M&T Bank Corp (MTB) 2017 Q2 法說會逐字稿

Welcome to the M&T Bank Second Quarter 2017 Earnings Conference Call.

It is now my pleasure to turn the floor over to 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 Second Quarter 2017 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 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.

Thank you, Don, and good morning, everyone.

As we noted in the earnings press release this morning, we're quite pleased with M&T's results for the second quarter. Further actions by the Federal Reserve to raise short-term interest rates back in March and more recently in June led to further expansion of our net interest margin by some 11 basis points, which, in turn, contributed to 3% growth in net interest income, both of those compared to the first quarter. Compensation expense declined from the seasonably high levels we typically see in the first quarter of the year and overall expenses remain well-controlled. Credit costs continue to be stable and nonaccrual loans declined slightly. We substantially completed our CCAR 2016 Capital Plan with continued repurchases of common stock during the second quarter and received no objection from the Federal Reserve as to our CCAR 2017 Capital Plan.

Let's have a look at the numbers. Diluted GAAP earnings per common share were $2.35 in the second quarter of 2017, up 11% from $2.12 in the first quarter of 2017 and up 19% from $1.98 in the second quarter of 2016. Net income for the quarter was $381 million, up 9% from $349 million in the linked quarter and up 13% from $336 million in the year-ago quarter.

Recall that the results for the first quarter of 2017 reflected the impact from new accounting guidance for certain types of equity-based compensation resulting in a tax benefit of $18 million or approximately $0.12 per common share. The impact in the recent quarter was not significant.

There were no merger-related expenses in either the first or second quarter of 2017. However, results for the second quarter of 2016 included merger-related charges amounting to $8 million after-tax effect or $0.05 per common share.

Also included in GAAP results in the recent quarter were the after-tax expenses from the amortization of intangible assets amounting to $5 million or $0.03 per common share, little change from the prior quarter. Consistent 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 second quarter, which excludes intangible amortization and merger-related expenses from the relevant periods, was $386 million, up 9% from $354 million in the linked quarter and up 10% from $351 million in last year's second quarter.

Diluted net operating earnings per common share were $2.38 for the recent quarter, an increase of 11% from $2.15 in 2017's first quarter and up 15% from $2.07 in the second quarter of 2016.

On a GAAP basis, M&T's second quarter results produced annualized rate of return on average assets of 1.27% and an annualized return on average common equity of 9.67%. This compares with rates of 1.15% and 8.89%, respectively, in the previous quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.33% and 14.18% for the recent quarter. The comparable returns were 1.21% and 13.05% in the first quarter of 2017. 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.

If we turn our attention to the balance sheet and income statement, taxable equivalent net interest income was $947 million in the second quarter of 2017, improved by $25 million from the linked quarter. The net interest margin improved to 3.45%, up 11 basis points from 3.34% in the linked quarter.

As was the case last quarter, the single biggest factor driving the wider margin accounting for an estimated 9 basis points of the increase was the Fed's actions to increase short-term interest rates, with the late March action reaching its full run rate during the quarter and, to a lesser extent, reflecting the increase in mid-June. The average balance of funds placed on deposit with the Fed declined by approximately $1.4 billion from the first quarter, reflecting lower levels of deposits received from trust clients engaged in capital markets transactions as well as lower levels of escrow deposits received in connection with our mortgage banking operations. We estimate that these factors produced a benefit to the margin of approximately 4 basis points.

Offsetting these factors were several other items, including continued core margin pressure. These items, in aggregate, amounted to approximately 2 basis points of pressure.

Average loans were essentially flat compared to the linked quarter. Looking at loans by category on an average basis compared with the linked quarter, we saw commercial and industrial loans up approximately 1% on an annualized basis. Commercial real estate loans were roughly flat. Residential mortgage loans continued the planned runoff at a 16% annualized rate, consistent with our experience in the prior quarter. Consumer loans grew an annualized 8% with growth in indirect auto loans and seasonal strength in recreation finance loans offset by lower home equity lines and loans. The growth in consumer loans includes the benefit from approximately $130 million of auto loans that came back onto our balance sheet in the middle of the first quarter following the dissolution of our auto loan securitization.

Regionally, we're continuing to make progress in New Jersey with good growth numbers on what is still a fairly modest base and, in line with total loans, growth on the commercial side was subdued in most other regions. Pennsylvania was particularly soft on the C&I side, but was above average in CRE volume.

Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, declined by some $2 billion from the first quarter, reflecting the lower balances of trust and mortgage escrow deposits as well as the continued runoff of time deposits acquired with Hudson City.

Turning to noninterest income. Noninterest income totaled $461 million in the second quarter compared with $447 million in the prior quarter. Mortgage banking revenues were $86 million in the recent quarter compared with $85 million in the linked quarter. Residential mortgage loans originated for sale were $770 million in the quarter, up approximately 6% compared with the first quarter. Total residential mortgage banking revenues, including origination and servicing activities, were $61 million compared with $58 million in the prior quarter. The higher origination volumes and a wider gain on sale margin contributed to the linked quarter increase. Commercial mortgage banking revenues were $25 million in the recent quarter, down slightly from the prior quarter. Trust income was $127 million in the recent quarter, up from $120 million in the previous quarter. The increase included approximately $4 million in fees earned in connection with helping trust clients prepare their tax filings. Service charges on deposit accounts were $106 million, up $2 million compared with the first quarter, primarily reflecting higher levels of customer activity.

If we turn to expenses, operating expenses for the second quarter, which include the amortization of intangible assets -- or sorry, which exclude the amortization of intangible assets, were $743 million compared with $779 million in the previous quarter. Salaries and benefits declined by approximately $51 million from the prior quarter, the majority of which reflects a return to a more normal run rate following the first quarter's seasonably high factors that I previously mentioned.

Most expense categories remain well-controlled with the exception of other cost of operations, the increase of which reflects higher legal-related and professional services expenses, and these are likely to remain slightly elevated through the remainder of 2017.

The efficiency ratio, which excludes intangible amortization and any merger-related expenses from the numerator and securities gains from the denominator, was 52.7% in the recent quarter. That same ratio was 56.9% in the previous quarter and 55.1% in 2016's second quarter.

Next, let's turn to credit. All of our credit metrics are indicating that we remain in the benign part of the credit cycle. Nonaccrual loans decreased by $54 million to $870 million at June 30 and the ratio of nonaccrual loans to total loans declined by 6 basis points to 0.98% compared with the end of the first quarter.

Net charge-offs for the second quarter were $45 million compared with $43 million in the first quarter. Annualized net charge-offs as a percentage of total loans were 20 basis points for the second quarter, up slightly from 19 basis points in the first quarter and in line with what we've seen on average over the past 3 years.

The provision for credit losses was $52 million in the recent quarter, exceeding net charge-offs by $7 million. The allowance for credit losses was $1 billion at the end of June. The ratio of the allowance to total loans increased slightly to 1.13%, reflecting a modestly higher proportion of commercial loans on the balance sheet.

Loans 90 days past due on which we continue to accrue interest, excluding acquired loans that had been marked to a fair value discount at acquisition, were $265 million at the end of the recent quarter. Of these loans, $235 million or 89% are guaranteed by government-related entities.

Turning to capital. Over the quarter, we completed our CCAR 2016 Capital Plan, repurchasing $225 million of common stock that remained under the plan and the board's repurchase authorization. Those repurchases, net of retained earnings combined with the reduction in the balance sheet and, in particular, risk-weighted assets during the past quarter, brought M&T's Common Equity Tier 1 ratio, under the current transitional Basel III capital rules, to an estimated 10.8% compared with 10.67% at the end of the first quarter.

As previously disclosed, our CCAR 2017 Capital Plan includes up to $900 million of share repurchases over the 4-quarter period beginning July 1, 2017. In addition, the plan contemplates a $0.05 per share increase in the common stock dividend in the second quarter of 2018, subject to declaration by the board in the ordinary course of business.

Turning to the outlook. Halfway through 2017, our outlook has little change from what we expected at the beginning of the year. We've had 2 rate actions from the Fed this year, which have had a significant impact on the net interest margin in which have led to stronger-than-expected net interest income growth. On the other hand, loan growth that we've seen has been less than we expected.

For the year-to-date, average loans are up just under 2% compared with the first half of 2016. On that same basis, but excluding the impact from the runoff in residential mortgages, average loans increased 8.4% over the first half of 2016.

At present, we don't see lending conditions being materially different in the second half of 2017 from what they were in the first half. We continue to expect average loans for the current year to be up in the low single digits versus 2016 with continued pay-downs on residential mortgage loans offset by a modest growth, year-over-year, in commercial and consumer loans.

The implied forward curve doesn't show any further rate actions by the Fed until late in the year. Given that, we expect more modest expansion of the NIM from the current level and more modest growth in net interest income than we saw in the first half of the year. We see the potential for some pressure on margin in the second half, including loan spreads and the impact from refinancing some of our long-term debt.

The outlook for the fee businesses is little changed. While we expect modest growth in mortgage banking revenues, we'll be pleased to match the strong results we saw in the second half of 2016, particularly on the commercial side. We continue to expect growth in the low to mid-single-digit range for other fee categories.

Our expense outlook is also unchanged. We continue to expect low nominal growth in total operating expenses in 2017 compared to last year and, as I noted, professional services, including legal-related costs, are likely to remain elevated through the end of the year.

Our outlook for credit continues to be little changed from recent trends, but as we have indicated in prior quarters, credit has been benign for several years and that we continue to view credit as more of a downside risk than an upside opportunity.

As to capital, given our strong operating performance and solid capital ratios, we expect to begin execution of our 2017 Capital Plan shortly. You may have seen our 8-K filing yesterday noting that the board has authorized a new buyback program in connection with the 2017 CCAR Capital Plan.

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

Now let's 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 Usdin of Jefferies.

Darren, I was wondering if you could just expand on the loan growth side. C&I was down at period-end basis and I think you'd mentioned that CRE was slower and that overall growth has been slower than expected. So understanding you're still expecting a low single-digit average for the year, can you help us understand, just point-to-point growth from here, where you expect to grow, especially in the non-real estate runoff categories?

Sure. So let's just kind of walk through each of the categories to try and help -- give a little clarity to what we were expecting to happen. If we start with the nonresidential real estate consumer loan side and you look at where the growth has been, it's been primarily in indirect, both in auto and rec fi, and those growth rates had been pretty consistent over the first half of the year and fairly consistent with what we saw in 2016. So we expect those trends to continue. In our rec fi, it was a little high in the second quarter, which was fairly typical given that it's boats and RVs and that tends to be the time of the year when people are looking for those kinds of vehicles. When we -- in residential real estate has been in a rundown mode since we acquired the Hudson City portfolio and the rate has averaged kind of 14% to 16% a quarter and we foresee that continuing. When we look at the commercial real estate part of the balanced sheet, it's been relatively flat this year and there's a couple of things that are going on within the portfolio. Notably, some of the construction balances that we originated in late 2014 and 2015, those projects have kind of come to completion and are converting to permanent and, oftentimes, the permanent financing is something that happens outside of the bank. So we're seeing a little bit of a shift in the commercial real estate balance mix, a little bit away from construction towards more permanent, and that shift is leading us to be more flat in terms of where those balances have been for the first half of the year, but the mix is helpful from a risk-weighted asset perspective. On the C&I side, what we've been seeing is slow growth and it kind of bounces around a little bit within the quarter. When we look by industry, we don't see any industries that stick out really positively or negatively. And when we look by geography, we're not really seeing anything that sticks out positively or negatively. What I think we're seeing or what, I guess, the feedback that we receive when talking to our customers about their thoughts, the word that I always come back to is uncertainty. And the thing that is on everyone's mind or appears to be is when will we have some direction out of Washington on several factors. When we talk to health care clients, for instance, which we do a lot of business in skilled nursing facilities, the Affordable Care Act is at the front and center of their thought process and the uncertainty of which direction it might go is leading them to pause before making any investments so that they know what they might be able to expect from a cash flow perspective before they take on new debt and consider expansion. When we talk to manufacturing clients, we see some interest in expansion. Their first priority would be to grow by maybe adding some capacity through second shifts or additional labor, but the labor markets are tough for them to find skilled workers. And they're reticent to invest in new equipment at the moment, again, given the uncertainties around where the economy is going. So that's kind of the background to our outlook. And we're not dire on the economy by any stretch, but I'd say there's some uncertainty and some cautiousness that when we look at the balance sheets of our customers and you saw it in our credit performance metrics, the businesses are very healthy. They're still more optimistic than they were at the start -- or at this point last year, maybe it's come down a little bit since the election highs, but it's still generally optimistic. They're just waiting for a little more certainty before they make any decisions and those companies that are investing are leaning more on their cash, which are -- have been at all-time highs in their business rather than taking on new debt. So until we get some -- a little bit more certainty out of Washington, I think we're likely in this spot for a little while longer and that's what is reflected in our comments. We think that the C&I will be a slow growth part of the portfolio over the next couple of quarters.

Great color there. And just one quick follow-up on overall size of the balance sheet. You mentioned all the escrow deposits and the securities-related stuff. Would you say that the average for this quarter was abnormally low, just given the size of the balance sheet shrunk by a few billion? And how would you just explain that episodic nature of them?

Sure. When you look at some of the components in those Fed balances and you start to see it also in the deposit balances on the other side of the ledger, you've got some volatility in some of the escrow balances as well as in what we call trust demand deposits, which are a function of some of the M&A activity that's going on in the market place. And those 2 sets of balances will move around a little bit as activity -- M&A activity shifts as well as our mortgage servicing customers look at their debt balances and try to manage their interest income. So you'll see a little bit of volatility in those. When we look at where the cash balances were this quarter, that's probably in the right range as we go forward, but they will tend to move around. I'll remind you that at this point last year, they were over $10 million. We've seen them move around and come back down into what we consider a more normal range over the course of the first half of this year. And as we go forward, my best advice is to think kind of in the $4 million to $6 million range and those things can move around a little bit within that spectrum.

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

I was just hoping to follow-up on the outlook for the NIM. I think you said something about -- first, you said modest NIM expansion back half of the year, but then you said there could be some NIM pressure from issuing long-term debt and some other moving pieces. So I was just hoping to flesh that out in terms of what specifically you're pointing to at the back half of the year on the NIM.

Sure. So we haven't seen the full benefit of the June hike in the second quarter's NIM. So there is some upside, we believe, we're projecting based on that increase, but it won't be the whole increase that we've traditionally seen. And we think that, that will be muted slightly by some pressure we see on loan margins as well as by the debt that we're going to issue. But overall, we expect some expansion in the margin in the third quarter and probably leveling off a little bit in the fourth, given that there are no rate increases projected until December.

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

I wondered if you could elaborate a bit on the CCAR ask on the buyback, down quite a bit on the previous year, but loan growth still feels like it's relatively subdued. So why not ask for a higher buyback and return capital outlay when growing the loan book is tough, given the Hudson City runoff?

Sure. Happy to elaborate on that, Geoff. And your thought process is very consistent with how we think about things. When we went into CCAR 2017, the expectations for the economy and for loan growth were a lot different than what they've proved to be over the course of the last 6 months and, clearly, over the last 3. So when we put our projections together and we put our baseline together, we're all given scenarios that you have GDP growth and unemployment forecast and, based on those, we project forward what we think our growth will be, both in loans and balances as well as interest income, fees, what have you, to calculate PPNR. And what I think has happened -- well, what I think has happened and what I know has happened is reality has had rate increases come faster than what was in those CCAR projections and loan growth is a little bit slower, which is creating more capital for us and for the industry. And if we had seen that information in those projections, then our asks certainly would have been different than what it was. We kind of expected that it would be down a little bit year-over-year just given the magnitude of the ask in 2016 because of this excess capital we are carrying as a result of the Hudson City acquisition. But overall, when we look at CCAR and how things went this year, we're actually quite optimistic in how things went. Obviously, getting our approval was a good thing, but when we look at some of the changes and how the Fed's models are working, in particular when you look at PPNR, we think they started to take a more company-specific approach to how they evaluate PPNR. And we saw our PPNR percentage of assets over the 9-quarter projection period go up and it went up pretty much more than anyone else in our peer group and, we think, reflects the consistent earnings that we've had and the low volatility of earnings that we produce. So that's a positive on a go-forward basis. And we also saw a decrease in the loss rates forecast on the mortgage portfolio. They're still high by our estimates, but part of what's in there is -- I know are serviced by other's portfolio where some of the information is harder to get and to provide as part of our submission, but that's a declining portfolio. So when we look at where we are, we see a lot of positives going forward that the PPNR puts us in a good position. Obviously, the margin increase and the capital that we're producing every quarter sets us up well. And the loan growth, we'd like to see the loan growth, but if it doesn't come them, we will -- that will also create capital that we will be able to distribute in the future. So overall, in our eyes, it was a positive outcome and we look forward to next year.

And then, in terms of use of capital, how far away do you think you are from being able to get back to M&A? Where do things stand with the written agreement?

So with regard to the written agreement, we're working with our regulators now to go through the work that we have completed and to make sure that it is 100% compliant with the terms of the written agreement and that we fulfilled all of our obligations, which we, of course, believe we have done. And we're just working through that with the regulators now to -- hope that they will agree with our assessment and we'll be able to have a positive resolution to that sometime this year.

Our next question comes from the line of Erika Najarian of Bank of America.

I'm wondering if I could just zoom out, Darren. You talked about an efficiency ratio target at the low end of your 55% to 57% range. Given that this quarter came in at 57 point -- I'm sorry, 52.7%, should we expect that, that efficiency outlook is still valid? Or could you fall below that range?

It's -- given where we've been for the first half of the year, it's probably likely that we will end up a little bit below the 55% range. This quarter was abnormally low. It even exceeded our own expectations. And I think there's a couple -- one primary factor there, which is deposit pricing just hasn't been as reactive as I don't think we or anyone in the industry thought, which really created a lot of net interest income and helped bring that efficiency ratio down. As we look forward, we believe at some point we're going to start to see that. It hasn't happened yet, but we'll start to see that. And as I mentioned before, we'll have a little bit of elevation in expenses off the second quarter number for some of the legal issues that we're working on. And the combination of those 2 things, I suspect, will have the efficiency ratio a little bit higher than where it was in the second quarter, but full year, we're likely to be below the 55 -- the bottom end of the 55% that we had talked about earlier in the year.

And my follow-up question is really sort of piggybacking off of Geoffrey's line of questioning. So you mentioned that the Fed is getting better at being more specific about its stress testing. You mentioned PPNR improvement and continued improvement in losses that actually reflect your risk profile. I'm wondering if your shareholders can look forward to the resumption of capital payout growth in 2018? And as you think about payout versus M&A, if you could give us some insight on the decision tree there, especially given where you're valued on a tangible book basis?

Sure. So all else equal, if we were starting the 2018 Capital Plan submission today, the distribution request would likely be higher than what it is or was in 2017 just given the fact that our capital ratios have gone up and that the net income -- or sorry, the PPNR production has also improved. And it's always been our philosophy in how we run the bank to put that shareholder capital to best use at a return above our long-term cost of capital. We typically want to invest that in the business, which is by growing the business. And then, after that, we look to distribute it to the shareholders through a combination of dividends and buybacks. When we look at M&A, we don't hold excess capital on the come, hoping that M&A will show up. We've always been successful at going to the market if we need capital to fund an acquisition and raising that capital because of our shareholder return focus and generally the positive financial nature of the deals that we've been able to do in the past. And we would expect that to continue. So when we look at where we sit from a capital perspective, we continue to target operating at the low end of the peer range in terms of our CET1 ratio, given our credit history and our low volatility of earnings, and put that money back to work, first, in the business; second, distribute it to shareholders; and then, as acquisition opportunities present themselves and if they are attractive from a financial perspective as well as from a strategic perspective, then we would put that money to work in an acquisition.

And just one technical question. When banks file their capital plan for the CCAR process, do you have to ask upfront that a deal is part of your strategy over the next 4 quarters? Or you -- that can happen outside of CCAR -- for most CCAR planning?

So the process is you would not put anything in the plan that wasn't definite. So in the plan, if you already had a merger agreement in place, then your CCAR plan would include the assumption that, that deal closed during the CCAR period. You would forecast the PPNR of the combined entity; you would forecast the charge-offs in the combined entity; and you would look at where your capital ratios are, assuming the 2 organizations were merged; and then, you would make your capital distribution request based on that. You wouldn't hold capital and put in a deal that isn't even on the table on the assumption that something might happen. It's got to be known. To the extent that a merger presents itself in the middle of the period, you would resubmit or provide an updated capital plan and kind of a mini CCAR, if you will, with your merger request.

Our next question comes from the line of John Pancari of Evercore.

On the -- back to the loan growth detail, but what I'm trying to get more info on is on the C&I decline in the end of period balances, what was that exactly attributable to? And then, when you look at where C&I, in isolation, could grow in coming quarters -- I know you indicated that there's several factors and it could be volatile. Are we looking at a similar low single-digit range for that as well? And I guess a similar question for CRE, given the current advancing factors you're seeing there.

So on C&I and when you look at what's going on with the balances within there, there's a number of components that are happening. One, when you look at credit lines and line utilization, we saw those cap out in the second quarter and start to flatten out, so people not drawing on the lines anymore is one thing. It starts to slow down the growth. I'll remind you that history has said that, in the third quarter, we tend to see a decrease in C&I balances because of our auto floor plan business that, as the model years changeover, you tend to see a decrease in the third quarter before the new model year start to show up on the showroom floor, which tends to increase in the third -- or fourth quarter, excuse me. And then, when you look more broadly at the -- at C&I, whenever, in any quarter and any year, there's a mix of pay-downs, payoffs and new originations. And when you see the decrease in loan balances, it's generally a function of the pace of new originations as opposed to you see a speed up in pay-downs. So when we look at the loan growth that we've had and what we foresee, it's not that we're seeing charge-offs increase that are bringing balances down or prepayment speeds increase, what we're just seeing is a more cautious attitude from our customers towards the future and originations being a little bit slower than what we had seen through 2016.

Okay. That's helpful. And on commercial real estate, given the volatility there and given the pressure or the shifting you're seeing from some of the construction credits now moving into permanent financing, that implies that you don't have the backfill happening with incremental construction growth and, therefore, front-end issue there as well. Is that likely the case and can that keep CRE flattish?

I think CRE will be flattish to slightly growing. It's obviously a function of activity and what's going on in the construction and real estate market in general. We did see a little bit of a slowdown in construction, at least with our customer base, over the last little while as they've been working on the projects that we had financed for them through 2016 and in the latter half of 2015. And if you look at where our growth was last year, particularly in the second half of the year, it was very heavy in CRE and in construction and our customers are busy with those projects and not taking on new business. Over time, those will come to pay-down and we've mentioned, I think, a couple of times that we'll flip into a more of a pay-down mode on the construction side over the course of the second half of 2017 and into 2018. And then, we'll see where new activity goes and whether it picks back up on the construction side or shifts more towards the permanent side.

Okay. And then, lastly, Darren, just around the deposit beta. I know you indicated that, so far, they've remained low. Can you just indicate where you've seen them post the June hike and where you expect they can move?

It's a great question. It's a tough one to handicap only because we're still in a territory we've never been in before and we all keep expecting that something is going to happen, but it hasn't. So on the side that says things will stay the way they are, you see bank loan-to-deposit ratios still below 100%. You see changes in the money fund industry and that alternative is still less attractive than it was and you see absolute Fed fund rates lower than they were at the end of the last time Fed funds were this low. So it's still a little bit of unchartered territory. On the side that you say we might start to see some movement, certain customers, especially large balance customers, will start to pay more attention to the rates that they're getting and we'll see a little bit of pressure there. But at this point, we still are expecting that betas will remain relatively low for one more hike at least, maybe 2. And in terms of where we're seeing any activity at all, it tends to be larger balance customers where it's more of a one-off conversation, where we're talking to them based on our total relationship being a relationship-oriented bank. And we see some movement on the consumer side, generally in the CD space, mainly in the one to 12-month term, some -- you see some kind of new terms coming up of 13 and 14-months from certain competitors and certain geographies. But overall, pricing has been fairly stable and we anticipate that it's likely to continue that way for the next little while. If you do see any increase in deposits, oftentimes they are customers who have an index-driven rate. And when you see the rates move, it's just because the index moved. But overall, still pretty quiet on the deposit front.

Our next question comes from the line of David Eads of UBS.

Maybe just a couple of kind of other topic. You mentioned a couple of times you guys have been growing in indirect auto. And I'm just curious what you guys are seeing from the competitive backdrop there? We've had some other guys kind of pulling out. Are you seeing that have an impact on pricing returns in that market? Are things getting better there?

It's a great question and it's something that we spend a lot of time looking at, given the nature of that business and how competitive it is and how good accessed information is from the dealer network about what others are doing. And we are aware of the pullbacks that we've seen from others in the industry. It's had relatively modest effect on our originations so far mainly because the space that we operate in isn't the super prime and it's not the subprime and it's not even really the near-prime. It's kind of the lower end of prime. I don't know whether there's such a category or not, maybe we're naming one here. But that customer base and that credit window that we've operated in has been pretty consistent for probably the last 3 or 4 years and the volume that we originate has also been fairly steady month-to-month and quarter-to-quarter. It can move around. If we average, let's say, $120 million a month, it can drop down to $100 million and it can go up to $140 million, $150 million, but we don't see it doubling in any month or quarter or shrinking and -- down materially below $100 million because that customer space where we're looking at FICO, we're looking at the vehicle itself and the term is a spot where we've been pretty consistent and our volumes have been pretty consistent as a result.

Great. And then, I don't -- would you -- you talked about the securities portfolio, but the yields went down sequentially, which is a little surprising to me, and you guys have talked about bringing down asset activity. And was that related in any way? I would have kind of expected that you walk some things in longer term in the securities line and at least a little bit more expansion. Can you just kind of walk through the dynamic there?

So on the securities portfolio, there's a couple of things. We slowed down a little bit some of the reinvestment of the cash flows that we're paying off from the mortgage-backed securities and we did a little repositioning of the securities portfolio to increase the percentage that is in Ginnie Maes in particular to improve the percentage that qualify as the top tier of high-quality liquid assets. And as we made that switch, you start to see a little bit of a movement in the margin because those tend to have a slightly lower coupon than the other asset categories, but there's no change that we made in terms of the duration of the portfolio and -- yes.

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

So Darren, just a follow-up question to what John had asked you about loan growth. And I know you said there wasn't any significant pay-downs you saw. It was more from an origination perspective. It was more muted on the origination side. I guess, is there any correlation to the big drawdown in the noninterest-bearing deposits and maybe some of those middle market customers are just accessing this excess liquidity versus trying to go out and take out a loan just to kind of fund their operations until they get more clarity from what's going on in Washington? Is that anything you're hearing from your customers?

It's -- definitely, we're hearing it from the RMs, Brian, but I -- if you look at the decrease in those deposit balances, the biggest drivers are really the escrow balances and the trust demand balances. There might be a little bit of it that's part of the phenomenon that you're referencing, but at this point -- or for this quarter I should say, that wasn't the biggest driver there. It was really more of the escrow and the trust demands.

Got it. And on the fee income side and the other miscellaneous fee income, it seems like it was up this quarter about 12 -- sorry, $6 million sequentially. Anything in there that's nonrecurring? Or anything that -- is that $117 million a better run rate to use going forward?

So when you look at that line item, Brian, there's a couple of things that were really driving the change quarter-over-quarter. One was loan fees. We had a fairly active quarter in our advisory and syndication parts of the bank. So we had a very strong quarter. And then, the other part of it is our investment in Bayview. And the -- over time, the carrying cost of that is now down to 0. So instead of that number being a negative in that other income line, it's now 0. So that one is definitely recurring and it will be around for a while. The loan fees, obviously we're hopeful that those will continue at that level, but obviously that moves around with the market.

Okay. So within there, the -- usually, the insurance income, you see a little bit seasonally softer in the second quarter? Or is that -- after a good first quarter, will the insurance revenues offset in there even though these other items were positive?

It wasn't materially different.

Okay. Okay. And just one last question on the deposit side with the time deposits. Again, you had another quarter of sequential decline in the rate pay-down time deposits. And I know you talked about the Hudson City remixing and repricing of that. I guess, how much more do you think should we see similar types of decline as we go into the back half of the year on the cost of time deposits?

So the rate of decrease should start to slow in particular as it relates to the margin. So when you look at what's in that book, slightly over half is less than a year in terms of duration, skewed towards 6 months and less. There's half of the book that we still need to reprice, but it will reprice over a longer time horizon because those were time deposits that we're carrying at 2, 3 and 5-year term on them and it's going to take the course of the next couple of years for those to reprice. So you've got a half of the book that has been repriced probably a couple of times already and is closer to market rates and then you've got the other half that will reprice, probably in equal proportions, over the next 3 years.

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

I just wanted to go back to the reducing some of the asset sensitivity that you've talked about in the past. Could you guys give an update where it stands today and kind of how it's going to trend going forward?

Sure. So if you look at the bank overall, we remain asset-sensitive. That sensitivity has come down a little bit in the second quarter and you'll probably -- you'll see that in the Q when it comes out that when you look at the impact of rates moving up or down 100 basis points, what you'll see is a slightly lower increase in net interest income when rates go up, but the offset of that obviously is that if rates were to drop, you'd see a slightly less smaller decrease in net interest income when rates go down. And really, what we were thinking over the course of the start of the year was that we had an extra hike that we didn't anticipate, I don't think anyone, did in March and that the rate increases, given our asset sensitivity, created a lot of net interest income. And not that we're expecting rates to go down, but if rates were to go down with deposits not repricing, that increase would equally go away. And we thought it was prudent -- and, again, as we think about managing the bank for a lower volatility -- to start to lock in a little bit of that. And in the quarter, we hedged above $4 billion of the balance sheet, think of it in kind of equal parts of loan hedges or cash flow hedges as well as deposit-related hedges or funding hedges, debt hedges and that produced that change in sensitivity, which lowered the asset sensitivity a little bit. Whether we do more or not, it remains to be seen depending on what the forward curves look like, but as rates moved toward throughout the quarter, we didn't think that it made sense to continue that so we stopped it at $4 billion.

That's great. And did any of that contribute to some of the margin expansion this quarter?

It helped a little bit, but really it's just more -- we had to hedge and kind of locked in the forward curve. So the curve, as long as it shows up the way we expect it, it doesn't have a material impact on the margin, but there -- it was about as expected and the impact on the margin this quarter was really not material.

Okay. And just one quick follow-up. On CCAR, there have been a couple of questions. Results were very good, capital's building. I'm just wondering if there's any thoughts of possibly resubmitting a capital plan later this year.

That's -- it's a good question. We focused in the last little while on getting through the quarter and doing our work to see where the capitals -- capital ratios ended up, given the strong performance. And we'll take a look and see. And if we decide to something, we'll let you know.

Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Gerard Cassidy of RBC.

Can you give us an update on just on the written agreement that you have with the regulators? I think you've been saying that you hope to have it lifted by the end of the year. Is there any update there? And second as part of that, with the changes in Washington not really having heads of the OCC yet and [Terillo's] position has not been replaced yet either, does that complicate it at all for you guys?

So I'll start with the first part. Unfortunately, I have no news to share with you on the written agreement. I mentioned earlier that we've completed our work and we're working with our regulators now to review that to make sure that they concur with our assessment that we have fulfilled all of our obligations under the written agreement. And from there, we kind of go to Washington to review that work and, hopefully, obtain agreement that we have completed all the parts of the written agreement. Within Washington, there's enough staffers around that have been there to make a decision, but I think it's probably a little bit difficult. You know this is speculation on my part, right?

Yes.

But without someone in those positions, that it might be a little bit more difficult to finalize that, but I don't know how the workings of the Fed -- how the Fed operates internally to say that that's definitively a help or a hindrance to us getting some progress on the written agreement.

Very good. And then, just as a follow-up, you guys obviously have spent an enormous amount of capital and money to meet the terms of the written agreement. And I believe that Bob put in a letter -- shareholder letter this year that total regulatory expenses now were -- are about $440 million, which were up meaningful from precrisis or around the crisis time. Should we anticipate, once the written agreement is lifted and your systems are all running smooth, that the $440 million could come down a bit because I'm assuming part of that number was to build out what you need to build out and now it's more just maintain and improve what you have?

So the way I would think about the $440 million is that's largely the run rate going forward. And there's a number of components that are a part of that. Some of those are what we would consider a little bit more soft dollar costs, if you will, and that it is time of frontline staff talking to our customers about regulatory-related things, collecting information, what have you. So those folks will still be around talking to customers. I just hope that they're going to talk more about business and a little less about their documentation. So those expenses won't go away. We have added expense in our compliance departments for the AML, BSA functions as well as for some of the modeling related to the CCAR and stress test. And as we continue to get smarter and more sophisticated in those areas, we expect there to be some efficiency gains, but you're not going to see $440 million go down to $200 million. We're talking more like 5% to 10% kind of normal efficiency gains that you can get through time through automation and process improvement as opposed to material parts of the operation go away.

That does conclude the Q&A portion of the call.

I would now like to turn the call back over to Don MacLeod for any additional or closing remarks.

Again, thank you, all, for participating today. And as always, if clarification of any of the items on the call or the news release is necessary, please contact our Investor Relations Department at (716) 842-5138. Thank you and goodbye.

Ladies and gentlemen, this does conclude today's M&T Bank Second Quarter 2017 Earnings Call. You may now disconnect.