Good day and thank you for standing by. Welcome to the M&T Bank Second Quarter 2021 Earnings Conference Call. Today's call, at this time, all participants are in a listen only mode. Quarter. After the speakers' presentation, there will be a question and answer session.
Please be advised that today's conference is being recorded. I would now like to hand the Conference over to Don McCloud. Thank you. Please go ahead.
Thank you, Eric, and good morning. I'd like to thank everyone $1,000,000,000 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, 2nd quarter. Www.mtv.com and by clicking on the Investor Relations link and then on the Events and Presentations link. Q2. Also before we start, I'd like to mention that today's presentation may contain forward looking information.
Cautionary statements about this information as well as reconciliations $1,000,000 Non GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. Quarter. These materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion of forward looking statements and risk factors. $1,000,000 These statements speak only as of the date made and M and T undertakes no obligation to update them. I'm happy to say that our Chief Financial $1,000,000 market and Investor Relations at the end of this year.
Darren? Thanks, Don. Good morning, everyone. Welcome back, Brian. After a 17 year hiatus, welcome 2Q.
B. Lowe:] To the other side of the table, and I have a rhetorical question for you. Where would you rather be than right here, right now? You got it, Maher, I mean Darren. $2,000,000 All right.
Let's jump into the business of the day. As we noted in this morning's press release, we were pleased with the continued rebound in the economy $1,000,000 from the pandemic induced slowdown. We continue to see improved customer activity across all sectors of the economy. Notably, while not back to pre pandemic levels, We're seeing improvements in the leisure and hospitality sectors. While non accrual and criticized loans increased from prior quarter, loss emergence remained subdued, $1,000,000 Leading us to recognize a further moderate release from the allowance for credit losses.
The balance sheet continues to strengthen $1,000,000,000 As both capital and liquidity grew from already elevated levels, positioning the bank to continue to be a source of strength for our customers. $1,000,000 We continue to make progress towards the 4th quarter close of the Peoples United merger, and we were pleased with the overwhelming shareholder support of the combination. Looking at the results for the quarter. Diluted GAAP earnings per common share 2.4 $1 for the Q2 of 2021, improved from $3.33 in the Q1 of 2021 and $1.74 in the Q2 of 2020. Net income for the quarter was $458,000,000 compared with $447,000,000 in the linked quarter $241,000,000 in the year ago quarter.
On a GAAP basis, M and T's 2nd quarter results $1,000,000,000 produced an annualized rate of return on average assets of 1.22 percent and an annualized rate 2nd quarter. The 2nd quarter of return on average common equity of 11.55 percent. This compares with rates of 1.22% and 11 point 2% respectively in the previous quarter. Included in GAAP results in the recent quarter $1,000,000 or $0.02 per common share, little changed from the prior quarter. Also included in the quarter's results were merger related charges of $4,000,000 related to M and T's proposed acquisition $2 of Peoples United Financial.
This amounted to $3,000,000 after tax or $0.02 per common share. $1,000,000 Results for this year's Q1 included $10,000,000 of such charges, amounting to $8,000,000 after tax effect or $0.06 $2 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 $1,000,000 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. M and T's net operating income for the 2nd quarter, which excludes intangible amortization and the merger related expenses, $163,000,000 compared with $457,000,000 in the linked quarter and $244,000,000 $2,000,000 and last year's Q2. Diluted net operating earnings per common share were $3.45 $1,000,000 for the recent quarter, up from $3.41 in 20 21's Q1 and up from 1.76 in the Q2 of 2020.
Net operating income yielded annualized rates of return on average tangible assets $1,000,000 and average tangible common shareholders' equity of 1.27% 16.68% for the recent quarter. $1,200,000,000 Comparable returns were 1.29 percent 17.05 percent in the Q1 of 2021. $1,000,000,000 In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non GAAP results, $1,000,000 including tangible assets and equity. Now let's take a look at some of the underlying details in our results. Taxable equivalent net interest income was $946,000,000 in the Q2 of 2021 $985,000,000 in the linked quarter.
A decrease And PPP related income accounted for approximately half of the quarter over quarter decrease in net interest income $1,000,000 as the first round of PPP loans continues to wind down. The net interest margin for the past quarter was 2.77 Percent, Down 20 Basis Points from 2.97 percent in the linked quarter. $1,000,000 Higher levels of cash on deposit at the Federal Reserve continued to contribute pressure to the margin, quarter, which we estimate accounted for 7 basis points of the decline from the Q1. Lower fee amortization from the PPP loan portfolio, quarter. Both scheduled amortization and accelerated recognition from forgiven loans contributed about 6 basis points of the margin pressure.
The impact of interest rates, primarily lower income from our hedge program, partially offset by a lower cost of deposits, percent accounted for about 3 basis points of the decline. All other factors accounted for some 4 basis points of margin pressure. Compared with the Q1 of 2021, average earning assets increased by some 2%, $1,000,000 reflecting a 13% increase in money market placements, primarily cash on deposit at the Fed and a 6% decline in investable securities. Average loans outstanding declined just under 1% compared with the previous quarter. $1,000,000 Looking at the loans by category on an average basis compared with the linked quarter.
Overall, commercial and industrial loans declined by $668,000,000 point 4 Percent. Dealer floorplan loans declined by $859,000,000 Reflecting the well documented auto production and inventory issues experienced by the industry. $2,000,000 Due to the late Q1 timing of round 2 originations and delays in forgiveness of loans over $2,000,000 in size, $1,000,000 Average PPP loans declined by less than $50,000,000 from the prior quarter. All other C and I loan categories grew slightly over 1%. Commercial Real Estate Loans declined by about 0.5%, similar to what we saw in the Q1.
Percent. We continue to see very low levels of customer activity. Residential real estate loans declined by 2%. We've seen little opportunity for additional buyouts of loans from Ginnie Mae servicing pools as delinquency and payment trends continue to improve. Percent.
Absent those, the ongoing runoff of acquired Hudson City mortgage loans continues at a moderate pace. Percent. Consumer loans were up 3%, consistent with recent quarters as growth in indirect auto and recreation finance loans percent has been outpacing declines in home equity, lines and loans. On an end of period basis, total loans were down 2%, $1,000,000 reflecting the same factors I just mentioned. PPP loans totaled $4,300,000,000 at June 30, $6,200,000,000 at the end of the Q1.
Average core customer deposits, $1,000,000 which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000 $1,000,000,000 compared with the Q1. That figure includes $2,600,000,000 of non interest bearing deposits. On an end of period basis, core deposits were up by just under $700,000,000 I'll note here that the repeal of the prohibition of paying interest on commercial checking deposits has led us to reconsider the need for a Cayman Islands office. $1,000,000 It held no deposits at the end of the quarter. Turning to noninterest income.
$1,000,000 Non interest income totaled $514,000,000 in the 2nd quarter compared with $506,000,000 in the linked quarter. The recent quarter $11,000,000 of valuation losses on equity securities, largely on our remaining holdings of GSE preferred stock, $2,000,000 while the prior quarter included $12,000,000 of such valuation losses. $1,000,000 Mortgage Banking revenues were $133,000,000 in the recent quarter compared with $139,000,000 in the linked quarter. $1,000,000 Revenues for our residential mortgage business, including both origination and servicing activities, were $98,000,000 in the 2nd quarter, $1,000,000 compared with $107,000,000 in the prior quarter. Lower gain on sale margins were the primary driver of the decline.
$1,000,000 In addition, residential mortgage loans originated for sale were down about 5% to $1,200,000,000 compared with the 1st quarter. Commercial mortgage banking revenues were $35,000,000 in the 2nd quarter compared with $32,000,000 in the linked quarter. $1,000,000 in the recent quarter, improved from $156,000,000 in the previous quarter. This quarter's results included $4,000,000 of seasonal fees arising from tax preparation work quarter we undertake for clients as well as the result of growth in assets under management in the Wealth and Institutional businesses. Service charges on deposit accounts $99,000,000 compared with $93,000,000 in the Q1.
The primary driver of the increase were customer payments related activity. 2Q. Expenses for the Q2, which exclude the amortization of intangible assets and merger related expenses, were $859,000,000 $1,000,000 The comparable figure was $907,000,000 in the linked quarter. Salaries and benefits declined by $62,000,000 to $479,000,000 from the prior quarter. Recall that the first quarter's results included $69,000,000 of seasonal salary and benefit costs.
Our deposit insurance increased by $4,000,000 to $18,000,000 during the quarter, primarily reflecting higher levels of criticized loans, $2,000,000 which factor into the FDIC's assessment calculation. Other costs of operations for the past quarter $1,000,000 included an $8,000,000 addition to the valuation allowance on our capitalized mortgage servicing rights. Recall, there was a $9,000,000 reversal $1,000,000 from the allowance in 20 21's Q1. The efficiency ratio, which excludes intangible amortization from the numerator $1,000,000,000 and securities gains or losses from the denominator was 58.4% in the recent quarter compared with 60.3 percent in 20 21's Q1, which included the seasonally elevated compensation costs. Next, let's turn to credit.
As I noted at the start of the call, $1,000,000 We're pleased with the signs of spending and revenue trends for our customers as the overall economy continues to improve. $1,000,000 That said, some industries are improving more rapidly than others and the supply chain issues and pressures on costs go beyond just the automotive sector. The allowance for credit losses declined by $61,000,000 to $1,600,000,000 at the end of the second quarter. $1,000,000 recapture of previous provisions for credit losses combined with $46,000,000 of net charge offs in the quarter. The allowance for credit losses as a percentage of loans outstanding declined to 1.6 percent 1.62%, excuse me, percent.
That ratio is little changed from 1.65 percent of loans at the end of the prior quarter. $1,000,000 annualized net charge offs as a percentage of loans were 19 basis points for the 2nd quarter compared with 31 basis points in the 1st quarter. The allowance for credit losses at the end of the quarter reflects our assessment of credit losses in the portfolio $1,000,000 under the CECL loss measurement methodology, which includes our macroeconomic forecast. $1,000,000 As we've previously indicated, 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, $1,000,000,000 on average 5.4 percent through 2021, followed by a gradual improvement reaching 3.5% by mid-twenty 23.
The forecast assumes that GDP grows at a 7.4% annual rate during 2021, $1,000,000 resulting in GDP returning to pre pandemic levels during 2022. $1,000,000 Non accrual loans increased by $285,000,000 to $2,200,000,000 or 2.31 percent of loans at the end of June. This was up from 1.97% at the end of March. We expect to disclose an increase in criticized loans with our Q2 10 Q filing. This This reflects the prolonged recovery in certain sectors of the economy, notably hospitality and healthcare.
M and T's commercial loan grades reflect the performance of individual properties with limited consideration of property values or guarantor ability to sustain cash flows from other sources. Notwithstanding those increases, loss emergence on troubled loans continues to be moderate. Interest reserves are healthy, sponsors remain supportive and collateral values are well within our underwriting assumptions. We continue to accrue interest, were $1,100,000,000 at the end of the recent quarter, and 96% of these loans were guaranteed by government related entities. Turning to capital.
M and T's common equity Tier 1 ratio was an estimated 10.7% $1,000,000 compared with 10.4 percent at the end of the Q1 and which reflects lower risk weighted assets and earnings net of dividends. $1,000,000 As previously noted, while the People's United merger is pending, we don't plan to engage in any stock repurchase activity. Now turning to the outlook. As we reach the halfway point of the year, the The cautious outlook we conveyed on the January April earnings calls has been well aligned with what we're actually seeing. The fiscal and monetary stimulus programs, along with the vaccination programs, have clearly brought a turnaround in economic growth and employment.
But the downside effects from these actions continues. Excess liquidity in the system has suppressed loan growth, particularly commercial loans For M and T in the broader industry, customer deposits are at all time highs and grew faster than our ability to deploy them into assets $1,000,000,000 that earn above our cost of capital. The fundamental aspects of our outlook haven't changed. 2. Total loan growth roughly flat on a year over year basis, excluding the PPP loans, with pressure on C and I, especially dealer floor plan percent and CRE loans being offset by growth in consumer loans.
Net interest income down low single digit percentage $1,000,000 from Full Year 2020. Low single digit growth in total fees. We see the potential for a slowdown in mortgage banking In the second half, offset by stronger trust income, payments related fees and commercial loan fees. Expenses for the first half of the year have been mostly in line with our expectations, with year over year growth $1,000,000 largely attributable to expenses directly tied to revenue growth, such as in trust and to higher corporate incentive accruals 2nd quarter. Together with costs associated with the reopening of the economy and costs incurred in preparation for the Peoples United merger, we expect there to be a little more pressure on expenses 2nd Half of twenty twenty one.
The credit environment continues to improve along with the overall economy, But some segments are recovering more slowly than others. We're encouraged by the progress we're seeing in our hospitality portfolio with respect to bookings and cash flows, But that sector's return to normal will lag the overall economy. Lastly, the planned merger with Peoples 2Q. United remains on track and our estimated time line for approval by the regulators closing and integration remains unchanged. $1,000,000,000.
Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, Now let's open the call to questions before which Erica will briefly review the instructions.
Your first question comes from the 2019 of Ebrahim Koonawala with Bank of America.
Good morning.
Q2. Good morning. I guess, if
you could just follow-up on the outlook for expenses being pressured in the back half. 2Q. When I look at second quarter, we grew about 7% year over year. Give us a sense of how we should think about it, like should back half 2Q. Higher than first half levels in terms of what we saw in expenses.
Any color around that would be helpful.
Yes, sure. I guess when you look at the quarter comparison in 2nd quarter versus Q2 last year. That was when the economy shut down and everything stopped. So you're in for a larger expense increase there 2Q. In that quarter, looking at a year over year basis.
When we think about the whole year and where we go for the second half, The things that we're looking at is we're looking at some increase in fee related expenses as we continue to see those fee categories grow. We're looking at, as I mentioned before, continued increase in our incentive accrual based on the performance of the bank. And so you recall that last year, we reduced the incentive pay to our senior folks based on the performance, of the bank. $1,000,000 And then the other place where you'll see some growth, is as we continue to make, our investments in technology and prepare for the Peoples integration. So So we'll probably see some expense pressure in the Q3.
We'll call out what's related specifically to the merger, $1,000,000 because some of those will either be one times or they could in fact be expenses that will start maybe a quarter earlier than we might have thought as we prepare For legal day 1 and for the conversion. But overall, the expense growth that we saw this quarter, 2. We wouldn't be running at that high of a rate for the whole year, certainly not excluding, the impact of the Peoples merger. I'd be thinking more in the, I don't know, 2% to 5%, taking into account the corporate incentives as well as the growth in some of the fee businesses.
Got it. That's helpful. And I guess just on a separate topic, Rene, last quarter, you provided some color around the hospitality book. 2nd quarter. I'm just wondering if you've seen any improvement in terms of the debt servicing for these borrowers.
And I understand you don't expect credit losses stemming from $1,000,000,000 of cash flow from the balance sheet. But how does how will that inform your ability to get back to sort of season on reserve levels as you think about the next few quarters? Thank you. 2.
Yes, sure. I guess the way we're looking at it and thinking about it is $1,000,000,000 When we look at the criticized portfolio, we're really focusing on the standalone cash flows of 2Q. Each of the properties and each of the each of those specific, I guess, called pieces of collateral, $2,000,000 Because with many of our relationships, our clients will have multiple properties. And so we look at each property and we assess its ability to cash flow. $1,000,000 And that's what affects the criticized balances.
When you look at actual losses, just because they're struggling, Many of them are actually still earning interest and accruing interest because the sponsors have outside sources that they're bringing to support the deals. And then the other thing we're looking at is we keep getting updated appraisals on loans and properties that we have both been criticized and in particularly in non accrual. $1,000,000 And what's been a pleasant surprise is when we look at the recent appraisals that have come in, they've been very strong. We've seen Valuations, I believe, we're on a fully as is basis that are above Well above our loan cost and on a stabilized basis that are maybe down 10% from the original appraisals. And so when we think about the loss content $1,000,000 in the portfolio, which is reflected in our allowance.
We feel quite comfortable with what's there. The question obviously will be the timing $1,000,000 on when the cash flows get to a point where we would see them as not criticized any longer. 2Q. We are seeing improvements in occupancy rates in the hotel portfolio across the board, but we're not quite back to pre pandemic levels there, Mainly because business travel hasn't resumed versus seeing good performance in leisure travel, but not as strong yet in business. And so as those vacancy rates come down and revenue per available night or per available room comes up, 2.
We'll see those assets go from criticized back into performing and then that will support further reductions in the allowance.
Good. Thank you.
Your next question comes from the line of Ken Derby with Morgan Stanley.
All
right. Thanks. Good morning.
Good morning, Ken.
Actually, I would love to stay on the whole I mean, certainly relative to what we've seen at a number of other banks. I know you can't necessarily comment on how you differ from other banks, but I am kind of curious Q2. Any color you have on like what assumptions that you're making that might explain the differences in your sort of $1,000,000 versus everyone else or maybe it's not assumptions at all, it really is like this big criticized portfolio that you're talking about. Any color would be helpful. Thank you.
Sure. No, happy to go into some of the details there. I guess Couple of broad thoughts to start. The CECL methodology is a lot more penal $1,000,000,000 on consumer books than on commercial books because they tend to be longer dated. And our institution, as you are aware, 2Q SKUs more commercial.
That's one. It also is has a big impact on credit card portfolios. And credit card at M and T is not a huge part of our book of Business. And so when you look at some of what was being done last year in reserving, what you saw was much larger additions to allowance $1,000,000 than you would have seen, at M and T because of those mix differences. And so now when we're going on the other direction, the releases are also higher 2 For those same reasons.
And so when you look inside our portfolio and just to give you a little flavor on the allowance, it's obviously it's a collection of The different asset classes and the loss expectations in those assets. And so if you think about C and I, $1,000,000 The C and I provision, there was a little bit of a release or recapture, because there was a decrease in the loans outstanding because of the Auto floor plan, right. And so that was as much a function of a decrease in assets as it was the loss rate on the assets. Within the real estate portfolio, $1,000,000,000 We continue to have a loss assumption that's pretty much unchanged, and there was a slight uptick there $1,000,000,000 Because of the increase in or is it the size of the criticized portfolio. If you look in the mortgage book, $1,000,000 It was a decrease, again, because of the reduction in the assets, as well as the continued great $1,000,000 performance of home prices, which affect the model and the loss expectations, and so there was a decrease there.
And then in the other consumer portfolios, it was actually an increase, $1,000,000 because of the growth in balances, offset a little bit by strong used car prices, Which brought the loss rate down a little bit. And so there's different pieces in each of the portfolios that will move the allowance $2,000,000,000 Either up or down, it could be because of economic factors, it could be because of the balance. But those are some of the dynamics that are happening underneath. $1,000,000 And hopefully that helps give a little bit more color to what's happening with the allowance.
That's perfect. Thank you. And then just maybe a follow-up question. In terms of the securities portfolio, I certainly understand the rationale for not
Was waiting for this conversation. I got to listen to Renee last time 2. On the same subject, when you look at where we sit today, I'll talk about the securities portfolio, But also just some of the other parts of the bank. We just talked about the reserve and where the reserve sits relative to CECL day 1. 2Q.
When we look at our underwriting and our losses, our expectations, to me, we are adequately reserved, 2, if not, maybe a little bit more, and that's future potential. Look at our capital ratios at 10.7%. $1,000,000 We're probably going to print near the high of the peers in terms of that ratio, and we'll hold on to that until we do the merger. That's untapped potential, and I see the securities portfolio the same way. And so we've been allowing that to run off.
I think what we'll you'll start to see is as we start to think about maintaining it, where it is and then look as we prepare to merge with Peoples. $1,000,000,000 And if you what's on our mind as we think about how and when to deploy that excess cash, it's a combination of $2,000,000 Just replacing some of the cash with securities in our own book, but what the combined balance sheet is going to look like. And so Peoples will bring a higher percentage of Securities and Cash, which will balance us out a little bit. And they'll also bring a bigger on balance sheet consumer mortgage $2,000,000,000 portfolio as a percentage of their assets, because they tended to be an originate and hold shop where we were we've been an originate and sell. And so the combination of those two factors when we combine the portfolios, we'll start to bring down some of our asset sensitivity.
$2,000,000,000 And based on that combined portfolio, we'll start to think about how we want to deploy that cash into what types of securities and what type of duration 2Q. We might want to add. So it could be through the securities portfolio itself with mortgage backed, it could be just retaining mortgages 2. And getting the same exposure, but having it on the balance sheet in an HTM as opposed to an AFS type of portfolio. And $1,000,000 So those are the things that we're looking at, and we'll look to do other things we can to optimize the cash, looking to reduce borrowings.
We'll continue to reduce time deposits, which will get some additional ones with Peoples. But I think as we look forward, $1,000,000 Our belief is that the deposits are probably going to stick around a little bit longer than we might have anticipated, which is affecting our thinking about deploying and the duration that we want to Assume and what percentage of the cash we want to put to work, but I think we're probably at a point where we start to see that securities portfolio level off and we'll be Selective about jumping in, but we'll probably keep it roughly where it is.
All right, great. Thank you.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning. Q2. Just a question on the margin front. Wanted to see if you can baked into your net interest income Expectation for a low single digit decline in 2021. How should we think about the margin trajectory underlying that Going forward from here, obviously, on an underlying basis, clearly, the Peoples deal would impact that.
But
2. And so when we think about when I think about the net interest income, the reason I've been explicit and we've been explicit about $2,000,000,000 Talking about that dollar number as opposed to the margin is there's a lot of things that are going to bounce the margin around that don't affect the dollars, right? So first and foremost is cash. 2nd quarter. And we're still in a place where each extra $1,000,000,000 of cash compresses the margin by 2 to 3 basis points, But it actually adds a nominal amount to net interest income.
The other thing that bounces the net interest margin around is just 2 The pace of forgiveness on the PPP loans. And when you look at the first or the last four quarters, We've really seen the bulk of round 1 PPP loans forgiven. And so when you accelerate that origination fee, Obviously, that affects the net interest income and the margin, but isn't necessarily repeatable. And so when we think about the full year guide $1,000,000 for net interest income down low single digit. Factored in there is the earning assets, Which we've talked about where we think those will be.
And if you go underneath and look at the actual loan $2,000,000 Spreads and deposit costs, those are pretty stable. And that portfolio is producing a pretty stable stream of net interest income. And the movements $1,000,000,000 are generally caused, certainly in the NIM by cash, by the pace of PPP $1,000,000 and then ultimately the hedge portfolio that we've talked about, I think, for several quarters now that it's out there. The notional amount outstanding hasn't changed. It's 2nd quarter.
Still around $17,500,000,000 but the effective yield is coming down each quarter. And so that will put a little bit of pressure On the net interest margin and ultimately net interest income. But as I at least look through the next couple of quarters on a stand alone basis, I think net interest income is roughly around where it was this quarter.
Great. Thanks. $2,000,000 That's helpful. And before I ask my second question, I have to acknowledge the Mark Levy quote.
I appreciate the developments. He's one of our favorites.
Not a Bill's fan, but got to acknowledge it. And then just separately on the loan growth outlook for the $1,000,000 for the year. Can you just talk about when you see an inflection $2,000,000,000 and balances as we look over the next couple of quarters. Is an inflection in the near term, can you see an inflection in the back half as 2Q.
Yes. I think you'll start to see it, But it's going to be nuanced, and it's going to be it's not going to be obvious. And the reason it's going to be 2. That way, there's 2 portfolios that we have that are going to cause a top line decrease in loans. So first and foremost is PPP, which is well documented, right?
And we know we've got now $4,300,000,000 at the end of the quarter that's going to run off, And will depend on the pace of forgiveness, but there's reason to believe that, that will happen in the next 3 or 4 quarters. $1,000,000 And then there's also the Ginnie Mae buyouts that we've added onto the balance sheet, to use up some of that excess liquidity because we like the duration and the yield on that. 2nd quarter. And as the economy continues to improve, it's our expectation that we will actually those will become re performing and they will get packaged and sold back as Securities and that will bring down those mortgage balances, but obviously, we'll drive some fee income. And so when you look Underneath the portfolio, back to some of the trends that we had talked about, ex floor plan, C and I was actually up modestly, and we did see a very slight uptick in utilization rates 2nd quarter of C and I lines in the quarter.
And we will see production come back $1,000,000 in the auto sector, and we'll see some of those floor plan balances growing again. Just for context, $1,000,000 Our current line utilization in the C and or in the auto floor plan space is about half of its long term average. $1,000,000,000 And so we'll see that start to come back. We think it'll be Really Q1 of next year. And then when you look in the real estate space, not surprisingly, there's not a lot of activity going on.
And usually what drives $1,000,000,000 Some of the CRE growth and declines is just activity and assets changing hands. And that when that happens Both a positive and a negative. We see payoffs because some of our clients sell, but we also gain assets $1,000,000 when construction projects come online or come due and or when our clients are out looking at assets and growing their portfolios. And so right now, that's pretty subdued and expect that the CRE balances will be kind of flattish, maybe slightly down as we work our way through. And then the big growth is in the consumer portfolio.
When I say big, that sounds more grandiose than it is. It's consistent growth in the auto Floorplan or auto indirect as well as auto and rectify, sorry. $1,000,000 So it's there. I like the trends that we see. The spreads are still holding up.
The returns in the business we're booking are solid. And so We don't feel the need to chase it, but to be there to support our clients with what their activities are, and it will largely reflect the economy.
Got it. All right. Thanks, Ben. Very helpful.
Thanks, John, and thanks for the Marv Levy reference. We got room in the bandwagon for more Bill's fans, okay?
Sure, Paige.
Quarter. And your next question is from the line of Ken Usdin with Jefferies.
2Q. Thanks. Hey, good morning. Good morning, Ken. Karen, I wanted to follow-up and ask to a point about the eventual $2,000,000,000 re securitizations on the Ginnie Mae's.
I was wondering if you could just help us understand how big is that book in the loan book now and if your Fee guide for down low single digit contemplates getting some of that re securitization income back into fees this year?
Sure. So if you look at the Ginnie Mae portfolio, it's, call it, 3.5 $4,000,000,000 that will ultimately get re securitized and sold. The pace is a little bit unknown right now as the foreclosure moratoriums keep getting extended. That gets pushed out. $1,000,000,000 When we gave the original guide about fee growth in low single digits, that contemplated Some degree of gain on sale coming from that portfolio.
That's been pushed out a little bit. One of the things that happens on the other side though is as long Those assets sit on our balance sheet. We're accruing interest income, and so that's helping with the net interest income. $1,000,000,000 And when we look at the potential gain on sale, it will move the percentage growth 2nd quarter. In fee income, maybe a percentage point, and it would be towards the Q4 of the year, not likely 2nd quarter.
Much before then, just given what we're seeing and the time it takes to get those securities considered re performing and available for sale. So it will be back end loaded and start to spill
into 2022. Yes, understood. Percent. And just a follow-up question. It's great to see the trust business continuing just to rebound up another 4%.
I'm just wondering, Can you just talk through just some of the underlying growth drivers in trust? And do you have the what the fee waivers were this quarter? And if You expect that those would have peaked and maybe we get a little bit of help back on those going forward given the IOER changes? Thank you.
Yes. Let me make sure I got all these. So I'll start with trust, and then I'll talk about the waivers. $1,000,000 So we're really pleased with how things are progressing in the trust business. There's really 2 main drivers of the trust fee income $1,000,000 in the last few quarters.
Our wealth team has really done a great job with $1,000,000,000 leveraging the changes that they made to their platform, to be out and growing new customers, which is very encouraging. $1,000,000 And then for the existing customers plus the new ones, everybody is benefiting from the capital markets and the growth there. $1,000,000,000 And another piece of our trust business is we manage assets on behalf of retirement plans. And as we manage those assets, 2. It's a great business because each month, employees contribute more to their plan.
We're signing up new employers and the market's $1,000,000,000 And so the combination of those three things is driving growth in assets under management, which is leading to top line. Keep in mind, this is where I say we're seeing expense growth that in many cases, we're a fiduciary of those. We're not $1,000,000,000 The underlying asset manager. And so there's a sub advisor fee that doesn't get netted against the trust fee income. It's in the other expense line.
$1,000,000 And so as we grow those assets under management, we like the returns in that business and we like the profit it adds, But it does cause expenses to go up at the same time. And so that's why I want to say there's expense growth related to fee growth. That's one of the big drivers. $1,000,000 When we look at the waivers in the funds, it's in the neighborhood of, Call it, at the high end, dollars 15,000,000 a quarter, is where we are today. $1,000,000,000 and what it will take to get back in there.
We probably need I think we need fed funds up Probably closer to 50 basis points before you see that start to materialize as opposed to the 1st 25. 2Q. This would be another one of these things when I look forward and I think about what the potential is for the bank in addition to the things we talked about With cash and capital in the provision, obviously, the waivers is another one 2Q. That can turn around. So lots of latent potential.
We just need to unlock it.
Yes. Got it. Thank you, Darren.
Your next question is from Bill Carcache with Wolfe Research.
Good morning. Good to have you back, Darren.
Thanks, Bill. Nice to be back.
As PPP balance 2nd quarter. Is there an opportunity to grow your small business lending into other markets outside of your traditional footprint, perhaps by Partnering with other financial technology players or doing a bolt on type deal like we've seen from others. More broadly, the question is, I guess, just any color that you can give on the extent to which you consider these kinds of moves across any of your business lines?
Sure. And great question. Small business is one of the cornerstones of M&T and who we've been for 3 years in the communities that we serve. I think the number one opportunity that sits in front of us is Peoples. We mentioned it on the announcement of the deal, And the more we get to know our new colleagues at Peoples and the geographies, we continue to be excited about the upside 2.
And then bringing our brand of small business banking to that franchise is really exciting. And We have been watching with great interest what's been happening with Nationwide Small Business Lending. $1,000,000 And I have the benefit of I used to actually run that division, in a prior career here at M&T. And We've seen people come in and out of that business a lot. And one of the things that always excited me in that business was when people announced they were getting in because it's tough.
$1,000,000 And one of the things that's really important to remember about small business is that small business loans are okay business, 2nd quarter. But the real value is in the deposits. And the small business franchise is actually self funding. And so one of the tricks and when you talk about nationwide small business lending, what we're watching is not the ability to give out money because that's easy, But the ability to make sure that you risk rate it, that you take care of fraud, which we saw some fraud in some of the PPP situations, and then ultimately, $2,000,000 Your ability to win the whole relationship. So if you think about M and T and our approach to banking, it's always been full relationship banking.
And one of the keys is Having we've always talked about the operating account of our customers, whether it's consumers, whether it's small business or middle market companies. $2,000,000,000 And that's a little bit of a tougher proposition on a nationwide and remote basis, but it's something that we watch. And fortunately, We had a very strong PPP showing, and we were able to win some new relationships in our footprint. And for now, I think we'll focus primarily on capturing the upside that we see in the new markets that come with The people's combination.
Understood. Thanks for taking my question. Eric, are we moving to the next question?
Your next question comes from the line of Gerard Cassidy with RBC. 2.
Hi, Darren. Welcome back into the seat.
Good morning, Gerard. Thanks.
I thought for a minute they just dropped me off with that long delay, but I'm glad you picked Couple of questions for you. We all and you referenced it in your prepared remarks about floorplan lending and And what's going on in the auto industry and the supply issues and other industries as well. The question is this, Autos in particular, you won there are some stories that have been written recently that maybe the auto dealers May follow what they're doing today into the future, meaning keeping a lower inventory and having higher margins. So maybe they sell fewer units, But the margins are higher. That may be a way to go.
Are you hearing anything like that from your guys in the front line 2. Who deal with the auto dealers that the normal inventory levels and the normal floor plan lending will come back or maybe it will not come back? 2
Gerard, it's a great question, and it's one that comes up often. It tends to come up a little bit more in other business circles than with the dealers. I Obviously, they love the situation that we're in right now, because of the how quickly the cars are moving off a lot. The thing that you got to keep in mind, especially as it relates to the auto business, is a lot of the production is pushed by the manufacturer. $1,000,000 And while we do a lot of floor plan, with the dealers, generally, the new car production is floored by the manufacturer.
And the manufacturer will actually have incentives and will buy back cars that don't sell. And so there's what's on the dealer's lot and what they'd like to do and then there's what the Factoring Industry or Part of the Value Chain wants to do. And I think the last SAR, if my memory is correct, printed around $16,000,000 And it averaged about $17,000,000 pre pandemic. And so that's a lot of production that's not there right now. $1,000,000,000 And one of the other elements of the production that happens is it goes from the manufacturer to the dealer, $1,000,000,000 and some of the unused inventory ends up in rental agencies.
And obviously, that was an industry that early on was hit pretty hard by the pandemic, 2. But seems to be coming back, at least if any of you have tried to rent a car lately, you'll find, 1, it's difficult and 2, it's really expensive. And so I I think as some of that production comes back, you'll see it move its way through the lots and back into the rental car company. So Probably more insight or information than you wanted in the response, but I don't think it will stay this way $2,000,000 Because I think there are other forces at play that are unique to auto. It's a different world in RecFi, where the manufacturers don't have that same $2,000,000,000 Power, and the dealers themselves have more control over inventory on the lots.
And obviously, that sector has been through a big change 2, through the pandemic as well. But I think we will see a rebound in auto floor plan lines. Will they get usage, I should Will they get all the way back to where they were? I guess that remains to be seen, but it will be a function, I think, of the ability of the manufacturers to ramp up production. 2nd quarter.
Very good. I appreciate the insights. Coming back to your comments about your average balance sheet and you talked about Deposits at the Fed, your securities, etcetera. I don't know if you're able to do this, but when you look at your Spread, I think in this quarter was 2.71%. Your margin was of course 2.77%.
And you look at the different categories of asset yields, Q2. How far away is the current market, your incremental loan that you make or the incremental security that you purchase 2. To the actual averages that you're showing in the Q3, is it a 10, 20, 30 basis point difference on the incremental Asset production versus what your averages are showing?
So 2023. When you look at roll on and roll off margins, what we've seen for probably the last 2 months. 6 to 9 months is roll on margins have been better than roll off margins. And so that bodes well for the portfolio $1,000,000,000 over the long run, but what we've also been seeing in the last few quarters is the spread 2Q Or call it, abnormal spread, I don't know, it's coming back closer to what it was pre pandemic. And so you'll see over time Spread, which is really the piece that matters the most to us, coming back to pre pandemic levels, but hopefully not below.
But in the last little while, What we've seen is roll on better than roll off. I'm cautioning a little bit because when I think about the press release and I think about the page in the press release that talks about $2,000,000 yield and particularly on C and I. There's a lot of movement in there right now because that's where all the PPPCs are rolling in and out of, and so that's why we're getting some wild swings $2,000,000 in margin there. And then when we look at the CRE yield, that's where some of the hedge would be. But when you take all that stuff away and just look at what's actually in the portfolio, the yields sorry, the spreads $1,000,000,000 over the last year have been a little bit better than what they were going into the pandemic.
They're trending back there. And so it would think that over time, our long term average $2,000,000 yield or spread would be similar to what it was pre pandemic. And as we start to deploy some of that cash hopefully Into things other than securities, but into supported customers, that we continue to see a net interest margin that, In the long run, Princeton, the top quartile appears as has been our history.
Very good. Appreciate it. Again, welcome back.
Thanks, Gerard.
Your next question is from the line of Christopher Spahr with Wells Fargo. 2.
Good afternoon. So my questions are tech related. So what's your outlook for your tech budget over the next, say, 3 to 5 years? In the past, you said tech cost is around low double digits of revenues. But given the challenging rate environment and the pending people's deal, I'm just wondering What you think it will be post merger?
And then what are the incremental investments in light of the comments you had for the 2nd quarter? And then as a follow-up, I'll just give that now. What's the mix of this budget in terms of run versus change to bank? Before the pandemic, we kind of estimate it was around sixty-forty
All right. Let me make sure I got all I'm trying to keep up with you, Chris, on the list here. So tech budget, Things that we're focused on and spending and kind of mix of build a bank versus run the bank. Did I miss anything there?
Correct.
No, that's pretty much it. Thanks.
Okay. So I guess I'll just start with what we saw in quarter over quarter. 2 When you look in the software and data processing line, there's 2 elements there. 1 is Contracts that we have where we pay a fee based on volume. And so as some of the data processing volumes increase, So will that be and that's one of the drivers.
And then the other one in there is software licenses. And what we tend to find is the Q1 is a little bit light on that and it tends 2 To catch up as the year goes on, some of the licenses will grow as we prepare for Peoples, $1,000,000,000 because we'll be buying additional licenses for the people's employees, whether it's for commercial loan RMs, whether it's for the branches or staff employees. 2. And you might see that a little bit in advance of the merger, and those would not be considered onetime expenses, but they would have been contemplated in our due diligence. 2nd quarter.
And so you'll see some of that. And then the other thing that happens is as you shift more of your technology into 2. ASP or cloud based environment that you pay more in kind of monthly or quarterly fees percent versus the upfront investment costs. And so it's a little bit of a shift. And so that impacts the growth of the overall tech budget, Right.
So you'll have a higher tech budget if you're kind of building your own software, versus buying off the shelf. The difference is it costs you a little bit less upfront, but then you've 2Q and A session. The tale of the ongoing software licensing costs. And so when we look at our tech budget and how it's grown over the last several years, It's been high single digit compound annual growth rates. When you look over the last 5 years, there's times when it moves up $1,000,000 And we invest a little bit more in times when it levels off.
But I think that's a pretty good estimate of where we've been and likely where we're going. $1,000,000 And the focus is across Delta Bank and Run the Bank. It's sixty-forty. I think that's a good number Nothing in include data, data quality, data warehousing, cybersecurity, risk management things, $2,000,000 which I guess are build the bank, but could be considered run the bank depending on how you qualify them. But they're Just part of being a larger institution.
As we've noted, we're spending focused on Engage in things that improve the customer experience, whether it's been the mobile app, whether it's been improving $1,000,000,000 The interactions that happen in the call center, whether it's providing better technology to the branch teams, we've made some big upgrades to our cash management We've made big upgrades to our loan origination systems to try and help the commercial RMs and make their lives easier. $1,000,000 And so it's across those types of investments, that you're seeing us spend our dollars. And I think Tech budgets are just part of banking. They're going to be there. It's hard to separate technology from banking these days.
2Q. But that doesn't mean it's the only part of banking. We'll reemphasize that we've always been a bank 2nd quarter. In our communities where our folks and the personal touch and relationship management matters, and the technology is there to complement that approach and
2. Your next question is from Dave Rochester with Compass Point.
Hey, good morning guys. Good afternoon, I guess. How 2Q.
Good afternoon. Yes.
So a quick one on capital. I know this may be a better question for the next earnings call. But just given what you're seeing today and your higher capital levels, do you think you'll be in a good position to get a lot more aggressive with the buyback once you close the deal? The capital ratios will still be pretty robust at that point. So just curious if you're looking to get more aggressive following the close.
Yes. I guess I would more aggressive, that gives me a little bit of agita. But We certainly are will be continue to be active and prudent stewards of capital. My first hope is that we go back to 2Q. The conversation we were having before about loan growth and that we continue to grow customers and grow balances, and we use that capital 2nd quarter.
To deploy for in the sake of our customers. That said, when you look at the things in front of us with hopefully deploying $2,000,000,000 Some of that cash and seeing some releases of provision and get the synergies, the cost savings out of the merger. $2,000,000 We're going to be creating more capital, and that gives us a great opportunity to go and do buybacks. And so we'll go through and put the 2 banks together. We'll put our forecast of loan growth together and uses of that capital.
We'll consider the dividend $2,000,000 And where that is within our capital governance and then what we can't deploy, effectively, we'll give it back to you guys. And so 2. I think just based on where I sit and where our ratios are right now, it's safe to say that the capital deployment will be in our future.
Would you say that
the chances are better than not that you wrap up the buyback that you have out there by CCAR next year?
Well, Since we announced the buyback in January and we got approval from the Board, but we didn't actually use it because we announced the deal. And so I don't think we could use that whole thing up before 2Q next year because that we'll be submitting that in April of next year. And so between the Q4 and And the Q1 to be able to use up that whole allotment would be pretty difficult. Go ahead.
I was just thinking through the first half of next year.
Even through the first half, that would start to get Tough, but like I said, we'll be back to you guys with some more detailed thoughts on capital deployment As we get through legal day 1 and get the 2 banks put together at least on paper and we We can get a look at the balance sheet and confirm the forecast. But I think it's definitely safe to say, as I mentioned before, A ramp up in the rate of capital deployment compared to certainly the last few years is in front of us.
Quarter. Sounds good. Maybe just one quick one on expenses. You guys addressed this a little bit earlier, but just trying to tie this back to the guidance you gave Earlier this year for flat to less than up 1% expense growth for the year ex the deal. I know you factored in some fee growth $2,000,000 into that guidance as well.
Are you still thinking that, that guidance works at this point ex the deal? Or has the revenue performance been better than what you thought at that point?
Yes. I guess, I think there's a couple of things. Some of the revenue performance has been a little bit better, and then it's more overall bank performance has been better, Right. So when we were contemplating our accruals for incentives at the start of the year, we were expecting Not as quick a rebound in the economy and maybe a little bit higher charge offs than what we're actually experiencing. $1,000,000,000 And so as we work through the year and we see better performance at the bank, we tend to set our accruals as a percentage of the bank's net income.
And as the net income is increasing, 2%. We're accruing a higher amount for incentives. And so if you go back to that original guide of flat to 1% 2%. Ex the Peoples and the other things, we're probably more going to run 1% to 2% ex The Peoples deal.
Okay, great. One last one on deposits. I I hear you loud and clear when you
say you're expecting deposits to stick around for a while. I was just curious if you've seen any increased spending, whether it's amongst Consumer customers or business customers of deposits in recent months. Thanks.
$2,000,000 Yes. It's interesting to see the deposits where we are seeing people spending, but it's not seeing we're not it's not showing up as a decrease in the balances. 2Q. What's interesting is I've started to get back out again as we reopen the economy. And $1,000,000 Lucky for Gerard's question, I had spent some time with some of our dealers, but a couple of our other customers.
2nd quarter. And they had received PPP loans, and I'm going somewhere with this because it was interesting to me that they had just gotten forgiven. And I said, oh, well, what are you going to do with the do Do you have the money left? And they said, we have every cent still. And I said, why you've got that to pay for these expenses?
And they said, oh, we did that out of our normal cash flow. We 2. We didn't want to spend the money until we actually had the loan forgiven in case we didn't get it forgiven. $1,000,000 And so that gives you a little bit of an insight into some of the mindset of the type of customers that we have, 1, but 2, that those dollars are still sitting there and available to be spent. $1,000,000 And so I think we'll start to see those move, but we need to continue to see movement in the economy.
And from any of the customers that I spend time with and talk to, there's obviously 2Q. There's obviously some supply chain challenges in certain sectors. The biggest supply issue is talent and available workers. And I think that's the next thing to go is to $2,500,000,000 Get more folks back on the employment rules, and then we'll start to see, I think some more of that spending and demand $1,000,000 for the cash out of both the consumer and the business deposit accounts.
All right, great. Appreciate all
the color. Thanks.
Quarter. Your next question is from Peter Winter with Wedbush Securities.
Great. Thanks.
Hi, Darren.
Welcome back. Hey, Peter. Q2. Thank
you. Just two quick housekeeping questions. Last quarter, $1,000,000 Renee mentioned that there was about $90,000,000 in swap income. And I was just wondering what it was in the second quarter and maybe the outlook for the second half of the year?
Yes. You said you had a couple. Is that your only question? Or do you have another one?
Well, just the other on PPP, how much is less in terms of amortized fees?
So in swap income, $1,000,000 For the quarter, it was down about $14,000,000 And as we had mentioned, I think, a couple of calls ago that 2. The total, for the year was going to be closer to for 2021, close to what it was in 2020, but kind of peaking in the Q4 last Q1 this year and then declining each quarter. From there, looks like we'll be down kind of round numbers, call it, 10,000,000 quarter. The rest of the way, this was a bigger quarter just because of the nature of some of the swaps that went on and off, but no change to that guide. And 2Q.
When we look at PPP, we look at PPP round 1. The bulk of the $2,000,000 origination fee has now gone through and been captured in the income statement and through net interest income. But PPP round 2, while the forgiveness Portals are open. We haven't really recognized any forgiveness on those yet. And so the whole second round of balances and The origination fees associated with them are still hanging out there.
Round numbers emphasize round, 2. Maybe $100,000,000 of income to come in, and hopefully, we'll start to see it next quarter. But the good news with it is that either amortizes in Every month or it accelerates, but you don't lose it. And so that's out there. And that's also factored into our guide about Net interest income being down low single digits year over year.
Got it. Thanks, Derek.
Sure, thanks.
Quarter. And this does end our allotted time for question and answer. I'll turn the call back over to Don MacLeod for closing remarks.
Again, thank you all for participating today. And as always, if clarification of any of the items on the call or news release is necessary, 2nd Quarter. Please contact our Investor Relations department at 716-842-5138.
Goodbye.