market fee waivers? And if so, do you know where that stands right now in an aggregate?
Yes. So, So when you look at those numbers, we had nice growth, but there was an offset from the money market waivers. I think the Total amount of waivers that we have around $12,000,000 or $13,000,000 that are embedded in that today. And I think that increased by $1,000,000 Quarter over quarter, yes.
Okay. Last quick one in the S-four, it mentioned that you guys will eventually Give a $25,000,000 donation that would be, I think you said at or prior to closing. Is that more of a closing quarter Number that was was that in this quarter or is that more of a closing quarter type of thing that you would do on the donation?
No. So No. What we did this quarter was separate from what we will do for Peoples which will decide at the time of the close. So what we did this quarter was I think we just had a slightly elevated number. We were I We made contributions of $12,000,000 and we typically have been doing about 3.
I think last quarter was around 3.
Okay, got it. So that 25 you mentioned would be more closer and contiguous with the closing itself? Exactly, Exactly. Separate. Got it.
Okay. Thank you.
Our next question comes from the line of Erika Najarian from Bank of America. Hi, Erica.
Hi. Good morning, Renee. And Gary, if you're listening, I hope you feel better. Renee, my questions have all been asked and answered. Thank you.
Okay.
Any other questions? There's still several more queued up.
Our next question comes from the line of Frank Schiraldi of Piper Sandler.
Hi, Frank. Let me guess, you're going to ask about cash?
No. I was going to, but after the 4th couple, you decided to strike. But I only have Yes. I mean, just on how much I'm trying to figure out how much capital might still be locked up in reserves, not only for M and T, but For everyone. And so just following up on the potential for additional reserve release, is the best way to think about Where the reserve to loan ratio sort of flushes out in a more normal environment, just look back at the CECL Day one mark for you guys and for others and so for an entity, maybe 1.3% I think is where you guys were.
Is that still the most reasonable Place to put it?
Yes. I mean, I think I'll say this. I mean, I don't disagree with what you said. But what it comes down to is what's your loan mix and what's the quality of your underwriting? And that for us really hasn't changed.
So today, if I were to sit here to say, answer the question, could we get back to our where we were in our lows Normal, sure. We're going to still see the same cycle a little bit sharper, but in a calmer, more neutral environment, we would have we would probably look like we did in the past.
Okay. And then just a quick follow-up on PPP forgiveness. You still have a significant level of 2020 OP loans on the books. And just wondering your thoughts on, does the majority of that run off the books in the current quarter? How should we think about that from modeling?
No, we have it running down sort of Over time, there's no sort of sharp drop in that space. So I mean, as you're thinking about Quarter over quarter and getting your way through the year and into next, that's how I would think about it. We need to be steady drop. I think if you take Mike's comments, You kind of get a sense of the ins and outs. And so I think we on the original PPP loans, are we 50% of the way through?
There's been a runoff of 50% of the original PPP loans, which started at about $13,500,000,000 were are now gone and 50% are there. So that should give you some sense. Okay.
Thank you.
Our next question comes from the line of Mike Mayo of Wells Fargo Securities.
Hey, Mike. Hey, Renee. Your CEO letter talks about new approaches with business banking And from Baltimore, Washington, Philly, Delaware, Virginia, you have got iHeartRadio and interviews with the 130 local CEOs. It seems like you're still revising your approach locally. My question is what metrics do you track to Monitor your progress and how those metrics changed and where do you hope those metrics will go.
I know you're not talking about the Peoples United transaction, but it would give us Better sense for are you looking at market share by MSA? Are you looking at average fees for business customer? What else are you looking at to monitor your progress?
I think you'll be happy to know it's not fancy. We measure the amount of checking accounts, business banking checking accounts we open every month against the amount of checking accounts that we close. On the ones that we closed, we're trying to find the friction points and make things easier So that they're not leaving and transitioning out. And it's really interesting that you asked the question because I mean we've seen just I'll just use the words. I mean, let's see how permanent it is, but we've seen a dramatic increase in our business banking DDA production, Primarily driven by new customer acquisition.
And I think what's happening is that's a combination of this idea that we've been introduced As a trusted partner through the PPP program, we've been introduced to a lot more customers. And at the same time, we now It's not been that long since we launched our small business online origination channel. And so what we're seeing is that the combination of those two things, I guess people's awareness about our capabilities and what we do have actually increased. So really simple every quarter, what's happening with checking accounts, Are we opening them? Are they from existing customers, new customers?
What are the MSAs they're working in? I have a real big bet on empowering New Hampshire might be different than Baltimore, but the expectation on the metrics are going to be all the same. How many quality Checking accounts are we opening? Not necessarily how much lending we're doing, because we think all that leads to a healthy company will
And just to follow-up, do you have any aggregate metrics that Do you expect that calls out from the approach? Like I said, it could be MSA market share by MSA or fees or Just the level of growth or is one region lagging behind another region is like the southern portion a little behind?
Well, I mean a couple of things we look at. We look at we've talked about a lot. We're doing a lot around Net Promoter Score. We do a lot around the Greenwich work. And if you think about the Greenwich work underneath, it doesn't just tell you that you Made a lot of loans.
It tells you how do you they survey your customers and they tell you where you stack up. So, do you do business with us? Are we your lead bank? We sort of measure those things religiously. Yes, I think what you'll see is usually it's the most volume of thing that we have is rank.
We talk about it all the time. Are we the number 1, number 2 SBA lender? We're not the number 1 or 2 in our markets, then why and what's happening in those spaces? Even that SBA rank, not a pure thing because it doesn't cover everything, but it's a huge indicator of the activity and how engaged our workforce is if they're not in the number 1, 2 or 3 spot in the community.
All right. Thank you.
Our next question comes from the line of Saul Martinez of UBS.
Sorry about that. I was on mute. Thanks for taking my question. But How much in hedge income did you earn this quarter from your Swan book? I think you said 275,000,000
It's about $90,000,000
Okay.
Yes. I will say, I'm sure I'm in this little temporary, I get the stage For one morning, but I tend not to worry about too much about looking at hedges on their own, Because the hedge only matters in the context of the rest of the portfolio. And so to the extent that we decided to slow down our hedging or Stop the hedging. What basically you're left with is you're moving away from you've turned floating rate assets into fixed rate assets. You're moving them back basically.
And the question is what's happening with the rest of the portfolio? In past recessions, We would see much higher margin on our roll on commercial loans and that would be replacing The rundown in the hedges. And so the real issue is loan growth in my mind. That's how I think about it. Right.
Darren will change that next week. So you only have 30, 90 days to think the way I do.
Good. Got it. Just if I could take a bit over to capital and ask how you're thinking about your Optimal capital position once the deal closes. And I think you've talked about a 10% CET1. You'll be subject now to the June 2020 results, so that seemingly gives you a healthy cushion.
And I believe you talked Terms in capital optimization and optimal capital and as we head into 2022.
Yes, your construct is right. We think ultimately our desire is to Towards the lower end of our peers, I think the context to think about is, we went under a really, really hard stress test last Fall, the redo last fall, and we went into that test around 9.4, and we were able to survive pretty severe space, In the real estate space, which we have high concentration in, we're 100 basis points above that today, right? So that tells you that starts to tell you the excess part. The other thing is, I think we're going to see a change, not immediately, but over time Around real estate exposure and how we think about those things, because to the extent that there's sort of a de facto assumption Of losses on real estate in the teens when you book it, right? Well, that begins to change the economics.
And we have to think about our portfolios We believe just being efficient use of capital is really important. So we thought a lot about how we might do certain things differently in the commercial real estate space. And to the extent that we do, That means that that'll be even position us better to be at the lower end of our peers.
Got it. It's really important. That's helpful. All right. That's helpful.
Thank you.
And ladies and gentlemen, that was our final question. I'd like to turn the floor back over to Tom McLeod for any additional or closing remarks.
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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.