M&T Bank Corporation (MTB) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank Q2 2019 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Samantha, and good morning everyone. I'd like to thank you all for participating in M&T's second quarter 2019 earnings conference call both by telephone, and through the webcast. If you have not read today's 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 and then on the Events and Presentations link. Also before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&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.

Thanks Don, and good morning everyone. As noted in this morning's press release, M&T's results for the second quarter include the continuation of several favorable trends. Loan growth continues to be in line with our expectations for low single-digit aggregate growth in 2019. We saw healthy growth in fees particularly mortgage banking and trust income compared with both prior quarter and the year-ago quarter. Credit quality remains solid with net charge-offs just over half of our long-term average notwithstanding an increase from the unusually low level we saw in the first quarter. We continue to return excess capital beyond what is needed to support growth of the balance sheet, including $402 million of common share repurchases and paying $135 million of common stock dividends. During the quarter, we successfully completed the onboarding of $13 billion of owned mortgage servicing as well as $17 billion of sub-servicing. These portfolios added to mortgage fee revenue, non-interest expenses, servicing related purchases of mortgage loans and non-maturity interest-bearing deposits. At the same time, the interest rate environment has become more volatile than at any point in recent memory, impacting our outlook for net interest margin and spread revenues, which we will discuss in more detail in a few moments. Now let's take a look at the specific numbers. Diluted GAAP earnings per common share were $3.34 for the second quarter of 2019, compared to $3.35 in the first quarter of 2019, and $3.26 in the second quarter of 2018. Net income for the quarter was $473 million compared with $483 million in the linked quarter and $493 million in the year ago quarter. On a GAAP basis, M&T's second quarter results produced an annualized rate of return on average assets of 1.60% in an annualized return on average common equity of 12.68%. This compares with rates of 1.68% and 13.14% respectively in the previous quarter. Including GAAP results in the recent quarter were the after-tax expenses from the amortization of intangible assets amounting to $4 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, when they occur. M&T's net operating income for the second quarter, which includes intangible amortization was $477 million compared with $486 million in the linked quarter and $498 million in last year's second quarter. Diluted net operating earnings per common share were $3.37 for the recent quarter compared with $3.38 in 2019’s first quarter and $3.29 in the second quarter of 2018. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.68% and 18.83% in the recent quarter. The comparable returns were 1.76% and 19.56% in the first quarter of 2019. 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. Both GAAP and net operating earnings for the first and second quarters of 2019 were impacted by certain noteworthy items. Our results for the first quarter of 2019 included a $37 million cash distribution from Bayview Lending Group reflected in other revenues from operations. This amounted to $28 million after-tax effect or $0.20 per diluted common share. Also affecting results for the first quarter was an addition to our legal reserves of $50 million relating to a subsidiaries role as trustee for customers employee stock ownership plans. This amounted to $37 million after-tax effect or $0.27 per diluted common share. Reflected in the second quarter of 2019s results was a $48 million write-down of M&T's investment in an asset manager, which is accounted for using the equity method of accounting. That amounted to $36 million after-tax effect or $0.27 per common share. In July 2019, M&T agreed to sell its investment in the asset manager, which had been obtained in the 2011 acquisition of the Wilmington Trust Corporation. Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $1.05 billion in the second quarter of 2019 down by $9 million or 1% from the linked quarter. This reflects a narrow net interest margin, partially offset by growth in both loans and total earning assets. The margin for the quarter was 3.91%, down 13 basis points from 4.04% in the linked quarter. Factors contributing to that decline include the higher level of cash on deposit at the Fed, which accounted for an estimated three basis points of the decline in margin, a higher day count in the quarter compared to the first quarter, which accounted for 1 basis point of that decline. We estimate that market rates primarily from LIBOR moving lower in advance of an anticipated cut in short-term rates by the Federal Reserve accounted for some two basis points of the decline, which this - has been consistent with our recent experience where LIBOR moves in advance of Fed funds, only now it is in the opposite direction. The higher cost of interest bearing deposits accounted for approximately 7 basis points of the decline, sharply higher mortgage escrow deposits in conjunction with our growth in mortgage servicing much of which are indexed to a mix of Fed funds and LIBOR are the primary driver of that increase. The expected continued migration of deposits into higher yielding categories, notably, commercial deposits into interest checking and on balance sheet [sweep] [ph], as well as a higher cost of time deposits as new certificates that are issued at higher rates than maturing loans were also factors. Average loans grew by 1% compared with the previous quarter. Originations remain solid, while payoffs and paydowns picked up a little compared to the first quarter but remain below our experience in the second half of 2018. Looking at the loans by category, on an average basis compared with the linked quarter, commercial and industrial loans increased 1% compared with the linked quarter. Commercial real estate loans also grew 1% compared with the first quarter with a slightly lower proportion of construction loans compared with permanent financing. Residential real estate loans declined by about 1% compared to the linked quarter. The continued comparatively steady pace of planned pay downs of mortgage loans acquired in the Hudson City transaction was partially offset by the purchase of government guaranteed mortgage loans out of the recently acquired servicing pools. While that practice will continue, it was somewhat elevated this quarter in connection with the onboarding of the mortgage servicing, we acquired. We expect the aggregate portfolio to resume its low double-digit rate of principal amortization in future quarters. Consumer loans were up about 2%. Growth in recreation finance loans continue to outpace declines in home equity lines and loans. Regionally, loan growth was somewhat stronger in our metro region, which includes New York and Philadelphia, as well as in the Mid-Atlantic. New Jersey continues to show solid growth off a low base. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and certificates of deposit over $250,000 grew an estimated 2% compared with the first quarter. This primarily reflects the escrow deposits we referenced earlier. Deposits received at the Cayman Islands office increased by $275 million. As noted last quarter, commercial customers continue to seek a higher yield on excess funds in demand accounts and often achieve that by sweeping around in the short-term interest-bearing deposits. Turning to non-interest income. Non-interest income totaled $512 million in the second quarter compared with $501 million in the prior quarter. Mortgage banking revenues were $107 million in the recent quarter compared with $95 million in the linked quarter. Residential mortgage loans originated for sale were $723 million in the quarter, up substantially from $422 million in the first quarter, reflecting the lower, long-term interest rate environment, as well as the seasonal strength. Total residential mortgage banking revenues including origination and servicing activities were $72 million in the second quarter, improved from $66 million in the prior quarter. The increase is primarily the result of the additional residential loan servicing and sub-servicing that we acquire combined with higher gain on sale revenues. Commercial mortgage banking revenues were $35 million in the second quarter compared with $29 million in the linked quarter reflecting seasonally stronger origination activity. Trust income was $144 million in the recent quarter, improved from $133 million in the previous quarter. This quarter's results include $4 million of seasonal fees earned in assisting clients with their tax filings. The rebound in the equity markets from the sell-off in the fourth quarter of 2018 also contributed to the linked quarter growth. Service charges on deposit accounts were $108 million, up from $103 million in the first quarter, reflecting higher levels of activity from what is usually a seasonally slower first quarter. The recent quarter also included $9 million in securities gains, representing the valuation gains on equity securities, while the first quarter of 2019, including $12 million of similar valuation gains. Turning to expenses. Operating expenses for the second quarter, which exclude the amortization of intangible assets were $868 million. As previously noted, the recent quarter's results include a $48 million write-down of our investment in an asset manager acquired in the Wilmington Trust merger. Also included in the quarter's results, was a $9 million valuation reserve on our mortgage servicing rights, reflecting the recent decline in long-term interest rates. Salaries and benefits were $456 million in the quarter, down $0.4 million from the seasonally higher level in the prior quarter. The year-over-year increase reflects annual merit increases, the salary adjustments we made in connection with the Tax Cuts and Jobs Act, as well as further adds to staff as we expand our pool of IT talents. We continue to expect to offset this hiring over time by reducing our use of consultants and contractors. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 56% in the recent quarter compared to 57.6% in 2019's first quarter. Those ratios reflect legal related accrual and write-down, we noted earlier. Next, let's turn to credit. Overall, credit quality remains in line with our expectations. Annualized net charge-offs, as a percentage of total loans were 20 basis points for the second quarter compared with 10 basis points in the first quarter. That reflects higher net charge-offs in our commercial loan portfolios. The provision for credit losses was $55 million in the recent quarter, exceeding net charge-offs by $11 million. The excess provision primarily reflects loan growth. The allowance for credit losses increased to $1.03 billion at the end of June compared with $1.02 billion at the end of the previous quarter. The ratio of the allowance to total loans was unchanged at 1.15%. Non-accrual loans declined by $16 million at June 30 compared with the end of March. The ratio of non-accrual loans to total loans improved by 3 basis points ending the quarter at 0.96%. Loans 90 days past due on which we continue to accrue interest, excluding acquired loans that had been marked to a fair value discounted acquisition were $349 million at the end of the recent quarter. Of those loans, $320 million or 92% were guaranteed by government-related entities. Turning to capital. M&T's common equity Tier 1 ratio was an estimated 9.84% at June 30 compared with 10.03% at the end of the first quarter. The 19 basis point decline reflects the impact of higher loan balances, earnings retention and capital distributions. During the second quarter, M&T repurchased 2.5 million shares of common stock at an aggregate cost of $402 million. The 2019 capital plan announced late last month contemplates net capital distributions of $1.9 billion over the four quarter period beginning this month. Our reference to net distributions reflects our intention to examine the current, non-common equity components of our regulatory capital structure in the coming months. Now turning to the outlook. As we noted at the beginning of the call, the interest rate outlook has changed materially over the past 90 days, impacting the outlook for M&T as well. We continue to expect growth in total loans in 2019 to be at a low single-digit pace with continued run-off in residential mortgages more than offset by aggregate growth in other loan categories. The forward curve is implying reductions in short-term interest rates, possibly starting as early as the end of this month and continuing over the next few quarters. Recall that, following the Fed's December action to raise rates, we took further steps to hedge our asset liability position by layering on additional received fixed paced floating interest rate swaps. While our balance sheet is much less asset sensitive than it was previously, we expect lower rates to result in less growth in net interest income than we previously thought. At this point, we estimate that all else being equal and holding aside volatility in certain deposit categories, each hypothetical reduction of 25 basis points in the Fed funds target should result in 5 basis points to 8 basis points of margin pressure over the ensuing 12 months. With these changes in mind, we still expect year-over-year growth in net interest income for 2019. The previously announced servicing and sub-servicing acquisitions have increased our mortgage banking revenues above the outlook we shared on our January call. Lower long-term interest rates have led to a pickup in residential mortgage loan originations, but not enough to further change that outlook beyond the impact of the servicing addition. Our outlook for the remaining fee categories remains unchanged with growth in the low single-digit range, except for trust income, which should be in the mid single-digit range, but remains vulnerable to market volatility. The write-down of the investment in the asset manager was obviously not contemplated in our earlier expense guidance. As we noted earlier, the acquisition of on payroll IT talent reflected in salaries and benefits over the first half, should be offset by lower contractor and consulting expenses over the coming quarters. Beyond that, with the revenue outlook being more subdued than we previously thought, we are examining our spending, as we look forward. Our outlook for credit remains little changed, credit cost moved from an unsustainably low level in the first quarter to a level, still well below long-term averages during the second quarter. We're watching criticized loans, which look like they will be down this quarter from the end of March. M&T's capital allocation philosophy and policies remain consistent with our previous thoughts. To summarize, we believe that our current capital levels are higher than what is necessary to operate in a safe and sound manner given our history of solid credit underwriting and low earnings volatility. As such, our intention remains to manage our capital to a more appropriate level over time. The 2019 capital plan is lower than the plan for 2018, basically reflecting the fact that the Fed's template used year-end 2018 capital levels at the start point which were some 86 basis points lower than year-end 2017, combined with stress test losses calculated by the Fed for the 2018 CCAR exercise. As noted earlier, the 2019 plan contemplates net capital distributions of some $1.9 billion with gross distributions potentially higher as we examine the non-common components of our regulatory capital and monitor growth in loans and risk-weighted assets. Lastly, we'll continue to watch the Fed's rulemaking on stress testing capital levels including stress capital buffer and liquidity coverage ratio as we develop our capital plans beyond 2019. 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 for questions, before which Samantha will briefly review the instructions.

[Operator Instructions] Your first question comes from the line of John Pancari with Evercore.

Just a little bit of - to get a little bit of color around the other expense line, I know you indicated I had originally include the $48 million Bayview and if - and then was the legal charge also that $50 million is that also in that line item?

Yes. In the first quarter, other expense included the addition to the litigation reserve, and in the second quarter, it included the write-down of the asset manager, as well as there was $9 million of the mortgage servicing reserve as well.

Right. Okay, so excluding that, how should we think about a good basis to grow off of as we go into the second half on that line?

I guess if you look at the other expense line and you look at it over the last five quarters, excluding kind of what I would describe as a special, so the litigation addition, and the - in the write-down of the equity investment, you'll see that that line is relatively consistent around 165, 170, it moves up and down a little bit and that's the place where over time we will expect to see some decrease in the professional services related to our IT spend. And that will start to come into play over the last half of 2019 and into 2020, but it will take a little bit of time to for those expenses to ramp down as we bring on new staff and train them and deploy them on projects, there is a bit of a tail effect where it takes a while for the outside IT professionals to finish the work that they're doing, doesn’t make sense to replace the midstream. And so that's where you'll see some of that and also while we added to the litigation reserve in the first quarter, there is still some ongoing expense for that case in some of that will show up in the professional services or in that other cost of operations line as well. So it should be - if you exclude those things look at kind of where the average has been for the last few quarters and use that as a start point and start to decline at probably more in 2020 than in 2019, that's the way I think about it.

And then also on the expense front, as we look out into 2020 and given the backdrop that you acknowledged around the rate environment, can you - how do you think about operating leverage for 2020, is that still a high expectation that you'll be able to achieve that or is there a risk to that, given the ray backdrop?

It's a great question, John. We're in the process of going through forecasting 2020 and starting to look at where we think revenue will be and what that might mean for expense growth and probably a little early to handicap where 2020 looks, but obviously, given a slower net interest income growth picture that makes positive operating leverage, a little tougher to achieve and we're obviously we're also not going to short change the investments we need to make in the business for the sake of a couple of quarters of a positive operating leverage. I don't think it will be wildly negative, if it is, but we've got work to do before we comment on what 2020 will be, we'll give you guys an update obviously in January on that.

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

Just a follow-up on your comments on the rate. Thanks for the commentary about what each 25 basis point means, if I'm doing the math right. I guess 5 to 8 basis points on a 25-cut, that's what like 50 million to 80 million depending on annually?

Yes.

So I guess the question is what's baked into your forecast then in terms of that new expectation that NII will grow a little bit this year relative to your prior expectations. Have you built forecast into that - cuts into that forecast formally and if so how many? Thank you.

Yes, we usually run our ALCO models and off of the forward curves. And so we will look at the forward curves at the end of June and use that as the basis for forecasting our NII for the rest of the year. You can kind of see in where LIBOR’s move that some of that's already started to happen. So I guess the question is how much incremental movement there is in LIBOR when and if the Fed actually moves. So I think a little bit of it's already kind of happened and then we'll see where things end up, but the direct answer to your question is, based off the forward curves and run at the end of June.

Okay, understood that is what I was getting at thanks. And then on the ability to control deposits costs and anticipate the mix shift, what are you seeing in terms of customers and what are you deciding in ALCO about how you're pricing deposits relative to that view of the curve? Thanks.

Yes, so when you look underneath the second quarter activity on deposit pricing, there is really two things. So, one is the addition of the escrow balances that came with the servicing that we did and actually those grew through the quarter and we actually expect them to grow into the third quarter as well. When you hold that to the side, what we saw in the second quarter was a continuation of the trends that we saw in the first, where we still see some commercial excess balances moving into interest checking and into on-balance sheet sweep. And we continue to see some consumer migration into time although that slowed down a little bit and really the time increases in the second quarter were driven by renewals of CDs that were actually coming off at a lower rate than where rates were and still in the one to two year and greater than two year space. If we look at the increase in time deposits in the second quarter, it was less than it was in the first and looked a lot more like what it did in the fourth quarter. And so most of the reactivity in deposit pricing that happened early on was in the commercial space and in the institutional space and in the wealth space and many of those accounts are tied to an index. And so as the index comes down those will move down faster. On the consumer side they’ll probably be a little bit slower, just because the cycle, the repricing cycle never fully matured and the way it tends to work is people move money into CDs first and then once those rate stabilize, they tend to look for liquidity and they move back into money market that second step didn't happen. And so a lot of the consumer money that sits in certificates of deposits will be there for a while. It will take renewals for - those rates to come down. I guess the good news is that they shouldn’t probably go up much from here either [indiscernible].

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

If I could follow-up on Ken's question as you know - thank you for giving us some of the assumptions that you have for the five to eight basis points of compression. I'm wondering for each 25 basis points what is the reverse beta that you're assuming specifically on the deposit side and does it - is it naturally wider for the, let's say the third cut versus the first cut?

Sure so when we disclosed in the Q, our ALCO runs they are obviously 100 basis point increments, when we do our work we do it in 25. And what we expect to see is the continued lag affect of deposit repricing continue into the third quarter. Usually takes two or three quarters for that to slowdown after the Fed stops. So even if they decrease rates at the end of July we’re likely still to see a little bit of movement in deposit rates. And then as we go from there, we'll start to see them come down, the rate of decrease in the deposits will be kind of consistent with what I mentioned before with Ken and that’s for the indexed deposits obviously there'll be 100% reactive. And then for our other customer deposits movement out of suite back into DDA, I think it'll be a function of customers’ businesses and cash flow. Not sure how quickly that will change, but we’ll obviously be paying attention to the pricing there. And then on the consumer side, I think we'll continue to see a slowdown of the remixing hope the pressure will be as older CDs mature and come on to the books at a slightly higher rate, which is why we’ll see a little bit of repricing there. I think as it relates to the third quarter and deposit cost specifically, I'll just remind you again that - we're expecting continued increase in escrow balances. And those are linked to an index either to LIBOR or to Fed funds, there is a little bit of different pricing depending on which portfolio it is. And so, those will have an impact on deposit pricing specifically or deposit costs in the third quarter.

And just as a follow up. Could you give us a sense of how much of your interest bearing deposits are indexed and would reprice immediately. And could you please remind us and - with the size of your swap book and the average life please. The total new notional since you added some swaps on in the quarter? Thank you.

Sure, so the swap book - the swaps that are currently in effect is about $13.5 million, $14 million of notional. And if you look at the remainder that's out there, which I think will show around $39 billion in the Q is our forward starting. And so, that should give you a sense of where the swaps are. And those should go out approximately two to two in a quarter years based on where we are right now. I should wrote down your first question. Remind me again your first question.

Apologies, what percentage of your interest-bearing deposits are tied to an index and therefore would reprice immediately when Fed fund goes down?

It's approximately 12%.

Got it, thank you.

Of total deposits.

Got it. Thank you.

Total deposits, obviously it plays a bigger percent of interest checking.

Thank you.

Your next question comes from the line of Frank Schiraldi with Sandler O'Neill.

Just wondering Darren on the, just one more on the margin - the five to eight basis points seems like that's baking in the expectation that this drag in deposit pricing is going to be - is going to continue here for a little bit. If we don't get a rate hike or rate cut rather I'm just wondering what the margin would look like and your expectation of sort of margin outlook without - those baked in rate hikes or rate cuts going forward?

Sure, so within the margin and in the go-forward, there is a couple things that are important to keep in mind. So when we talk about the five to eight, we were specific about saying holding some other deposit categories constant that - creates volatility in the market. So obviously cash balances, as we've talked about a lot, they were worth five basis points of expansion. The decrease in cash balances in the first quarter expanded the margin by five basis points. They contracted the margin by three basis points this past quarter. And so those we kind of hold aside and because they can move around and they affect the margin, but not so much the net interest income. The other thing is that moving around right now is just the mortgage escrow balances. And as those roll on and we get so what we think is a more stable balance, we'll be able to give a little bit better guidance on our expectations on the impact of escrow. So if nothing changed in the second quarter, third quarter there’s probably some margin compression because of those escrow balances. And so any movement would be on top of that, excluding what's already been priced in. If we didn't have the escrow balances, and I mean, held cash balances constant, and you didn't see a change in rates from the Fed. I think we'd see pretty stable margin like the plus or minus 2 to 3 basis points, some because of the natural extension of deposit pricing and then some just because of roll-on, roll-off margins in the loan book.

And then there's been some recent reports out and the media talking about some branch reduction in the Philadelphia areas some consolidation and reinvesting into tech and I guess modernizing the remaining branches. Just kind of curious, if you could talk maybe a little bit about that, but more generally just your brand strategy here more broadly?

Sure. So now I'll talk specifically about Philadelphia. So if you look at our market position in Philadelphia, and I think we have about 1% deposit share in a fairly similar brand share, which even as things move electronic, we find that customers still value branches as a place that they can go and get advice and solve problems as well as - and it provides a sense of security, they are there for a long period of time. And our focus in Philadelphia by shrinking, isn't to ignore those things, but more to recognize that our strength there has really been in the commercial space and in particular with small business customers and we're aggregating or concentrating our efforts in Philadelphia in the markets where there is a concentration of small business customers and where we've had some success there, and we'll really orient the branch in the activities there to support the activities of our small business and commercial customers. Our experience has been the - while this is customers tend to use only one branch and that one tends to be close to their business. So we think that that's a better way for us to compete there. And as we reduce the footprint, we'll take some of the savings and invest it in the remaining branches. When you look more broadly, we have markets where we have really high share both in terms of deposits and branches and markets where we have a little bit less. We're going to be looking at what we do at Philadelphia and how that works in combination with the investments we're making in digital and to learn from that and see how that works and will - depending on how that goes, we will adjust our strategy there, if we like it, will probably see it rollout into a few other geographies. And then when you look at the markets where we're a little bit more dense, I would describe our branch thoughts as consistent with our prior practices whereby we look at the total network each year. We look at which locations both branches and ATMs are favored by our customers and then we make adjustments to the network each year given - given that information. We're always trying to make sure that we provide convenience and access to our customers and while managing our cost structure, so that we can be competitive. The nice part is in banking customers vote with their feet every day and we get to use the results of that vote to help us shape the network and that's the way we've always thought about distribution and we'll continue to.

But this is more thought of as a reinvestment opportunity as opposed to cost cuts, cost cutting initiative. Is that fair or maybe both?

Yes, I think it's really both. We will clearly over time have some safe. But for all of our colleagues in that geography, they will be placed in one of the branches that remains open, usually there is turnover in those offices in over time, whether that is replaced or not will be a function of how busy the locations are, but we will be saving some of the occupancy expense, will reinvest a little bit of that in the end of the existing locations in some of that will save.

Your next question comes from the line of Saul Martinez with UBS.

Couple of questions more clarifications then anything, first on the net interest income guide I forget the exact terms you use, but you said you expect to see some growth in 2019 full year versus 2018, by my calculations, that you're basically baking in, I think something in the neighborhood of $1 billion and change in net interest income run rate in the second half of the year quarterly is that it may, I'll just obviously place some reduction in the run rate, but is that more or less correct that math?

Yes, that's correct, is probably based on the current forward curves. It probably comes down a little bit each quarter, but we'll be a little bit over $1 billion. Yes.

Okay. And then again a clarification. Great color on all the moving parts on deposit costs, and why you think it could be stickier is even as the Fed cut, but I guess, putting all of that together, would you expect deposit cost to actually rise in the third quarter versus the second quarter if I'm looking at your overall cost of interest bearing deposits that wasn't clear if that's what to me at least, is that, if that's what you're basically saying?

Sure. So the short answer is, yes. And I'll give you color on that, it's, yes, because of the growth in the mortgage escrow balances that we anticipate. If those weren't there, we would expect a little bit of increase in our deposit cost just because of the last little bit of remixing that tends to happen for two to three quarters after the Fed stops. When you look at that - when you look at just that effect, it was lower in the second quarter than in the first quarter and we anticipate that the third quarter would be lower still and then it would kind of be done by the time we get to the fourth quarter. Will it slow more quickly to zero in the third quarter, if the Fed reduces hard to handicap just given some of the repricing CDs and the fact that they're rolling off at a lower rate than they will roll onto there's probably still a little bit of push there, but that's, those are the two elements. And I want to make sure I'm explicit about what's driving it, because one of the things that's kind of in the five to eight and the other one is 10 and up.

Okay. So if we were to see two cuts, let's say, one in July and September, October, when would you think you would actually start to see deposit start to come down, is it sort of late years for early part of next year and how do you think about that lag in this cycle?

Yes, I guess, so again with the nuance of the escrow balances, I think the whole and again holding onto to the side. You would see a modest increase in deposit costs in the third quarter and I think you'll start to see them either flatten out or decrease in the fourth quarter and just because of the fact that there are several categories that are index, those would give you a benefit, right away with the cuts and if those other categories like the time deposits, as well as just people shifting still from non-interest bearing into interest bearing our suite. I put no modest upward pressure on it. But, I would expect that you see a little bit in the third quarter and by the time we get to the fourth quarter, you probably start to see it level out or decrease.

Your next question comes from the line of Kevin St. Pierre with KSP Research.

Just circling back to expenses in conjunction with overall strategy. Darren, you and - both you and Rene have characterized M&T is being somewhat behind from a tax perspective and needing to catch up, maybe you could characterize for us where you think you are from that perspective along the timeline in catching up to competitors from a mobile and digital perspective?

Sure. So I think over the last 18 months, we've made some really great strides in our technical environment, our mobile app continues to get updated on a regular basis with the new feature functionality coming, basically every six months, if not sooner. And it's in a pretty good spot. When we look at the feature functionality that is most used by customers. We feel pretty good about what we have. I think the next focus is in there is on security features and more self-service and security features. When we look at the commercial part of the bank, we've just gone into production with our loan origination system. And so we're getting that up and running and the team up to speed. And we continue to make investments in our treasury management platform, which will make things easier, both for our employees and for our customers and should bring us a lot closer to parity with our peer group if not towards some of the larger players. And we're making investments in our merchant capabilities. Within the bank, we continue to invest in infrastructure. We invest in securities, things like cyber security and how we protect the bank and our customers, as well as in the data. So we're investing along all of those categories and we continue to make progress, but I think as you know and we all know that it's a bit of a moving target too. So each time you catch up some of that, something to get a little bit ahead and I think that's the nature of Rene's comments and my comments about you're never really there because the bar is always moving and you're continually investing. And we just kind of think about our tech spend is we've got to spend to keep in the game to stay competitive and to react to the changes that are happening in all of our businesses, whether it's in the commercial business, the consumer business, the wealth and private banking business or the institutional business, and that's just going to be a way of life. And because of that, that's why we're making the investments we are in the tech hub and in adding IT professionals to our on-staff team, because as technology continues to become a bigger part of banking. Then, you want to control that resource and not have a walk out the door and into someone else's operations the next day because they are an outside contractor. The outside contract can help you get there quickly and if you bring our skill set but you don't have in the short-term. But over the long-term - such a strategic asset that we would rather control it and that's why you see us making those investments.

Great, and so as we think about the impact on the income statement, we can expect that the salaries and benefits is going to have this natural upward drift as you continue to invest in people?

Yes, you’ll see that happen. You’ll see some from the first half to the second half, just because of that, as well as the full effect of the mortgage servicing that we brought on and the people that help with that. The offset over time will be in that other cost of operations line that we talked about. The trick is and the thing to keep in mind is just the timing of that right. And if we have to, we have to add the new facility and build it out and get people there before we can consolidate other states then we have some double counting, if you will in that time period. As we bring on new focus to the team and train them up with - sometimes they’re experienced professionals and they come up to speed faster or they could be new recruits. And they take a little bit longer that you've got that overlap in time period where you get the new ones up to speed, before you can reduce the expense on the other side. And we don't expect that this is hundreds of millions of dollars by any stretch because we'll take it as increments. We think that's also a better way to manage the change as well as the cost, but it's going to be something that will be consistent over the next several quarters.

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

A couple of questions as we see some of the smaller banks report numbers this quarter, the trend of these one-off credit events seem to be popping up again. Are you guys seeing now that the margin pressure is picking up for everyone. Is there any evidence yet of more aggressive loan underwriting by banks to grow their balance sheets to offset this margin pressure?

It's an interesting question. And when we look at payoffs and paydowns and we talk about that, we track it by what the source of the payoff or paydown was. And kind of to your point, what's been interesting this year so far is other banks have been a bigger source of payoffs and paydowns for us, than it has been private equity or funds or insurance. So there might be a little bit to that. And I guess, when we compete in the market from our perspective, we always feel like others are losers structure and lower on price, then we would want to be. And so it's hard for me to say that there is a specific change, but it was notable when we were going through the numbers, that we did see a little bit higher proportion of other banks as a source of payoffs and paydowns in the first half of this year.

Very good, and then based on your experience, you pointed out that you guys have used the forward curves to forecast out your margins. This is not something new of course, How accurate in your opinion, are the forward curves in predicting where rates actually go at this - in this kind of a new rate environment we're in, when you have to forecast out 12 months. I would think they're very accurate over the very short periods 30 days or so, but how about if you go out into six and 12 months in your experience they’re very accurate?

I don't know Gerard that sounds like a loaded question to me. I think we've all seen the charts that have been put together that always show the forward curves. At the moment in time against the actuals and I guess what - but my experience has been as if the forward curves are not very good predictors of the actuals. But they're good predictors of the direction.

Yes, I agree with that.

And so, we obviously we use that in the absence of a better way to forecast, but also, that's why we use the hedges right. Is that we look at where the margin is and how that compares to long-term average and we take into account some of the deposit reactivity. And then just the shape of the balance sheet and that's why we use the hedging to try and take that volatility out of our earnings and that's what gives us the whereabouts when things get a little volatile like they've been late to - did not have to be overly draconian on expenses. And allows us to make sure that we can maintain the investments back to the question, that Kevin was asking in particular about our ability to invest in technology.

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

One real quick question, I know there's a lot of conversation around the expenses. So I was trying to keep up with everything. But I mean, directionally if you want to take that operating expense base from the second quarter, does it sounds like that's going to be higher in the third and fourth quarter before you start to see, like you said, some of the double spend that you have come out in 2020, is that's the right way to think about it?

Yes, I guess so the way that I would look at the second half is, if you look at our expenses in the first half, and you take out the big things the write-down and the asset manager and the litigation reserve.

Yes.

That's probably a good guide for where the second half will show up, you know it's should be pretty similar to that that takes into account, the investments that we're making in the tech hub. The full-year cost of the mortgage servicing colleagues that we added and some of the other expenses that we foresee in the second half.

And just another follow-up on the capital discussion yeah, does it sound like when you look at the 1.9 billion net that you talked about, having in the capital plan and now yesterday, the Board approved up to what $1.645 billion and a buyback. So does that imply that you're as you mentioned something in the neighborhood of about 300 million or 350 million of a preferred issuance possible in the future. Is that what you're thinking?

Yes that was, that's in the ballpark of where our thought process was. I think the logic there is, when you look over the last several years of CCAR, Tier 1 Capital has become our binding constraint as much as CET1. And so, as we contemplated the plan this year, we are looking at the mix and the ratios of Tier 1 to CET1, and think there is an opportunity for us to just re-stack the capital a little bit to make sure that we're in good shape going into CCAR 2020.

There are no further questions at this time.

Again, thank you all for participating today. And as always, 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.

This does conclude today's conference call. You may now disconnect your lines.