M&T Bank (MTB) Q4 2016 Results - Earnings Call Transcript

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M&T Bank Corporation (NYSE:MTB) Q4 2016 Earnings Conference Call January 19, 2017 11:00 AM ET

Executives

Don MacLeod - Director of Investor Relations

Darren King - Executive Vice President and Chief Financial Officer

Analysts

Frank Schiraldi - Sandler O'Neill

Brian Klock - Keefe, Bruyette & Woods

Ken Usdin - Jefferies

Geoffrey Elliott - Autonomous Research

John Fox - Fenimore Asset Management

David Eads - UBS

Ken Zerbe - Morgan Stanley

Ricky Dodds - Deutsche Bank

John Pancari - Evercore

Matt Burnell - Wells Fargo

Gerard Cassidy - RBC

Peter Winter - Wedbush Securities

Chris Spahr - CLSA

Operator

Ladies and gentlemen, thank you for standing-by. And welcome to the M&T Bank Fourth Quarter and Fiscal Year 2016 Earnings Conference Call.

It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.

Don MacLeod

Thank you, Laurie and good morning. I'd like to thank everyone for participating in M&T's fourth quarter and full year 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 may contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on 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.

Darren King

Thanks, Don, and good morning, everyone. As most of you have no doubt seen in this morning's earnings press release, M&T's results for the fourth quarter reflect a solid rebound in net interest income.

Changes to the balance sheet which include the reinvestment of cash previously held at the Fed into investment securities over $1.2 billion of growth in average loans, success in repricing Hudson City, book of time deposits and a modest tailwind from interest rates all contributed to an $18 million increase in taxable equivalent net interest income. Expenses remained well controlled and credit continued to perform well versus our long term average.

I’ll share some details on how each of these actions impacted us in a few moments. However, before we proceed, I’d like acknowledge the contributions of Patrick Hodgson a member of M&T’s Board of Directors who passed away suddenly over the holidays. Mr. Hodgson was one of our longest serving directors having joined the M&T Board in 1984. He helped to guide the growth of M&T from what was a local back in Buffalo to the $120 billion super regional bank that we are today. We will miss his counsel and his friendship.

Now let’s turn to the numbers. Diluted GAAP earnings per common share were $1.98 for the fourth quarter of 2016 compared to $2.10 in the third quarter of 2016 and a $1.65 in the fourth quarter of 2015.

Net income for the quarter was $331 million compared with $350 million in the linked quarter and up 22% from $271 million in the year-ago quarter.

Include in the fourth quarter’s results was a $2 million gain from a sale of a CDO which represented the last such security we held which would require divestiture under the so called Volcker Rule. When combined with the $28 million of gains realized from a similar Volcker Rule related divestiture in the third quarter, total securities gains for the past two quarters were $30 million, which amounted to $18 million after tax effect or $0.12 per diluted common share.

In the fourth quarter, we contributed a like amount $30 million to The M&T Charitable Foundation, which also equaled $18 million after tax effect and $0.12 per common share.

There were no merger related expenses in either third or fourth quarter of 2016, however results for the fourth quarter of 2015 included merger related charges amounting to $61 million after tax effect or $0.40 per common share.

Also 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 unchanged from the prior quarter.

In system with our long term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions.

M&T’s net operating income for the fourth quarter which excludes intangible amortization and merger related expenses from the relevant periods was $336 million compared with $356 million in the linked quarter and $338 million in last year’s fourth quarter.

Diluted net operating earnings per common share were $2.01 for the recent quarter compared with $2.13 in 2016’s third quarter and $2.09 in the fourth quarter of 2015.

On a GAAP basis, M&T’s fourth quarter results produced an annualized rate of return on average assets of 1.05% and an annualized rate of return on average common equity of 8.13%. This compares with rates of 1.12% and 8.68% respectively in the previous quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholder’s equity of 1.1% and 11.93% for the recent quarter. The comparable returns were 1.18% and 12.77% in the third 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.

Turing to the balance sheet and the income statement. Taxable equivalent net interest income was $883 million in the fourth quarter of 2016, up $18 million from the linked quarter. The net interest margin improved to 3.08%, up 3 basis points from 3.05% in the linked quarter.

Average balances of funds placed on deposit with the Fed declined by nearly $900 million from the third quarter. Those funds were reinvested resulting in $1 billion higher level of average investment securities. We estimate that this exchange benefited the margin by approximately 2 basis points.

The benefit to the margin from the Fed’s December action to raise the Fed funds target and the rate paid on excess reserves was about 2 basis points. This benefit was offset largely by core margin pressures. The net result was at the yield on loans was unchanged from the third quarter.

We also saw the impact from an improved deposit mix as higher cost time deposits declined and were replaced by lower cost saving deposits and noninterest-bearing demand deposits. We estimate this added about 1 basis point to the margin.

We’ll provide our outlook in a few moments, but I’ll note particularly that the benefit from the Fed’s rate action was only in play for a part of the quarter and we expect further benefit from a full quarter’s impact.

Average loans increased by about 6% annualized or $1.2 billion 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 up approximately 8% annualized led by the usual seasonal rebound in floorplan balances.

Commercial real estate loans increased by about 20% annualized. This includes a higher than normal level of loans held for sale by our commercial mortgage banking group. Residential mortgage loans declined at a 16% annualized rate.

Consumer loans grew an annualized 6% with growth in indirect loans including auto continuing to be offset by a decline in home equity lines of credit.

Regionally, we’ve seen loan growth evenly spread across most of our footprint with the only out layers being greater New York City and New Jersey which have been consistently stronger all year.

Average core customer deposits which exclude deposits received at M&T’s Cayman Islands office and CDs over $250,000 increased by $1 billion from the third quarter with higher levels of trust demand and savings deposits partially offset by a faster pace of runoff in time deposits.

Turning to non-interest income. Non-interest income totaled $465 million in the fourth quarter compared with $491 million in the prior quarter. Excluding securities gains from both periods, non-interest revenues grew slightly from the linked quarter.

Mortgage banking revenues were $99 million in the recent quarter compared with $104 million in the linked quarter. Residential mortgage loans originated for sale were $760 million in the recent quarter, down about 9% compared with the third quarter.

Total residential mortgage banking revenues including origination and servicing activities were $63 million compared with $67 million in the prior quarter.

Our commercial mortgage banking operation had another strong quarter, down only slightly from the record breaking volumes we saw in the third quarter’s results. Commercial banking revenues were $36 million compared with $37 million in the third quarter.

Trust income was $122 million in the recent quarter compared with $119 million in the previous quarter.

As I noted last time, on our last call, new business generation remains particularly strong on the institutional side of our business. Service charges on deposit accounts were $105 million compared with $108 in the third quarter.

Turning to expenses, operating expenses for the fourth quarter which exclude merger-related expenses and the amortization of intangible assets were $760 million. Expenses were well controlled in the fourth quarter.

The efficiency ratio which excludes intangible amortization and any merger-related expenses from the numerator and securities gains from the denominator was 56.4% in the recent quarter. The ratio was 55.9% in the previous quarter and 55.5% in 2015’s fourth quarter.

Next, let's turn to credit. Our credit quality remains relatively stable. Nonaccrual loans increased by $83 million to $920 million at December 31st. And the ratio of nonaccrual loans to total loans was 1.01% compared with 0.93% at the end of the third quarter.

Residential mortgage loans acquired with Hudson City accounted for approximately half of the increase, while one large commercial credit to an environmental remediation and disaster response company substantially accounted for the remainder of the increase.

Net charge-offs for the fourth quarter were $49 million compared with $41 million in the third quarter. Reflected in the recent quarter’s charge-offs was $12 million associated with the commercial loan to a supplier to the metals industry. Recall that the third quarter’s results included a similarly large charge-off on a loan to a commercial maintenance company.

Annualized net charge-offs as a percentage of total loans were 22 basis points for the fourth quarter. Just slightly an excess of what we’ve seen on average over the past two years. The provision for credit losses was $62 million in the recent quarter exceeded net charge-offs by $13 million reflecting overall loan growth as well as the continued shift to higher proportion of commercial loans to total loans as the Hudson City residential mortgage portfolio pays down.

The allowance for credit losses was $989 million at the end of December. The ratio of the allowance to total loans was 1.09% unchanged from the end of the third quarter.

Loans 90 days past due on which we continue to accrue interest excluding acquired loans that have been marked to fair value discount on acquisition were $301 million at the end of the recent quarter. Of these loans, $283 million or 94% 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 10.96% compared with 10.78% at the end of the third quarter which reflects earnings retention during the fourth quarter as well as the impact of the net decline in end of period assets.

M&T repurchased a modest amount of common stock during the quarter preferring to avoid the volatility in the market through the election and its aftermath.

Next, I’d like to talk a moment to cover the key highlights of 2016’s full year results. GAAP based diluted earnings per common share were $7.78, up 8% from $7.18 in 2015. Net income was $1.32 billion improved from $1.08 billion in the prior year. These results produced returns on average assets and average common equity of 1.06% and 8.16% respectively.

Net operating income which excludes intangible amortization and the merger related expenses was $1.36 billion improved from $1.16 billion in the prior year. Diluted net operating income per common share was $8.08, up 4% from $7.74 in 2015.

Net operating income for 2016 expresses as a rate of return on average tangible assets and average tangible common shareholder’s equity was 1.14% and 12.25% respectively.

Now turning to the outlook. As we look forward into 2017, there is reason for optimism particularly with respect to the outlook for interest, interest rates, but also including further improvement in the economy and the potential for regulatory reform.

However, we entered 2016 an optimistic frame of mind and we’re reminded that the market and the electric don’t always follow the expected script. But today based on what we know will offer our thoughts.

Loans at the end of 2016 grew just under 4% from the end of the prior year. This reflected relatively strong 11.5% growth in our commercial loan portfolios and consumer loans partially offset by a 14% plan decline in residential mortgage loans, predominantly those acquired with Hudson City.

For 2017 even how rates have moved, we are looking for similar net loan growth likely in the mid-single-digit range. We expect that will be driven by somewhat slower growth in commercial and consumer loans than we saw in 2016 combined with a slower pace of runoff in residential mortgage loans.

As was the case at this time last year, our outlook for net interest margin is dependent on further actions by the Federal Reserve. A flat rate scenario should still lead to some expansion of the margin as the benefit from last month’s Fed action becomes fully embedded in the run rate offsetting core margin pressures. One or two further actions by the Fed in 2017 will potentially offer additional upside.

That outlook excludes the potential impact from cash balances brought in through Wilmington Trust, which could have an impact on the reported margin but would have a marginal effect on revenue. The level of cash at the Fed was quite low at year-end and we would expect somewhat of a rebound looking forward. In any case we're looking for year-over-year growth in net interest income.

The higher interest rate environment will likely challenge mortgage banking in 2017, specifically with respect to residential mortgage loan originations. As we've noted previously, we have the capacity and appetite for additional servicing or sub servicing business shouldn’t any opportunities present themselves, this could offer a potential offset to slow originations.

The outlook for our other fee businesses remained stable with the growth in low to mid-single digit range. We expect low nominal growth in total operating expenses in 2017 compared to last year. We continue our focus on generating positive operating leverage for the year further rate actions by the Fed would likely make that go easier.

I'll remind you that we expect our usual seasonal increase in salaries and benefits in the first quarter 2017 which primarily reflects annual equity incentive compensation as well as the handful of other items. Last year that increase was approximately $42 million.

Our outlook for credit remains little changed. There are some modest pressures on non-performing and criticize loans, but our outlook for credit losses remains relatively stable. Net charge-offs amounted to just 18 basis points last year following 19 basis points in both 2014 and 2015, all of which were roughly half of our long term average of 36 basis points. But as we said on this call last year and the year before our conservatism won't let us count on being net figure in 2017.

As to capital, we expect to work toward completion of our 2016 CCAR capital plan by the end of the CCAR fiscal year in June.

Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors, which may differ materially from what actually unfold in the future.

Now let's open up the call to questions, before which Laurie will briefly review the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Frank Schiraldi of Sandler O'Neill.

Frank Schiraldi

Good morning.

Darren King

Good morning.

Frank Schiraldi

Darren, just a couple of questions, first I want to make sure, I think in the right way about the buyback going forward. So obviously you noted there was a pullback after the election, the volatility in the stock price. But it sounds like you're still indicating that you're expecting to get near or to what was authorized by or approved through CCAR, is that the case now that the stock kind of stabilized at these levels?

Darren King

That's right. When we saw the volatility that kind of gave us pause for the moment in many respects not dissimilar to how we thought about our securities repurchases post-Brexit where we kind of step to the side and waited for things to kind of normalize and stabilize, now that we've had a chance to see where things have shaken out. We feel good about where things are and plan to resume our distributions through 2016 and plan to distribute all of our allotment between now and the end of June.

Frank Schiraldi

Great. Okay. And then just secondly on the margin, I believe last quarter you’ve noted that a good expectation once the 25 basis points from December was fully flowed through the NIM was for six to 10 bps of expansion, is that still a reasonable assessment and would that be a reasonable assessment for another 25 basis points that we could get at some point during the year?

Darren King

So, on the first hike that happened, I think 6 to 10 is still a good target range for the full year. Also looking at the full year 2015 or 2016 sorry versus full year 2017, 6 to 10 is a good target probably towards the higher end of that range as we look based on what we've seen so far. It’s probably a good starting point for another increase obviously the biggest [Technical Difficulty]

Frank Schiraldi

[Technical Difficulty] $45 million of increase seasonality and we also take out the $30 million charitable contribution, is it fair to sort of all else equal expect expenses to be up $10 million to $15 million next quarter?

Darren King

I think that math works, yeah, in that range.

Frank Schiraldi

Got it, perfect. Last question about, just curious your comment on thoughts around acquisitions as a capital deployment tool sort of what the appetite is now here is for in Hudson City as you are and if it is something of interest where you would be interested?

Darren King

Acquisitions as you're well aware have always been an important component of our growth strategy combining acquisition with organic growth where we would like to be back in the game, but we've got to finish off our work to deal with our written agreement. When we think about the geographies and generally, we've been interested in things that are within our contiguous to where we do business. We think that those are the best places for us to be, because it leverages our brand and our management capacity that going far afield doesn't really is harder to execute.

But you know the other question obviously is prices and where our prices are right now and multiples are known if you tend to look at when we've been more aggressive and, aggress is probably not the right word, but more active it’s when things have gotten little bit bad. So we're still in the best part of the credit cycle, but that is traditionally not been when we've been active, but we’re open to it. We're hoping to get back to it. We’ll just see whether 2017 is that year.

Frank Schiraldi

Okay, fair enough. You mentioned things that are in market are contiguous, is there any preference within the footprint there are upstate or the New York markets you've been added to or mid-Atlantic or elsewhere?

Darren King

We don't tend to think about that way. We tend to be more on the side and watching what's happening and you know we have an idea of which franchises we think are well run and would be good fits with us. And then from there we’re more opportunistic based on what kind of presents itself.

Frank Schiraldi

Great, thank you.

Operator

Your next question comes from line of Brian Klock of Keefe, Bruyette & Woods.

Brian Klock

Hey, good morning, Darren and Don.

Darren King

Good morning, Brian.

Brian Klock

So, Darren on the NIM, I just want to follow-up with the few questions. So it doesn't look like there is any additional accretable yield that would've gone through the fourth quarter versus the third?

Darren King

Maybe a small amount that came in, but nothing that would materially drive the NIM…

Brian Klock

Okay and then on the….

Darren King

…towards the end of that.

Brian Klock

So is there any sort of headwind going into 2017 with your guidance for NII from this lower accretable yield that is not material enough to impact the numbers.

Darren King

I don't think is material enough to impact the numbers compared to the guidance that we gave and where the NIM will be and we've taken all that stuff into account.

Brian Klock

Okay, and then so on deposit side, so you mentioned some of the benefit coming through on line more and you can see that on the C&I yields that there are up three basis points, but on the time deposit side for a basis point reduction in costs there is so, is there any more benefit coming from the repricing on the Hudson City time deposits?

Darren King

We think there's still some juice left there. It's interesting when you look at our numbers which I'm sure you have from second quarter to third quarter there wasn't much of an impact and it took you know a quarter’s worth of work to make that change happen and start to see it in the reflect itself in the numbers. We think there's still some movement there. The repricing continues and the turn of that book continues. I guess I would expect another quarter similar perhaps to what we saw in between Q3 and Q4 repeat itself between Q4 and Q1 then we should start to slow down because a lot of that book is also going into shorter rate structures.

Brian Klock

Gotcha. So if we think about the 6 to 10 guidance of getting the benefit into the first quarter from the - 2017 from the benefit of the December hike that would be justified hikes and not that the potential benefit you could see from this time deposit repricing?

Darren King

When we run our numbers, when we do our treasury forecast, and we look at what we think will happen and enough rate scenario, we've got all of those other things baked into that cake. So you know when I look at that our margin for the full year for 2017 and I look at where it - where we think it will show up compared to 2016, we think that 6 to 10 on average for the year is probably a good range. And again based on some of these changes that we've made business to the amount of cash as well as the deposit pricing, we think the higher end to that range makes some sense. And that's assuming no other rate increases when you talk about that.

Brian Klock

Gotcha.

Darren King

It probably starts out higher in the first quarter. Probably we expect it will start out higher in the first quarter, and then absent any other rate increases, there's still some of that core margin compression as the longer dated securities and loans run off that we're carrying a higher margin, there's still a little bit of margin compression baked in, and you'd see some modest compression from their throughout the year which you get you down to that average range that we talked about.

Brian Klock

Okay, very helpful. Thanks for your time.

Darren King

No problem.

Operator

Your next question comes from the line of Ken Usdin of Jefferies.

Ken Usdin

Thanks. Good morning, guys. Hey on the loan front, you had talked about and in fact realize it's an excellent amount of pure re-growth, and I'm wondering if you can talk through where are you seeing that some other peers have talk about a little bit of pullback you guys are very strong in the business and you are seem to be accelerating. Where you seeing the best opportunities and what's your execution to that type of growth can continue?

Darren King

Ken, good question. If you look at our CRE book and where the growth is coming from there's a couple of things. So one I’ll remind you we made a - we commented that our commercial mortgage banking division that is more an origination in servicing business had some higher balances and help for sale at the end of the year which elevated that number a little bit. So we've got a bit of factor down the growth rate linked quarter to account for that.

And then when you look at where our growth is coming from in CRE in the third quarter - sorry in the fourth quarter, we saw most of our growth come from non-construction was more traditional CRE. However our construction balances grew in the fourth quarter from projects that we had agreed to finance earlier in the year and obviously as those projects come online and things happen then the balances grow and that's what's driving the growth in construction.

When we look at where it is, it's on a percentage basis, it's just proportionately New York City and New Jersey, New Jersey obviously because we're building our franchise there, so it's off a low base and then in New York City because it tends to be bigger projects. When we look at the types of projects that we're doing there, it's ones with customers that we've had a long relationship with, ones where they have lots of equity in the deal where the loan to values are very, very strong. So we feel pretty good about it.

We're not seeing as much in the retail space or the office space built on there, but kind of the places where we’re seeing our growth and the types, structures that we're seeing. So we’ve been changed our credit philosophy, it's still the same, I mean it’s generally we're dealing with customers that we have a long relationship with.

Ken Usdin

Okay, and a broader question just on your mid-single-digit net outlook for loans and you kind of give us a little bit of the color that you'd expect a little slowing on the runoff part. So just wondering if you can kind of parse that apart because if you think about that I would imply still getting run off you’re expecting still more than mid-single on the commercial side, and so do you expect more that to come from the C&I side then if you're slowing here, do you expect to slower rate of growth on CRE or is it actually a lot of slowdown in the mortgage runoff?

Darren King

It's probably both. We're expecting a pretty decent slowdown in the mortgage runoff based on where the - how the curve has moved since the election. And when we think about commercial balances, in general we expect them to both slowdown probably slightly bigger slowdown in CRE then C&I in a better balance than that what we might had in 2016 but just given where our knowledge bases and where our customers are, we think that CRE probably just slightly above C&I in 2017.

Ken Usdin

Okay, thanks Darren.

Darren King

Okay.

Operator

Your next question comes from the line of Geoffrey Elliott of Autonomous Research.

Geoffrey Elliott

Good morning. Thank you for taking the question. Another one on loan growth, I guess you talked quite bit about CRE bit of be interested in C&I as well. And then any broader observations, it just feels like most banks if you look at the industry days there or if you look at banks which have reported have had quite slow loan growth in the fourth quarter and you've been a real exception so and particularly if you strip out the Hudson City portfolio. Why do you think that is, what do you think you are doing differently or is different about your portfolio that’s allowing you to grow when other banks are growing much more slowly?

Darren King

I guess when I look at what we think is happening with other banks loan growth, clearly on the CRE side, we've got a relatively unique approach to how we operate in that space and our philosophy there has been to follow our customers, and people we've done business with for a long time and they move in and out of the market and we move with them and they've been active.

And the C&I side, our philosophy isn't much different and that we've always been a relationship based bank and that we try and help our customers grow. When we look at across the geographies, when I look at C&I growth by region, we don't have any one region that's a particular standout in terms of where the growth is coming from. Again you might see from a percentage basis, a little disproportionate growth in New Jersey, but it's off that small base not really any particular industry when I look at and just got through there and get - if I can get the number when I look at where we think that are growth rates were versus the other guys.

Operator

Your next question comes from line of John Fox with Fenimore Asset Management.

John Fox

Hi, good morning, everyone. I’ve got two questions. First Darren, is there are other opportunities to buy additional securities that you feel like you are through that process of deploying cash?

Darren King

We feel like the place where we are now is where we've got the securities book that we anticipate that whatever cash should had come off earlier in the year that slowed down on reinvesting we've put back to work now and then we would look to kind of maintain whatever comes off, we would reinvest it, but not to do any more.

John Fox

Okay great. And then go back to the buyback. Given the large increase in the stock price over the last couple months just how do you guys thought about that in terms of the price you're paying and the capital ratios and just how you thought about the buyback with the higher stock price? Thank you.

Darren King

So the buyback as we mentioned before when we looked at, when we saw the volatility in the market post-election and things were going, there was lots of daily movements and large movements which is very uncharacteristic for a bank stocks. We just wanted to step aside and watch what was happening and see what we think was being reflected in the pricing and how our stock was moving vis-à-vis other peers and how we were performing versus the S&P 500.

And when we look at where we are now things have stabilized and settled down and now we trade versus our peers. We think we understand where the value is and what the valuation is and we feel comfortable that it makes sense to be back in the market and returning that excess capital to our shareholders.

John Fox

Okay, thank you.

Darren King

Just before we go on just to come back to the question Ken, I feel like we finish the answer on C&I and CRE. When we look at our C&I growth overtime, we tend to be a little bit higher than the market when things slow down a little bit lower than the market when things get busy. And if we look over 2014 and 2015 our growth rate C&I was actually half of what the market was and in 2016 we were a couple percentage points higher than the market, but not anywhere near our overall highs.

So much like our earnings and our credit originations also don't tend to exhibit a lot of volatility, but relative consistency and again what drives that is that our focus is always on supporting the growth of our customers and following them and that's what kind of gets you some of that consistency through time and you don't have big peaks and valleys in your originations.

I guess if you look over long periods of time that's kind of what we see and that's how we would respond to what's going on in the C&I space. CRE is not dissimilar, but it does tend to have a little more volatility in it just I think because of the size of the deals that get done that you can have big movements up or down.

Operator

Your next question comes from line of David Eads of UBS.

David Eads

Hi good morning. Maybe kind of touching on the loan growth point, do you have any comments on kind of how the conversations with clients have gone and your optimism about back half of the year and what and you could be there. And I guess particularly in expanding to New Jersey, do you feel like you're better position for that or is it just kind of similarly positioned to capitalize on any kind of uptick in demand?

Darren King

So I guess a little - I'll start with the question about optimism. So we survey our customers a couple times a year. And we actually had our fourth quarter customer survey going on during the election, and what's fascinating is we could look at the customers that had responded before the election results and those after. And in our own customer base the optimism jumps by six to 10 points after the election versus before the election.

And when we would ask our customers what was their biggest issue or hold back in investing it was business regulation, employee benefits, and access to people meaning qualified labor to grow their business. So those would be the things that were kind of on the minds of our customers when thinking about expansion and looking for lending it's not really been about access to capital or pricing.

When we look at New Jersey in particular we feel like we're in a good spot because we've been building out our own population in New Jersey and over the last couple years they've had the opportunity to put deals through our credit shop and start to understand our credit appetite how we price deals, how we structure deals, and just how we think about customer relationships. And I think that that philosophy and that culture starting to take hold there, and we can see it in the pipeline and we can see it in the type of deals that we're doing. So we feel like we're ready to respond to that marketplace and ready to do business.

David Eads

Great. And then may be if you could touch on credit just a little bit, you’ve had a little bit of lumpiness on the commercial side both in 3Q and 4Q here. I mean just this is kind of typical lumpiness just with credit not being all getting better or is there something you know should we expect more of this lumpiness to continue?

Darren King

Well I guess commercial by definition is going to be lumpy. I think the fact that we're at the very best time in the credit cycle, and the non-accrual portfolio in the charge offs are still low that anyone deal going bad is disproportionately affects that number in the growth rate. So there's always going to be some lumpiness as we come off the lows in terms of charge offs anyone deal is going to exacerbate that number. But overall when we look at the quality of portfolio, we look at delinquency rates, we look at where there are none of rules are? There is nothing that is giving us pause for concern when we're looking through the book.

David Eads

All right, thanks.

Operator

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

Ken Zerbe

Great, thanks. Good morning. I’m just following on the credit side a little bit. So provision higher this quarter totally makes sense to saw the $12 million commercial lumpiness did you just pointed out. But you also made a comment there that said that provision was higher just as you sort of remix the portfolio more towards commercial version in less on the resi side. So I guess when we think out towards 2017 does provision remain at kind of these higher levels versus what we saw say during 2016 even if charge offs remain serving that whatever the high teens low-20s basis points? Thanks.

Darren King

Sure. So I think from a provision perspective charge-offs will follow along based on non-accruals and delinquencies and obviously many of those will turn in charge-offs, but we don't see the meaningful acceleration in the rate of charge-offs, when we look at where the charge-off rate has been for last three years it's been relatively stable in that 18 basis points, 19 basis point range, but we know the long term average is higher than that, it's double that almost. So given where we are in the cycle it's got to start to move up a little bit.

And the access provisioning side it's going to be a functional loan growth, and given the long growth that we had in 2016 compared to 2015 and how skewed it was towards commercial balances that's what's going to that's what drove that excess provision on the overall. When we think about 2017 we think that the growth rate in some of those portfolios slows down a little bit, which means that that excess provision should slow down a little bit as well and then the only question is what happens with charge-offs as the year goes on.

Ken Zerbe

Gotcha. So I want to read too much into of a maybe I'm making too bigger deal over the portfolio mix from commercial versus resi, I mean I get it growth in line with longer and totally makes sense. But it's a far bigger driver than the mix between the two?

Darren King

In the near term mix that that's the bigger driver, yeah.

Ken Zerbe

All right. Okay, thank you.

Operator

Your next question comes from the line of Matt O'Connor of Deutsche Bank.

Ricky Dodds

Hey guys. It's actually Ricky Dodds from Matt’s team, just wanted to ask a quick question on the tax rate. It came in a little bit lower than previous quarters and trying to see provide some color there and then perhaps if you can provide an outlook for the tax rate 2017?

Darren King

Sure. So the tax rate of fourth quarter was really a function of a lot of our employees exercising stock options that we’re going to come do in this month and next year. I think a lot of people saw the run up in the stock and better take advantage of it, and we had an abnormal high level of selling, which led to its called as a disqualify disposition which the bank gets a tax benefit from that that was worth about 1% from the fourth quarter unless that continues we would anticipate the tax rate goes back to what we've seen through time in the first quarter and throughout 2017.

Don MacLeod

Just to clarify that's 1% on the tax rate.

Darren King

Thanks Don.

Ricky Dodds

And then maybe a quick follow up to that question on corporate tax rates in general and the potential cuts. Can you guys talk a little bit about what would be sort of the net impact to M&T if we did see a change to the corporate tax rate?

Darren King

So I guess that depends on what the changes, but based on the work we've done when we look at any change in tax rates, we think that whatever the changes the vast majority of it not all of it, but the vast majority of it would fall to the bottom line.

Ricky Dodds

Got it, thanks guys.

Operator

Your next question comes from the John Pancari of Evercore.

John Pancari

Good morning. I want to just go back to the margin quickly, want to see what you're seeing in terms of a deposit data at this point from the coming off the December hike and then what you would - where you would expect that data to the trend for the incremental hikes that you could see this year? Thanks guys.

Darren King

So far the deposit base as we've seen are very low sub 10% or even sub 5% when we look very similar to what we saw based on the rate hike that happened at the end of 2015. As we go forward we expect that those rates are going to start to move up, but how quickly they move up. We think is a function of the pace of the movements by the Fed. So if the Fed makes one more move this year that's in the middle of the year, we think the data will still be fairly low compared to historical averages if the pace of rate increases by the Fed accelerates. We would expect to see those data start to move up.

John Pancari

Okay, all right, got it. And then separately on the expense side, just looking at operating efficiency and you're in that 56 to 57 range now maybe 56.5 I guess for the full year 2016. Can you just all things considered give us an idea of where you think that could fall out for full year 2017 and if you could see incremental improvement from where we’re right now? Thanks.

Darren King

Sure. I think if you look at our efficiency ratio and you actually look at it over the course of the last few years, it's been within a pretty tight range 55 to 57. You know when we think about the efficiency ratio we think about it as an output as opposed to a number that we per se try to target. We want to run each of our businesses as efficiently and as profitably as we can, and depending on that mix of business the efficiency rate and efficiency ratio can move up and down. So as we grow our mortgage servicing business or our wealth business those tend to be higher efficiency ratio businesses, but higher return on equity businesses as well.

So depending on the mix change also converting a thrift to a commercial bank, commercial banks running at higher efficiency ratio than thrifts, so those are some of things that will pressure that number up. We think we've help to improve or get some control on the expenses which should help it from going further up and then depending on what happens with rate increases. Rates will give us relief on the other side. So long winded way of saying I think we're in the range that we've been in we should be within that range through 2017 and I would expect to be towards the lower end of it.

John Pancari

Lower end of the 55 to 57?

Darren King

Yeah.

John Pancari

Okay, got it. All right thank you. That’s it from me.

Operator

Your next question comes from the line of Matt Burnell of Wells Fargo.

Matt Burnell

Good morning. Thanks for taking my question. Just one I guess follow up. On the capital side I understand your reasoning on the on the buybacks, but it look like you had an increase in AOCI this quarter from the third quarter close to $200 million which seems a little counterintuitive given the rise in rates. So can you give a little color as to what's going on there?

Darren King

Yeah that’s basically the mark-to-market on the mortgage backed securities that are in the securities portfolio with the change in interest rates.

Matt Burnell

Okay, okay. And then you mentioned your outlook for sort of flattish fees outside of the mortgage businesses, but I guess I'm just curious in terms of if we do get a greater increase there a phase of increase in interest rates, and then maybe just the one that we're all expecting in the middle of the year. Does that benefit the brokerage services? Does that benefit that the trust fee sorry in terms of the potential revenue growth there?

Darren King

Maybe slightly, but nothing that were not enough it would materially change our forecast on growth. I think there's some upside left of very, very small in waivers on some of the funds we should see most of that. We saw most of that with the first like we should see a little bit this year, but nothing that will materially change the growth trajectory.

We do have some of those businesses and associated with Wilmington Trust where we might get paid if you will and balances compared to fees and if rates go up people would not choose to hold those balances with us. They would tend to pay us with fees and part the balances somewhere else, so that would be something that would help move those - move the fee income up. But will it change the rate materially the 25 basis points change that growth rate materially. We don't expect that to happen.

Matt Burnell

Thanks very much, Darren.

Darren King

No problem.

Operator

Your next question comes from the line on Gerard Cassidy of RBC.

Gerard Cassidy

Thank you. Good morning, Darren.

Darren King

Good morning, Gerard.

Gerard Cassidy

Question for you over the years M&T has done a very good job of managing their capital obviously post the crisis things have changed, but in this most recent quarter you reported that you CET1 ratio is now 10.96%. Can you share with us what you think the ideal rate should be for M&T, and time that into push the very like strong likelihood that banks under $250 billion in assets in the upcoming CCAR are going to be relieved of the qualitative portion of the test which may enable you and your peers to even ask for more return of capital, I know you've been very good at doing that, but possibly even lifting it higher than levels achieved last year for you folks?

Darren King

Sure. So we did see an uptick in our CET1 ratio in the fourth quarter as we slow down the buyout it just served for me as a powerful reminder of our ability to generate capital as a bank and to move those numbers and it shows you how much we need to give back just to keep that number relatively flat.

If we look at our CET1 ratio when we do our work obviously we think we're carrying excess. Let me look at where that ratio is compared to our peer group or at the top end of that, I think from some of the work that we've done and shared at some of the conferences that range tends to go from 9.5% up to the high 10s and low-11s who sits in those buckets tends to vary a little bit from time to time, but the top and the bottom doesn't change that much.

And as we've said before we would think based on our credit profile and our losses through that we should be operating at the bottom end of that range. And it would be our objective to continue to do our work on CCAR to continue to do our work on CCAR to show the regulators that we can comfortably operate at that range and we continue to push it down.

As far as the impact of the qualitative fail being off the table, and I think we're still trying to figure out what exactly that means, there will still be supervisory reviews that will happen as part of the regular examination process. So there will still be looks into our process doesn't mean that you couldn't have a problem from your process it just would be public as the quality fails are. But we're happy that it's off the table, and we think it will start to move the industry towards pushing those levels down and we would look to do the same.

Gerard Cassidy

Very good. And then as a follow up, obviously the Hudson deal closes at the end of 2015 you consolidated that of course into existing M&T is existing M&T footprint. As you look forward over the next 12 months maybe 18 months, is there any plans for branch rationalization that’s firstly with the increased use of digital - in the digital channel for delivering retail products should we see maybe net basis more branch closures over the next 12 months or so?

Darren King

I think that's a reasonable expectation. One of the things that has happened actually over the last five years as we've been steady consolidators of branches, we just haven't ever had a big program that we've announced with that it's just part of how we run the bank to manage to our to be as efficient as possible.

If you look back over time from when we did our Provident acquisition our Wilmington Trust and then ultimately you'll start to see it with Hudson City that the rate of branch decrease versus what we acquired, we've been steadily pruning the network and we look at it on an annual basis we look at which of our branches are most coveted by our customers, as an industry we're lucky they vote every day with their feet, and we're able to see based on their transaction behavior, which ones are most important, and we're always looking at which locations people are using for sales and service and for ones that are becoming less relevant, we're not shy about closing them.

So a little bit of a long winded answer, but it's part of our D&A and part of how we've always run the bank and you know as these behaviors of our customers change we're addressing our network at the same time.

Don MacLeod

I can just bring the couple of numbers behind that. Immediately after the Wilmington deal we peaked at 781 full service branches. And in the last quarter before the Hudson deal we were at 684. So down just over about 100 over a four year time frame and then obviously Hudson brought it back to back up with another 135.

Gerard Cassidy

Great. Thank you Don, and thank Darren as well. Thank you.

Darren King

No problem.

Operator

Your next question comes from the line of Peter Winter of Wedbush Securities.

Peter Winter

Good morning. I was just wondering, can you talk about the new account prove that you are seeing this quarter, again what the disruption in the markets from the acquisitions?

Darren King

Sure. When I look at the account growth we had in the fourth quarter was still very strong compared to what we saw in the fourth quarter of last year, but tailed off compared to what we saw in the third quarter. When I look at the third quarter account growth, my focus just on Western New York or upstate New York rather, our account opening doubled in the third quarter compared to what they were in the second quarter and then they came back down not all the way down to the second quarter but just slightly above it in Q4.

So what tends to happen when there is a changeover and your market places when the branches change signs and when the customers get new statements and get new systems that they have to deal with that’s what pushes people over the hedge and that’s when you see the most activity in the market place. That’s why when we talked over the quarters about our investment we made in marketing in our geographies in those time periods that’s why we did it. Then - and we saw - we saw the results that we expected. And - but we’ve seen things slow down a little bit from those highs in the third quarter which we also expected.

But four quarter is traditionally a slower account opening quarter. Note the time between Thanksgiving and New Year is usually a time when people are thinking about things other than banking but there is still some and when we look at how our fourth quarter numbers were, they were up over to fourth quarter last year, so we are pleased with that.

Peter Winter

Okay. And then - thank you. And just a quick follow-up. What left with satisfying the written agreement and do you think it would get satisfied this year?

Darren King

So the thing that we’re finalizing is something it’s called low risk customer remediation. So when you look at the risking the severe portfolio of customers, you categorize them into high medium and low based on a number of factors and then you are looking to capture additional information from those customers to confirm that they are in fact as risky as you believed.

We are anticipating completing those activities end of the first quarter early second quarter of this year and those would be the last parts to satisfy all the components of the written agreement. And of course once you’ve done that then you need to have your internal audit review that and then your regulators can come in and determine whether or not you’ve satisfied all the requirements and on and ask us for more information or to do anything else.

We’ve been getting feedback all the way along on how we’ve been doing in satisfying the terms of that agreement. Everything’s been going great. We think we’re well on track on that but the timing of - the timing of when we expected to finish our work is fairly certain. The timing on when we might get an opinion on whether we’ve actually satisfied or not to from the regulator’s perspective, the timing on that’s a little bit less server.

Peter Winter

Okay. But you think the compliance costs are first quarter would then, would be the peak?

Darren King

They probably as it relates to the agreement peaked probably ‘15 maybe even late ‘14 you know that these activities are now baked into our BAU. And that the real big cost that we incurred as a result of the agreement was kind of the onetime setup cost to build our risk ranking model to build some of the infrastructure that we needed to support these activities. We would have seen most of that stuff in 2014-2015 and that’s really not been there as much in 2016 and 2017. This is now part of life you know looking at this customer information and refreshing it and updating it is now just part of what we do on our go-forward basis and we’ll be doing every year. So it’s not material.

Peter Winter

Okay, thanks very much.

Operator

Your final question comes from the line of Chris Spahr of CLSA.

Chris Spahr

Thank you. I was just wondering about your philosophy on charitable giving and what the incentive was at this quarter, was it strictly just linked to the gain on sale in the prior quarter?

Darren King

Pretty much that’s what it is. I mean we obviously - we have a charitable foundation that we fund regularly. We were very philanthropic in our communities across all of our geographies and we look to fund that generally if we get what we consider win fall profit we all try to share that with the communities in which we do business.

Chris Spahr

And one final question, regarding long term debt, what is your view on long term debt as a percent of total funding and have we seen the kind of return over the portfolio to date or is there some more work to be done to the less where the cost of funds there?

Darren King

Well there is probably some turnover that’s going to come in 2017 because we have some funding that’s going to come due and we’ll be doing some issuing there. What we’re finalizing is when we will do it and how much we will do and what the structure will be you know exploding to manage the total cost of funds and we’re also looking at what the mix of funding is on the balance sheet depending on how things go with deposit, volume, with the rate changes that are happening. So we expect to see some turnover in the portfolio in 2017 though we got a replace things are coming due and we expect that will be largely doing that and not much more.

Chris Spahr

Thank you.

Operator

Gentlemen, are there any closing remarks?

Darren King

Again, thank you everyone for participating today. And as always if there are clarifications of any of the items on the call or news release is necessary, please reach out to our Investor Relations department at 716-842-5138. Thank you and good bye.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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