M&T Bank Corp (NYSE:MTB)
Q3 2016 Earnings Conference Call
October 19, 2016, 11:00 ET
Darren King - EVP and CFO
Don MacLeod - VP and Director of IR
Matt Burnell - Wells Fargo Securities
John Pancari - Evercore ISI
Geoffrey Elliott - Autonomous Research
Frank Schiraldi - Sandler O'Neill & Partners
Erika Najarian - Bank of America Merrill Lynch
Ken Zerbe - Morgan Stanley
Ken Usdin - Jefferies
Matt O'Connor - Deutsche Bank
Steven Alexopoulos - JPMorgan
Welcome to the M&T Bank Third Quarter 2016 Earnings Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Don MacLeod, Director of Investor Relations. Please go ahead, sir.
Thank you, Maria and good morning. I'd like to thank everyone for participating in M&T's third quarter 2016 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 and by clicking on the investor relations 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&T encourages but participants to refer to our SEC filings, including those found in forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.
Now I'd like to introduce our Chief Financial Officer, Darren King.
Thank you, Don and good morning, everyone. As most of you have no doubt seen in this morning's press release, M&T's results for the third quarter reflect the initiatives we have underway to position the Bank for future success. The merger with Hudson City Bancorp was completed almost a year ago and the ongoing process of converting a thrift to a commercial bank continues. During the quarter we continued to build out the New Jersey consumer bank, both by growing new households as well as taking steps to reprice the acquired deposit base. For the New Jersey commercial bank, loan balances for the year to date have grown at an annualized rate of over 20%, led by loans to small- and medium-sized enterprises.
We're pleased to see that our community-focused approach to banking is starting to take root in the New Jersey marketplace. Customer migration arising from the multiple mergers and acquisitions that have occurred within our footprint also continues. We have been advertising and offering incentives to bring in new customers impacted by some of those changes in our markets. Customer growth in the third quarter was the highest we've seen in the past 8 quarters. We've also continued our program of investments in operational infrastructure and technology. As we previously signaled, the enhanced mtb.com website went live during the quarter. Other highlights for the quarter include an upgrade to our ATM network to handle EMV chip-equipped cards and adding a feature to our payment services capability that enables our customers to send and receive same-day ACH transactions.
The upgrade to our consumer mobile app is in final testing and we expect it to go live later this quarter. And finally, we took some actions to get ahead of the pending implementation of the so-called Volcker Rule contained within the Dodd-Frank Act by divesting some securities disallowed by the rule. I'll share some more details on each of these actions and how they impacted us in a few minutes. However, before we proceed, I'd like to take a moment to acknowledge the recent passing of Richard King, a member of M&T's Board of Directors. Mr. King joined M&T's Board in 2000, following our acquisition of Pennsylvania-based Keystone Financial. We valued his extensive experience in business and his deep ties to the communities in Pennsylvania. We'll miss his counsel and his friendship.
Now let's turn to the numbers. Diluted GAAP earnings per common share were $2.10 for the third quarter of 2016, improved from $1.98 in the second quarter of 2016 and $1.93 in last year's third quarter. Net income for the quarter was $350 million, up 4% from $336 million in the linked quarter and up 25% from $280 million in the year-ago quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $6 million or $0.03 per common share in the recent quarter compared with $7 million and $0.04 per common share in the second quarter. There were no merger-related expenses in the third quarter results. However, results for the second quarter included merger-related expenses amounting to $8 million after-tax effect or $0.05 per common share.
Consistent with our long term practice, M&T provides supplemental reporting on its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of the amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the third quarter which excludes intangible amortization and merger-related expenses from the relevant periods, was $356 million compared with $351 million in the linked quarter and $283 million in last year's third quarter. Diluted net operating earnings per common share were $2.13 in the recent quarter, improved from $2.07 in this year's second quarter and $1.95 in the year-ago quarter.
On a GAAP basis, M&T's third quarter results produced an annualized rate of return on average assets of 1.12% and an annualized rate of return on average common equity of 8.68%. This compares to 1.09% and 8.38%, respectively, in the previous quarter. Net operating income yielded annualized rate of return on average tangible assets and average tangible common shareholders' equity of 1.18% and 12.77% in the recent quarter. The comparable returns were 1.18% and 12.68% in the second quarter of 2016. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Included in both GAAP and net operating results were $28 million of net pretax securities gains. This equates to $17 million after-tax effect or $0.11 per common share. The gains pertain to a variety of TruPS CEOs that M&T obtained during our acquisition of other banks over the past number of years, primarily through the merger with Provident Bankshares in 2009. All were marked to fair value through acquisition accounting and under section 619 of the Dodd-Frank act, commonly known as the Volcker Rule, divestiture of most of these securities would otherwise have been required prior to July 21, 2017.
Turning to the balance sheet and income statement, taxable equivalent net interest income was $865 million in the third quarter of 2016, down $5 million from the linked quarter. The net interest margin declined to 3.05%, down 8 basis points from 3.13% in the linked quarter. During the quarter, we had another increase in average trust deposits which we placed at the Fed. Average interest-bearing deposits with banks were $9.7 billion during the past quarter compared to $8.7 billion in the second quarter. Those deposits are modestly additive to net interest income, but we estimate a diluted net interest margin by approximately 2 basis points during the quarter.
Also, with the acquisition of the Hudson City mortgage loans, we have a higher proportion of assets with the 30 over 360 day pricing basis on our balance sheet than we had previously. That has the impact of diminishing the reported margin in a 92-day quarter, such as the one that just ended. We estimate the impact on the margin was about 2 basis points. Several other items included in net interest income, including prepayment fees and interest on nonaccrual loans which individually aren't large, in the aggregate reduced the margin by approximately 1 basis point. What we would consider to be core margin pressure accounted for about 3 basis points of the decline. As we discussed earlier in the third quarter, we began to take action to reprice the Hudson City deposit base to be more in line with the market and we began those efforts in mid-August. This benefits the margin immediately but will take another few quarters for the full impact to be realized as time deposits reach their stated maturity.
Average loans increased by about 3% on an annualized basis or $577 million compared to the linked quarter. Looking at the loans by category on an average basis compared with the linked quarter, commercial and industrial loans were roughly flat, with the usual seasonal decline in auto floorplan loans offset by about 4% annualized growth in other C&I loans. Commercial real estate loans increased by about $1.1 billion or 15% annualized. Residential mortgage loans declined at a 13% annualized rate. And consumer loans grew at an annualized 8%, with growth in indirect loans, including indirect auto loans, being offset by a decline in homes equity lines of credit.
Regionally, we've seen the highest growth rate in commercial loans in New Jersey, coming off what is admittedly a low base. Growth in the adjacent New York City/Tarrytown/Philadelphia markets continues to be strong as well. Only Pennsylvania stood out as having a below-average growth this quarter. Average core consumer deposits which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, increased at an annualized rate of 8% from the second quarter, reflecting higher levels of trust and savings deposits, partially offset by lower levels of time deposits.
Turning to noninterest income, noninterest income totaled $491 million in the third quarter, up from $448 million in the prior quarter. Excluding securities gains from both periods, noninterest revenues grew 3% from the linked quarter. Mortgage banking revenues were $104 million in the recent quarter, $14 million higher than in the linked quarter. Total residential banking revenues, including origination and servicing activities, were $67 million compared with $65 million in the prior quarter. Residential mortgage loans originated for sale were $836 million in the quarter, down about 3% compared to the second quarter, but with a higher gain-on-sale margin.
Our commercial mortgage banking operation had another strong quarter. Commercial mortgage banking revenues were $37 million compared with $24 million in the second quarter, reflecting strong origination activity. Trust income was $119 million in the recent quarter compared to $120 million in the previous quarter. Recall that in the second quarter's results, included were $3 million of seasonal tax preparation fees that did not recur in the third quarter. New business generation remains particularly strong on the institutional side of our business. Service charges on deposit accounts were $108 million, improved from $104 million in the second quarter, reflecting seasonal strength as well as the benefit from new customers.
Turning to expenses, operating expenses for the third quarter which exclude merger-related expenses and the amortization of intangible assets, were $743 million compared with $726 million in the prior quarter. The FDIC assessment increased by $6 million to $28 million as the assessment surcharge on banks over $10 billion in size came into effect. Other costs of operations increased by $10 million on an operating basis compared to the second quarter. That increase reflects higher advertising expenses to capitalize on the competitive changes occurring within our markets as well as higher professional services which include legal.
The efficiency ratio which excludes intangible amortization and any merger-related expenses from the numerator and securities gains from the denominator, was 55.9% in the recent quarter compared to 55.1% in the previous quarter. The comparable figure was 57.1% in last year's third quarter.
Next, let's turn to credit. Our credit quality remained stable, with continued low levels of nonaccrual loans and net charge-offs. Nonaccrual loans declined by $11 million to $837 million at September 30 and the ratio of nonaccrual loans to total loans was 93 basis points, improved from 96 basis points at the end of the second quarter. Net charge-offs for the third quarter were $41 million compared to $24 million in the second quarter. Reflected in the recent quarter's charge-offs was $12 million associated with a commercial loan to a commercial maintenance services provider.
Recall that the second quarter's results included a sizable $7 million recovery on a previously charged-off commercial loan. Annualized net charge-offs as a percentage of total loans were 19 basis points for the third quarter, in line with what we've seen on average over the past two years. The provision for credit losses was $47 million in the recent quarter, exceeding net charge-offs by $6 million, reflecting overall loan growth as well as the ongoing shift to a higher proportion of commercial loans to total loans as the Hudson City mortgage portfolio pays down.
The allowance for credit losses was $976 million at the end of September. The ratio of this allowance to total loans was 1.09%, little changed from the 1.10% at the end of the second quarter. Loans 90 days past due, on which we continue to accrue interest, excluding acquired loans that had been marked to a fair value discounted acquisition, were $317 million at the end of the recent quarter. Of those loans, $282 million or 89% are guaranteed by government-related entities.
Turning to capital, M&T's common equity Tier 1 ratio under the current transitional Basel III capital rules was an estimated 10.76% compared to 11.01% at the end of the second quarter. This reflects earnings retention less $350 million of share repurchases during the quarter, $110 million in dividends paid during the quarter, as well as the impact of net asset growth. Turning to the outlook, the trends in the third quarter were largely consistent with what we've seen over the course of 2016. At this point, our outlook for the remainder of the year remains little changed. We expect run-off of the mortgage loan portfolio to continue but be more than offset by growth in commercial and other consumer loans.
We expect a normal seasonal rebound in auto floorplan balances. The pipeline of customer activity in other parts of the C&I portfolio remains strong. We expect continued pressure in the core net interest margin in the area of 2 to 3 basis points. But as we saw this quarter, changes in the level of trust deposits, the overall cost of interest-bearing deposits and other items can result in some volatility in the printed margin. In any case, we expect growth in net interest income to continue to be challenged while we transition our New Jersey operations to a commercial banking profile amidst the ongoing difficult interest rate environment. On expenses, our outlook for spending in the second half of 2016 is that it will approximate spending in the first half.
Our outlook for credit is little changed over the short term. We're still not seeing any significant pressures on credit, either in nonaccrual loans or in charge-offs. And we remain on track with our capital plan, with the pace of repurchases a little more weighted toward the second half of 2016 and a little less in the first half of 2017.
As is our normal practice, we'll share our thoughts on the outlook for 2017 in the July earnings conference call. Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future. At this point, we'll open up the call to questions, before which Maria will briefly review the instructions.
[Operator Instructions]. Our first question comes from the line of Ken Zerbe of Morgan Stanley.
Let's start off with the margin. I heard what you said, the 2, 3 basis points of core compression, but it sounded like there was also about 5 basis points in this quarter of other items that caused NIM compression. When you look at fourth quarter potential NIM, like, is there other items? I know you said it's going to be volatile, but does that 5 basis points negative that you had this quarter actually come back? Or is it basically just gone and it's going to remain at this lower level; and then those other items are sort of neutral, plus or minus, if that made sense?
Yes, so good question. I know there's a lot going on in the margin. If we think about the basics and the 2 to 3 basis points, that's what we've been talking about all year. And that is the combination of the run-off in the mortgage portfolio, how quickly we priced the CD book; as well as just as older loans that are at a higher-margin pay off and the newer ones that are at a slightly lower margin become a bigger part of the portfolio, you're seeing that compression.
If you look at the 2 basis points that happened because of the trust demand deposits, it's really literally that extra $1 billion that was being kept at the Fed. So those $1 billion carry a very low margin. You know, we're not receiving much on them, but we're not paying much on them. Those are just a different form of payment for our global capital markets business.
And then the other piece was obviously the mortgage portfolio being a bigger chunk of our balances and the pricing convention there being 30/360 -- that when you have a quarter like we did, the interest paid by the customer doesn't change, but the basis over which you calculate the effective rate or the margin drops. So I guess we kind of look at that as what I would call noise. You know, how much cash at the Fed and trust demand deposits will be in the next quarter, I guess it's our anticipation that they will go down, but that's something that is subject to move quarter to quarter based on the activity we have in that business.
All right. And then just the other question I had on the provision expense, I think in the release, you did talk about the normal seasoning of the non-purchase-impaired loans at Hudson City. If that deteriorates, just normal seasoning of the Hudson portfolio, does that have a meaningful impact on your allowance or the provision expense that you might take? Because it sounds like credit is still pretty good, but it was maybe a little bit higher than what we were looking for this quarter.
I guess when I look at the total provision, if you look at charge-offs, charge-offs was just, you know, normal course of business. And when we look at what's in our allowance for doubtful accounts, as well as when we look at what's not performing, we don't see anything in there that gives us cause. In fact, it looks pretty good. The provision over and above charge-offs was the reflection of the loan growth we saw this quarter and just following our normal practices of providing for future losses, based on our historical charge-offs at rates by loan category.
Our next question comes from the line of Matt O'Connor of Deutsche Bank.
I was wondering if you could talk about expenses beyond the fourth quarter, either explicitly or just some of the puts and takes, as we think about investment spend. You know, maybe there was less investment spend on the technology side, but you're still ramping in New Jersey; kind of normal inflation; and then kind of some of the expense efforts that you have as well as partial offsets?
Sure. So I guess if you look at our expenses and how they've gone over the course of the year and you look at where some of the investments have happened, if you look at our salaries and benefits line and where we've been over the course of the year, in the course of the last year we've added some people; we've invested in some businesses. In growing global capital markets business, we've hired a couple of teams over the course of the year. And we're investing, as you noted, in New Jersey.
We think that we'll continue to make investments as appropriate, but probably the pace will slow down a little bit -- that we wouldn't maintain the pace that we were this year versus 2015 when you think about salary and benefits. When you look at some of the other costs of operations, I mean, occupancy obviously will go with people, but that should be pretty much contained. One of the places where we did spend more money this year was advertising and promotion. It was probably a little bit elevated compared to what would be a normal run rate for us, because we were making a splash in New Jersey as we went in there as well as we were taking advantage, as we've talked about, of some of the changes in the marketplaces that we operate in that have been happening.
So I guess absent other changes happening, our expectation would be that that would come back down. Probably not all the way to where it was in prior years, because we're now a bigger organization with New Jersey, but below the place where we're today. And when we look at the other professional services expenses that are out there, our pace of IT investment, I think, won't get higher from where we're right now. We're looking at the additions we have made to the technology team as well as to outside help -- that we think the run rate we're at is a good place.
And we might actually slow it down a little bit so that we're able to manage the change that we're introducing into the Bank so that we can do things well. So I guess I don't see those dropping dramatically, but I don't see them going up from here. And then, obviously, the other wildcard is legal which is part of the professional services. And we will continue our work there as we get ready to go to trial which has been extended until October of next year.
So not to put words in your mouth, but if you take what you just mentioned which all seem positive in terms of moderating expense growth -- if you take those positives, is that enough to offset kind of the normal inflation, so that you start looking at kind of flattish costs as we think about full-year 2017?
It's a good question. I guess we're still doing our work on our 2017 plan and looking through what we were expecting. So I don't want to comment on what the 2017 numbers will look like. We'll give you more guidance in January. I think actually in my remarks before, I said July. I'm not going to keep you guys until July before we let you know. But we'll give you little better view on that in January.
But in general, our expectation is to try and make sure that we can manage our expenses in conjunction with revenue. Right? And our long term goal is always to try and produce positive operating leverage. There will be quarters and years where that might go negative or to zero, but over the long run that's really what our objective is. So we're trying to make sure that we align our expense growth to the revenue world that we're operating in.
Our next question comes from the line of Steven Alexopoulos of JPMorgan.
First, I wanted to follow up on the comments on the buildup of the trust deposits. Short term liquidity looks like it's just around $11 billion. How much do you realistically need to run the Bank? And is there any plan to move at least some of that liquidity into the securities portfolio?
Sure. You noted something that we've been paying attention to and had a lot of discussion on around here over the last little while. There's a bunch of components within that $12 billion. We certainly don't need $12 billion to run the Bank, that's for sure. When we look at what we need for HQLA and for the LCR, that number is maybe between $3 billion and $5 billion. And I think the question of whether it's $3 billion or whether it's $5 billion is really a function of what we think we can invest it in and the securities world.
And for us, when we look at investing it in two-year treasuries at 70 basis points or just keeping it at the Fed at 50, right now we're kind of more inclined to leave it in the Fed. Now, other components of that $12 billion include primarily two things. One is trust demand deposits. And when you look at those, either we or the customer that we're holding those on their behalf, we can either choose to put them in the Fed or we could put them in the money funds which is what would have happened historically. I think as rates start to come back there, trust demand deposits will sit as much or more in the money funds as it will sit in the Fed.
And either we'll do that on behalf of the customer or the customer will choose to do it themselves. And then we won't get those dollars as payment; we'll get paid in fees in our global capital markets business. And then the other part of what's at the Fed is some escrow balances that come with the relationship we have with Bayview and the servicing that we do. And those are monthly P&I payments.
So there's a floor that we see every month and that we'll look to put to work. But there's some part of those balances that grow throughout the month until the payments are made and then they drop back down. And we think the most prudent thing to do with those, certainly, right now is to just keep those at the Fed.
So really, when we look at those balances, we're thinking about those three categories. And we're looking to try and optimize what we have to make sure that we're not putting funds at risk, but we're getting as good a return as we can on those dollars.
Regarding the high-cost CDs maturing from Hudson City, can you quantify the balance of these maturing in the fourth quarter and if you know at this point what 2017 looks like? And how will the rate that you're paying change on those?
There's a couple of factors that are involved in the Hudson City deposits and I'll do my best to give you some guidance on how to think about it. So in the fourth quarter, there's, I think, $2 billion to $2.5 billion that will mature. And they are across a number of different term buckets. And what we've seen so far as we have started the repricing is that approximately 50% of the CDs are renewing and they are renewing typically at a lower rate.
And that could come in two forms. It could be at a lower rate within the existing term or what we're also seeing is people shifting to shorter term. Just because of the interest rate environment we're in, I think the book is generally short for us. I think it is for folks in the industry, because people are uncertain. So some of the dollars will reprice into CDs of light term or shorter term.
Some of those CDs will actually change categories and will go into money market accounts or even now accounts, again, while people wait out the interest rate environment. And then some of those are attriting. In total, we're retaining about 60% of the balances across all categories and about half are staying within time deposits of various maturities.
That's helpful. Anything on 2017 at this point?
Nothing at this point that I would comment on. I think we're kind of looking to see -- we're learning through this process. The good news is so far what we've seen is pretty much on track with what we expected to happen. But this is a big quarter, so I would like to see how that goes. And we'll continue to decide how we want to play things out in 2017.
Our next question comes from the line of Frank Schiraldi of Sandler O'Neill.
Just a follow-up on the Hudson City question in terms of deposits. Darren, if you are retaining 60% of those balances, what sort of percent are you seeing, I guess, the most favorable outcome -- where you'll get lower time deposit, maybe, but you'll get the primary checking account relationship to come over?
Last numbers I looked at on that were we're getting about 20% to 25% of those customers adding a checking account. Now, when they add the checking account, that's great, as long as they are active. So one of the things that we spend a lot of time looking at is the activity rates of our customers and their accounts. And for us that means, do you have a debit card and do you use it regularly? Do you get direct deposit? And while the rate of people signing up for that account is off to a good start, the activity levels are a little bit lower than we'd like.
So as we work our way through this, our objective is to get what we would call primary households, where people view us as their primary bank. And those are the measures that we would tend to look to. So we do have a part of the 25% of the 50% that are opening checking accounts. And the results are decent, but we're going to keep watching that to see how things play out.
Okay, but that's 25% of the 60% you are retaining that are opening--?
Okay. And then just secondly or lastly, just in terms of commercial loan growth, I don't know if you guys have quantified it for the year; I guess you'd require at least mid-single digits to offset the run-off in Hudson City. But is there a potential outperformance there? Can we read anything into this particular quarter -- the particular strength acceleration we saw in commercial this quarter versus the previous linked quarter?
I guess we didn't realize going into the quarter, as we were going through it, that it was going to be as outperforming as it might look at this point. We've just kind of spent our time talking to our customers and helping them out. When we look at some of the commercial real estate growth this quarter, there was some construction which are projects that we had agreed to finance in prior quarters that were coming on stream and building which helped drive some of the growth.
And then obviously we're trying to grow in New Jersey which is a place where we did see some outsized growth -- although I'll remind you that the percentage looks good, but it's off of a small base. But overall, when we look at our pipeline, the pipeline is strong. It's slightly above what we had seen in prior quarters. So we feel good going into the fourth quarter, but I wouldn't want to characterize it as we're expecting to see outsized growth, at least vis-a-vis the industry.
Okay. I guess it's mostly, I guess, with the smaller banks, but there's some regionals that also you see some concentration issues, certainly, with CRE. And just wondering if that maybe is a tailwind for M&T?
Well, I think you're certainly hearing more people worry about the concentration limits. And I think that's certainly a concern. I read through some of the other comments from other calls and I recognize that's a concern. We obviously pay attention to that as well. And when we look at where we stand today, we feel pretty good about the headroom that we have there.
But I guess the important thing for us is that we try to do business, particularly in the commercial real estate space, with customers with whom we have a long history of doing business. The equity that's in the deals is still very strong and as strong as it was pre- the last recession or stronger than that.
And our credit appetite isn't changing. We're not lowering our standards, because we're seeing maybe a little bit more activity and we're not increasing it. We try to be very consistent with how we underwrite and what our expectations are in all parts of the cycle.
Our next question comes from the line of John Pancari of Evercore.
Just a housekeeping type of question around the loan growth. I noticed the EOP, the end-of-period, balances were higher than the average balances on a couple of fronts on most of the buckets. And just wanted to get your take on what is the better number to look at in terms of what it could mean for growth into next quarter?
I guess my bias is always to look at the average rather than the end-of-period, just because when deals close can be lumpy throughout the quarter. You can get stuff that happens at quarter-end for various reasons. I would tend to look at the average; that normalizes out things that might show up. One month it might get participated out. So I think that's a better measure to use and the one that we would probably pay more attention to.
I guess the only thing to remind everyone of is -- the fourth quarter, there always tends to be a little bit of a spike, as our customers reach year-end and they are trying to get things done in a certain tax year. That's often a driver of activity to get deals done or loans closed. And we've historically seen a little bit of a spike at the end of the fourth quarter. So I would just pay attention to that.
But it's usually late in the quarter, so from an average perspective -- again, you know, it won't necessarily drive income in the quarter, but it will give you a nice pop at the end of the period. So a long-winded way of saying I would tend to focus on the averages.
No, that's helpful; it helps to account for it. I mean, it looks like it amounted to about $1 billion this quarter. And sorry if you already alluded to this, but just want to get your take on borrower demand within the pure C&I space. We have had several of your peers flagging some apprehension on the midmarket borrower side, given some uncertainty around the elections, but a little bit more by way of economic trends -- CapEx pulling back, industrial production weakening. So I wanted to get your thoughts there. Thanks.
I guess from speaking with our commercial bankers across the region before coming on the call, they are feeling good about the demand that's out there. You know, as I mentioned before, our pipeline is very, very strong. It's in line with what we've seen in prior quarters. I think there is a little bit of a pause and I expect there will be a pause this quarter, as we go through the election cycle and people digest what that means and with the change in administration.
And the more global trend that we've seen this year and have for the last couple of years is companies of all sizes are sitting more on cash and they are holding that cash. And they are investing, but they are still reticent to invest beyond maintaining where they are. We're not seeing a ton of CapEx for growth and a bunch of the replacement cycle is gone. So I guess I would describe it and think about it as steady.
And the growth that we had in the quarter, I think, is fairly consistent in the ex-floorplan space, consistent with where we've been in the prior quarters. And we don't see a huge reason for that to change in the fourth quarter, either up or down.
One last question, it's a quick one, as well. But in terms of your expectation there on the margin for the 2 to 3 basis points of compression, this might be a stupid question, but is that for the quarter for 4Q? So that's a quarterly pace or are you expecting that to occur over a couple of quarters?
That's been a quarterly pace.
Our next question comes from the line of Ken Usdin of Jefferies.
Can I ask just a bigger-picture question, a follow-up on the balance sheet? You mentioned it's been tough -- it looks tough to grow NII from here. But I was just wondering, when you think about the size of the balance sheet, you had good period-end loan growth. You had higher securities balances at period-end. You had the good deposit growth.
Do we see kind of the bottom in NII after a couple of quarters of decline? It would seem that you still have the balance sheet growth to overcome the NIM pressure. I just want to make sure I'm understanding the back-and-forth between balance sheet size and the output that is NIM.
Right. So I guess as we look at what's been going on with net interest income, we think we're approaching the bottom and that it will start to turn. How quickly that turns will be obviously a function of whether we get a rate increase in December or not. But even absent that, we expect it to start to turn in the next couple of quarters. Part of the issue is -- and I think this is pretty straightforward for everyone -- as the mortgages run off, the reason they are prepaying is because they tend to be right around 4% and those are fixed yields; whereas the commercial loans that we're replacing them with in the short term with LIBOR, where they are being LIBOR-based, are at yields that are kind of 3.50% to 3.60%.
So that's part of what is driving that core compression. But as the mortgage balances become a little bit less of a factor in the balance sheet, that's why we see that bottoming out coming in in the coming quarters and expect to happen in 2017 and see things go the other way.
Got it. And as a follow-up to that point, this is the first quarter where we'll see the full-year effect of having Hudson City on. In the first quarter of last year, when we got the rate hike in December, it was tough to kind of understand the melding in of the benefit from rates versus the merging in of the Hudson City balance sheet.
So can you help us just understand the rate sensitivity? If we got a December hike, how does that carry forward? And would that also help -- how much do you think that would help the NIM on the new balance sheet?
Sure. I guess a couple of things, I'll remind you that in the fourth quarter of last year, we had two months of Hudson City and in December was when we did the balance sheet restructuring. So it's a true statement that fourth quarter to fourth quarter, Hudson City will be in both; but it's not a full fourth quarter. And there was some balance sheet restructuring that we were doing in the fourth quarter of last year with Hudson City.
So I think the best comparison for you will be the first quarter 2016 to first quarter 2017. Now, that said, the impact of a rate hike on net interest margin, I think, will be pretty similar to what we saw last time. If it's 25 points, it won't be the whole thing that will show up in the margin. Obviously, deposit pricing, deposit price reactivity will impact that.
We're not sure that it will be that much this time as well. But I think a good guideline would be to look at what happened last time. And we would be right around that for the next hike. And we'll all keep our fingers crossed that it comes.
Yes, that's the tricky point, just because the balance sheet is different and we couldn't quite see that happened fourth to first. Do you have kind of what you think that would be in, like, a basis point helper?
I guess I would be thinking in the 15 to 20 range.
15, 20 basis points on the quarter or on a full year?
Well, you have to have it, obviously, for the full year. The full-year impact.
A full-year impact of one hike? Okay.
Our next question comes from the line of Erika Najarian of Bank of America.
Just had a follow-up to Steve's line of questioning. I'm sorry if I missed this, but did you give the rate at which the CDs are repricing -- or, rather, the rate that you're offering -- the new rate that you're offering the Hudson City CD holders?
We didn't talk specifically about the rate. We talked about the rate at which they tend to be renewing which -- we're seeing approximately 50% of the CDs stay in the Bank. Those are staying across a number of term buckets. Not all customers are renewing in the same term. And so the rates vary, obviously depending on which term they're in.
In general, those are lower than what they were before. But the customer can get a different rate depending on the breadth of their relationship. So it's a little bit all over the board. There's not one rate, per se, that we're seeing those CDs go into.
So when I just looked at your website and I look at an Ally bank or a GS bank, there's a huge difference between what the rate is on the M&T website and the rate that others are offering that would attract CD holders. And I'm wondering, as we think about the renewal rate, is the mix of all of those buckets that you talked about sort of -- is somewhere in between? I think I'm getting 10 basis points just doing a quick search on your website across different terms. And for GS and Ally, I'm getting 1%.
I think that's pretty accurate with where pricing is on some of the CDs. I think when we're dealing with customers who are single-service CD customers, oftentimes there's a better option for them. We're a relationship bank and our best pricing is for our best customers and those have more fulsome relationships with us. So we certainly have customers who earn much more than that on their CD balances.
We're obviously also sensitive to the market in which we're operating. We know it's broader than just the local market, that the Internet banks are part of it. But for certain customer segments that's not an option they choose to use. So we look at our pricing all the time and make sure that we feel good about where our pricing stands vis-a-vis the competition as well as doing the right thing for our customers and doing the right thing for our balance sheet.
So there's a bunch of things that we're always trading off when we're looking at pricing, but the rates that are there are certainly the posted rates that are in the market and, we think, comparable to other like institutions.
Got it. And just one last follow-up question. I wanted to make sure I understood -- you only need $3 billion to $5 billion of the $12 billion in cash to run the Bank. And as we think about the comments you made on the variability of escrow and trust deposit inflows, how much do you benchmark per quarter in terms of how much cash you have to hold to account for the volatility of those inflows and outflows?
I guess I go back with the -- the main thing that we were running the Bank for and holding the cash is obviously for the LCR and LCR purposes. And it's our intention to manage that number so that we've got ourselves covered, but without giving away interest income that we could otherwise get if we were able to invest that in securities that paid better than holding cash at the Fed. When it comes to the escrow balances, there are minimums that we need to have to make sure that we don't ever have ourselves in a position where we can't make those payments on behalf of the people that we're covering from a servicing perspective. There obviously is a cost to the holding those and we're cognizant of what the cost is. But that's also part of the pricing that we have with the people that we're doing that business.
Trust demand would be the same thing. I guess I think it's a -- the trust demand balances I look at as primarily a function of the interest rate environment that we're in right now -- that if we were in a different part of the cycle, where rates were -- you know, we'll see what happens if there's a 25 basis point hike. But certainly another 50 and I think the level of trust demand deposits that we see us carrying will start to get real small real fast. And we'd be down into the range of the $5 billion-ish that we're holding for HQLA. And even that we might start to haircut a little bit.
Our next question comes from the line of Matt Burnell of Wells Fargo Securities.
Just wanted to get a little more color on the consumer loan demand. We've seen across the industry greater demand across a number of consumer loan types -- not just auto, growing demand for card, growing demand for other types of consumer lending. I'm curious as to how you're feeling about that growth heading into 2017 -- fourth quarter in 2017? And is there -- what is the opportunity set within the HCBK customer base, not only to reprice the CDs, but possibly to sell them consumer loans?
Sure. I think when we look within Hudson City customer base, we do see upside to selling consumer loans. That would be primarily credit card and home equity lines of credit. What we're finding within the CD customer base, at least, is it tends to skew a little bit older. And therefore our ability to penetrate that with home equity loans and cards isn't the same as it would be if we were dealing with a slightly younger crowd. But obviously we have got those mortgages that we look at as well.
And if we have someone that has a mortgage, those would be good candidates for, certainly, home equity lines of credit. So we're cognizant of that and we're working on it. But is that going to drive double-digit growth? I don't think so. I think what you're seeing in our home-equity growth is not dissimilar to what you're seeing in the industry. And really, with 30-year rates and 15-year rates as low as they are, the average consumer is much more interested in doing a first than using a second. We would only start to see second balances and demand start to increase as rates increase, when people can't utilize the first lien market as their primary option. You know, when you talk about auto loans, for us and, I think, the industry, that tends to generally work through the dealerships.
We've been operating in New Jersey even prior to having Hudson City. And we have reps there that are working with dealers, dealerships and dealer groups, to try and be in their set of options. I don't think you would look at New Jersey -- I certainly wouldn't -- and say that's a big opportunity that will drive our indirect auto business growth beyond the rate that we've been seeing over the last few quarters.
Okay. And just to follow up on a comment you made earlier, I just want to make sure we're clear on the benefit of the one rate hike that you're talking about. You mentioned a 15 to 20 basis point benefit over the course of 12 months from the 25 basis point hike that we hope will occur in December, but we didn't see that last -- we haven't seen that over the course of the past 12 months.
I appreciate there's been a whole lot of moving parts over the last 12 months, but should we assume that the 25 basis points that we might get in December would add, all else being equal, 15 to 20 basis points to the margin by the fourth quarter of 2017? Or are there other moving parts that could diminish that?
I'm glad you came back to that, because it was something that I wanted to come back to as I thought through the moving parts and the answer. So I think the 15 to 20 -- you start to see that work its way through the loan book, but sort of thinking about the whole part of the impact on the liability repricing as well. And I think when you net the two together and you look at what happened last time, you'll probably net more in the 6 to 10 range -- and that you see the pop early on and then it comes down.
Hopefully, it doesn't come down -- the reason for the range -- hopefully it doesn't come down quite as much as it has this time, because as the LIBOR rate moves up, what you're giving up from the mortgages going into commercial loans isn't as big a gap as what it is today, given where rates are. And so that will affect it. And then, obviously, the other thing that will be part of the margin that's important to think about is in total how we fund the balance sheet, right? So we have some bank notes that are coming due next year that we'll issue; and depending on where the print is there, that will also impact the margin.
So I guess originally, as I was thinking about the question and my response, I was thinking more on simply the asset side. I think 6 to 10 in total margin is probably a better space to be -- which, again, I always look at what happened this past year, recognizing there was some noise in there, but that's probably a good guide.
Our next question comes from the line of Geoffrey Elliott of Autonomous Research.
You've spoken quite a lot about the repricing of Hudson City deposits. But I guess if I look at time deposit costs in the quarter, they increased 5 bps, from 85 to 90 bps. So I wonder if you could explain what's been going on there -- if there's some accounting related to the merger or something like that that's caused that tick-up and how it flows through over the future quarters?
Yes, so I think you hit the nail on the head -- that when the accounting acquired certificates of deposit -- the math is that if it's a 12-month CD and there's two months left, you basically mark it as a two-month instrument and you think about the interest rate as that. So as those CDs that were in partial paydown, if you will -- you know, they were less than their full maturity, the rate that we would see would be the marked rate. And then as they renew, you would go to the actual rate. And that's partly why you are seeing that increase in those time deposit accounts over the course of the quarters this year. We have talked before that the bulk of the book is less than a year.
So we should be pretty close to the end of that accounting happening and start to see more pronounced the effect of the repricing that's happening. But I would also remind you that the repricing happens every month. So in the first month, you see 1/12th of it and in the second month you see 2/12ths of it. So it takes a while for that stuff to work its way through. And it's also a function of how big the balances are that are maturing in each of those twelfths. And we started the work in the middle of August.
So really, we've got 1/12th in the books so far in September and that's why the numbers that you're quoting are accurate and why they are not that impressive. But you got to start sometime in making those changes and we're starting down that path. And we think it's an important next step in the conversion we have of this thrift into a commercial bank.
And in terms of that cost of time deposit inflecting, when are you thinking that takes place?
I'm thinking that is a 2017 event, just based on the fact that it's on average 12 months or less. So I think you start to pass through that inflection point sometime late second -- or late first quarter, sorry, early second quarter.
Ladies and gentlemen, that was our final question for today. I would like to turn the floor back over to management for any additional or closing remarks.
Again, thank you for all participating today. And as always, if there are any clarifications on the items on the call needed or if you have any further questions, please contact our investor relations department at 716-842-5138. Thank you.
Thank you, ladies and gentlemen. This does conclude M&T Bank's third quarter 2016 earnings conference call. You may now disconnect and have a wonderful day.
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