M&T Bank Corporation

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&P Bank 22 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the county. Thank you. I would now like to turn the call over to Don McCloud, Director of Investor Relations. Please go ahead.

Thank you, Samantha, and good morning, everyone. I would like to thank you all for participating in the M&P'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, .mtv.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 the forward-looking statements relating to the banking industry and the M&P Bank Corporation. M&P encourages participants to refer to our FTP5s, including those found on forms 8K, 10K, and 10Q, for complete discussion of forward-looking statements. Now I'd like to introduce our chief financial officer, Dan Koehler.

Thanks, Dan, and good morning, everyone. As noted in this morning's press release, M&P's results for the second quarter include the continuation of several favorable trends. Loan growth continues to be in line with our expectations for loan single-digit aggregate growth in 2019, which our healthy growth and fees, particularly mortgage banking and trust incomes, compared with both prior quarter and the year-ago quarter. Credit quality remains solid, with net charge up 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-sale purchases and $135 million of common stock dividends. In the quarter, we successfully completed the onboarding of $13 billion of owned mortgage servicing, as well as $17 billion of subservicing. These portfolios added to mortgage fee revenue, -in-disc expenses, servicing-related purchases of mortgage loans, and non-insurgency and concern departments. At the same time, this assertion environment has become more volatile than at any point in recent numbers, impacting the power of us for netting this margin and spread revenue, which we will discuss in more detail in a few moments. Now let's take a look at the specific numbers. Deluded gap earnings for common shares were $3.34 for the second quarter of 2019, compared with $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 late quarter and $493 million in the year-old quarter. On a gap basis, MSU's second quarter results produced an annualized rate of return on average assets of 1.60 percent and an annualized return on average common equity of 12.68 percent. This compares the rates of 1.50 percent and 13.14 percent respectively in the previous quarter. Included gap results in the recent quarter were the after-tax expenses from the amortization of an annual asset amounting to $4 million or $0.03 for common shares. Little change from the prior quarter. Consistent with our long-term practice, MSU provides supplemental reporting of its results on a net operating potential basis from which we have only ever excluded the after-tax effects of amortization of an amortizable asset as well as any gains or expenses associated with mergers and acquisitions that may occur. MSU's net operating income for the second quarter, which includes amortization, was $477 million, compared with $486 million in the late quarter and $498 million in last year's second quarter. Deluded net operating earnings for 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 candle assets and average candle common shareholder's equity of .68% and .83% in the recent quarter. The comparable returns were .76% and .56% in the third quarter of 2019. In accordance with the FDG guidelines, this morning's press release contained 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 certainly no worthy items. Our results for the first quarter of 2019 included a $37 million tax distribution from Baby Lending Group, reflected in other revenues from operations. This amounted to $28 million after tax effects, or $0.20 for diluted common share. Also affecting results for the first quarter was an addition to our legal reserve of $50 million, relating to a subsidiary's role as trustee for customers' employee stock ownership plans. This amounted to $37 million after tax effects, or $0.27 for diluted common share. Reflected in the second quarter of 2019's results was a $48 million breakdown of M&C's investment in an asset manager, which is accounted for using the equity method of account. That amounted to $36 million after tax effects, or $0.27 per common share. In July 2019, M&C used its self-investment in the asset manager, which had been obtained in the 2011 acquisition of the Wilmington Trust Corporation. Turning to the balance sheet in the income statement, taxable equivalent net income was $1.05 billion in the second quarter of 2019, down by $9 million, or 1% in the link quarter. This reflects a narrower net income 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 .04% in the link quarter. Factors contributing to that decline include a higher level of cash on deposit at the Fed, which accounted for an estimated 3 basis points of the decline in margin, the higher day count in the quarter compared to the third 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 2 basis points of the decline. This has been consistent with our recent experience where LIBOR moves in advance of Fed funds, only now it is in the opposite direction. A higher cost of interest-span deposit, accounted for approximately 7 basis points of the decline. Startling high-end mortgage after deposit, in conjunction with our growth in mortgage servicing, much of which are in-depth to a mix of Fed funds and LIBOR, are the primary drivers I mentioned. The expected continued migration of deposits into higher living categories, notably commercial deposits into interest-spec and -down-suit sweets, as well as a higher cost of high deposit, as new certificates that are issued at higher rates than the current ones were also factored. Average loans grew by 1% compared to the previous quarter. Originations remained solid, while payoffs and paydowns kicked up a little compared to the first quarter, but remained below our experience in the second half of 2018. Looking at the loans by category, on an average basis compared to the mid-quarter, commercial and industrial loans increased 1% compared to the mid-quarter. Commercial real estate loans also grew 1% compared to the third quarter, with a slightly lower proportion of construction loans compared to permanent financing. Residential real estate loans declined by about 1% compared to the mid-quarter. The continued, comparatively steady case of planned paydowns of mortgages loans acquired in the Hudson City Payments Act was partially offset by the purchase of government-guaranteed mortgage loans out of the recently acquired servicing tools. 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 the slow, double-digit rate of principal land renovation in future quarters. Consumer loans were up about 2%. Growth and recreation stance loans continued to outpace declines in home equity lines and loans. Recently, loan growth was so much 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 at a low base. Average core customer deposits were excluded deposits received at M&G's Cayman Islands office, and certificates of deposits over $250,000 grew an estimated 2% compared with the first quarter. This primarily reflects the outdoor deposit we referenced earlier. Deposit received at the Cayman Islands office increased by $275 million. As noted last quarter, commercial customers continue to seek a higher yield on access funds and demand accounts, and often achieve that by keeping them in the short term in the current deposit. Turning to non-interest income. Non-interest income totaled $512 million in the second quarter compared with $501 million in the prior quarter. Mortgage savings revenues were $107 million in the recent quarter compared with $95 million in the late quarter. Residential mortgage loans originated for sale with $722 million in the quarter, up from $522 million in the first quarter, reflecting the lower, long-term and discrete environment as well as seasonal threats. Total residential mortgage savings revenues including originations and servicing activities with $72 million in the second quarter improved from $56 million in the prior quarter. The increase is primarily the result of the additional residential loan servicing and subservicing that we acquired, combined with higher King Mountain Revenues. Commercial mortgage savings revenues were $35 million in the second quarter compared with $29 million in the late quarter, reflecting a seemingly stronger originations activity. Trust income was $144 million in the recent quarter, improved from $132 million in the previous quarter. This quarter's results include $4 million of seasonal fees earned in assisting clients with their tax balance. The rebound in the equity markets from the sell-off in the fourth quarter of 2016 also contributed to the late quarter bill. Service charges on deposit camps were $108 million, up from $103 million in the first quarter, reflecting higher levels of activity than what is usually a seasonally slower first quarter. The recent quarter also included $9 million in security gains, representing the valuation gains on equity securities, while the first quarter of 2019 included $12 million of similar valuation gains. Turn to expenses. Property expenses for the second quarter would exclude the amortization of incremental assets for $860 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 Lincoln Trust Merchant. Also included in the quarter's results was a $9 million valuation reserve on our mortgage servicing rate, reflecting the recent decline in long-term interest rates. Salaries and benefits were $456 million in the quarter, down $44 million from the seasonally higher levels in the prior quarter. The -over-year increase reflects annual bearings increases with salary adjustments remaining in connection with the tax cuts and job deaths, as well as further access to staff as we expand our pool of IT talent. We continue to expect the offset of hiring over time by reducing our use of consultants and contractors. The efficiency ratio which excludes in-canticle amortization from the numerator and security gains or losses from the denominator was 55% in the recent quarter compared to .6% in 2019's third quarter. Those ratios reflect legal related approval and write-downs we noted earlier. Next, let's turn to credit. Overall, credit quality remains in line with our expected costs. Annualized net start-ups as a percentage of total loans were 10 basis points for the second quarter compared with 10 basis points in the third quarter. That reflects higher net start-ups in our first loan portfolio. The provision for credit losses was $55 million in the recent quarter, exceeding net start-ups 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 to $1.02 billion at the end of the previous quarter. The rate growth of the allowance total loans was on gain at 1.15%. -a-true loans declined by $16 million at June 30 compared with the end of March. The ratio of -a-true loans to total loans improved by three 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 discount at acquisition, were $349 million at the end of the recent quarter. Of those loans, $320 million, or 92%, were guaranteed by government-related entities. Current scaffold. M&T common equity, tier one ratio, was an estimated .84% at June 30 compared with .03% at the end of the first quarter. The 19 basis points decline reflect the impact of higher loan balances, starting pretensions, and capital distribution. 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 distribution of $1.9 billion over the four quarter periods beginning this month. Our reference to net distribution reflects our intention to examine the current non-common equity component of our regulatory capital structure in the coming months. Now, turning to the outlook. As we noticed at the beginning of the call, the interest rate outlook has changed material over the past 90 days, impacting the outlook for M&T as well. We continue to expect low and total loans in 2019 to be at the lowest impoverished pace, with continued runoffs in residential mortgages more than offset by aggregate growth and other loan pamphlets. The forward curve is implied 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 success of December assets' rate breaks, we took further steps to height our asset liability position by layering on additional received fixed case loading and straight slots. While our balance sheet is much less asset sensitive than it was previously, we expect lower rates to result in less growth in the net income than we previously saw. At this point, we estimate that all else being equal and holding the sidewall utility in certain department categories, each hypothetical reduction of 25 basis points in a Fed fund target should result in 5 to 8 basis points of margin pressure over the next 12 months. With these changes in mind, we still expect -over-year growth in net income for 2019. The previous three-month servicing and subservicing acquisitions have increased our mortgage banking revenues above the outlook we shared on the January call. Lower long-term interest rates have led to a pickup in residential mortgages loan originations, but not enough to further change that outlook beyond the impact of the servicing additions. Our look for the remaining key categories of inventions was 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 is 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 quarter. Beyond that, with the revenue outlook being more subdued than we previously saw, we're examining our spending as we look forward. Our outlook for credit remains little-kinked. Credit costs move 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 for the stride line, which looks like they'll be down this quarter from the end of March. MIT's capital allocation philosophy and policies remain consistent with our previous stuff. 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 as a start point, which were some 86 basis points lower than year-end 2017, combined with stress-deficit 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 growth distributions potentially higher as we examine the non-common components of our regulatory capital and monitor growth and loans in a regulated asset. Lastly, we'll continue to watch the Fed's rulemaking on stress testing capital levels, including the stress capital bumper and the liquidity coverage ratio as we develop our capital plan 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, same as in its case political events and other national economic 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.

Ladies and gentlemen, as a reminder, if you are about to ask an audio question, please press star, then the number one on your telephone keypad. Again, not a star, one to ask a question. And that first question comes from the line of John Pencar with Evercore.

Good morning. Good morning, John. Just a little bit of a color around the other expense line. I know the indicator that had originally included the $40 million Bayview and then was the loophole chart also, that $50 million, is that also in that line, Adam?

Yes. In the first quarter, other expense included the addition to the litigation reserve, and in the second quarter it included the breakdown 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 base with the firewall program if we are going to the second half of 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 the special, you know, so the litigation, the addition, and the breakdown of the equity investment, you'll see that that line is relatively consistent around 160, 125, 170, moves up and down a little bit. And that's the place where over time real expectancies can 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 for those expenses to ramp down as we bring on new staff, train them, and deploy them on projects. You know, there's a bit of a tail effect where it takes a while for the outside IT professional to finish the work that they're doing. It doesn't make sense to replace them midstream. And so that's where you'll see some of that. And also, you know, while we added to the litigation reserve in the first quarter, there's still some ongoing expense for that case. And some of that will show up in the professional services, or in that other types of operations line as well. So, yeah, that's the use of 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 it probably more in 2020 than in 2019. That's the way I think about it.

Okay. All right. That's helpful. And then also on the expense front, as we look out into 2020 and given the backdrop that you've now looked around the RAID environment,

how do

you think about operating with it for 2020? Is that still a high expectation that you'll be able to do that, or is the risk of that giving me

a great backdrop?

You know, it's a great question, John. We're in the process of going through forecasting 2020, starting to look at where we think revenue will be and what that might mean for expense growth. Probably a little worried to have a staff look at 2020, but obviously given a slower net interest income growth picture, that makes the positive operating leverage a little tougher for the team. And obviously we're also not going to shortchange the investment we need to make in the business for the sake of a couple quarters of 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, and we'll give you guys an update obviously on that. Okay, go ahead. Thanks, Darren.

We have a question come from the line of Penn Mastin from Jeffery.

Thanks. Hey, Darren, to 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 five to eight basis points on a 25 cut, that's what, like $50

million, $80 million, depending on annually. Yes. So I guess the question is, what's based into your forecast then in terms of that new expectation that, you know, NII will grow a little bit this year relative to your prior expectations? Have you built form forecasts into that,

cut into that forecast formally, and if so, how many? Thank you.

Yes, we've run our ALCO model then off of the forward curve, and so we will look

at that forward curve as we end of June and use that as the basis for forecasting our NII for the rest of the year. You know, you can kind of see in the rare live work group that some of that's already started to happen, so I guess the question is how much incremental movement there is in live work when an exercise actually moves. I think a little bit of it's already kind of happened, and then we'll see where things end up. But the direction to see your question is based off the forward curve and run at the end of June. Okay, understood. That's what I was getting at. Thanks. And then on the ability to control deposit costs and anticipate the mixed shift, what are you seeing in terms of customers and what are you deciding in ALCO about how your pricing deposits relative to that view of the curve? Thanks.

Yes. So when

you look underneath the second quarter activity on deposit pricing, there's really two things. So the one is the addition of the FRO 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 back 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 settling and into unbalanced interest, 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 in the one to two year and greater than three 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 most of the last four like it was 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 are now sort of 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 because the cycles, the recycling cycle never fully reshared, and the way it tends to work is people move money into CD's first, and then once those rates stabilize, they can look for the putty and then move back into the money market. That second step didn't happen, and so a lot of consumer money that sits in certificates and deposits will be there for a while, but it will take renewal for that to, for those rates to come down. I guess the business is that it's probably going to go up much from here even. Let's move to the next question.

We've got another question that comes from the line of Erica Noboru, with Bank of America. Hi, good morning.

Good morning, Erica.

I was going to follow up on Tim's question. As you know, thank you for giving us some of the assumptions that you have for the five basic terms of compression. I'm wondering for each 25 basis points, what is the reverse data that you're assuming specifically under the project side? Is it naturally wider for the, you know, let's say the third cut versus the first cut?

Sure. So when we disclose in the two, our ALCO runs, they're obviously kind of basis point increments. When we do our work, we do it in 25. And what we expect to do is the continuous lag effect of deposit repricing continue into the third quarter. You know, it usually takes two or three quarters for that to slow down after the Fed stops. So even if they increase rates, let's see, on the July, we're likely still going 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 rates of increase in the deposit will be kind of consistent with what I mentioned before with 10. And then for the index deposits, obviously there'll be a 100% reaction. And then for our other customer deposits, movement of the fleet back into the DBA, there'll be a function of customer services in actual. I'm 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, you know, we'll continue to see a slowdown of the remittance. I think the pressure will be as the colder season is here and come onto the books that have played with higher rates. This is why we'll see, you know, a little bit of repricing there. And I think that because it relates to the third quarter and the deposit cost specifically, I'll just remind you again that we're expecting to see an increase in after-all balances. And those are linked to an index. Either it's a live order set fund or it's 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.

Got it. And just as a follow-up, could you tell us how much of your interest in deposits are indexed and reduced price immediately? And could you please remind us on the size of your swap book and the average life, please? The total new notional since you added some slots on the quarter. Thank you.

Sure. So the swap book, so the slots that are currently in effect is about $13.5, $14 billion of notional. And if you look at the remainder of the stuff there, which will show around $39 billion in the queue, is all forward started. And so there's a few cents of where the red swaps are. And those should go up approximately to the -a-quarter year based on where we are right now. I'm going to go down to the first question. My name is in your first question.

Apologies. What's the figure of interest on deposits are tied to an index and therefore would be priced immediately when something goes down?

It's approximately 12%.

Got it. Thank you.

A full deposit.

Thank you.

A full deposit. You know, obviously, it's a good figure to start with.

Thank you. Your next question comes from on the line of Frank Sieraldo with Sandra O'Neill.

Good morning. Just wondering, Darren, on the – just one more on the margin. The 5-30 points, it seems like that's basing in the expectation that the – you know, 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 a rate cut, rather, I'm just wondering what the margin would look like and, you know, your expectation of sort of margin outlook without, you know, without those baked in rate cuts going forward.

Sure. So within the margin and the go-forward, there's a couple things that are important to keep in mind. So when we talk about the fact that we were specific about holding some other deposit category constants that increase volatility in the market. So obviously, cap balances, we talk about a lot. They will work five basis points of extension to decreasing cap balances in the first quarter expanded to margin by five basis points. They contracted to margin by three basis points in the past quarter. And so those, you kind of hold aside because they can move around and they affect the margin, but not so much the net experience. The other thing is that moving around right now is just the more deceptive balances. And as those roll on and we get to 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 changes, in the second quarter, third quarter, it's probably the margin compression because of those escrow balances. And so any movement would be on top of that, excluding what's already been placed in. If you didn't have the escrow balances and the health tax balances constant, and you didn't see that change in risk from the Fed, I think you'd be pretty stable margins. You know, it might be what's the minus two to three basis points, some because of the natural extension of deposit pricing, and then some just because of roll on roll off margins and then roll off.

Okay. And then there's been some recent reports out in the media talking about some branch reduction in the Philadelphia area, some consolidation and reinvestment 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 branch strategy here more broadly.

Sure. So, you know, I'll talk specifically about Philadelphia. So if you look at our market position in Philadelphia, we have about 1% of the products there and a fairly similar branch here. But even as things move electronic, we find that customers build value branches as a place that they can go and get advice and solve problems, as well as provide the sense of security that they're there for a long period of time. And our focus in Philadelphia by currently 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's a concentration of small business customers and where we've had some success there. And we're really working at the branch and the activities there to support the activities of our small business and commercial customers. You know, our experience has been that small business 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 shares, 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 in Philadelphia and how that works in combination with the investments we're making in digital, to learn from that and see how that works. And we'll, depending on how that goes, we'll adjust our strategy there. As you like, it will probably be at Rollout into a few other theodicies. And then when you look at the markets where we're a little bit more dense, I would describe our branch spot as consistent with our prior practices, whereby we look at the total network each year. We look at which locations both branches and APMs are favored by our customers. And then we make adjustments to the network each year given that information. We're always trying to ensure that we provide convenience and access to our customers while we're editing our constructors so that we can be competitive. The nice part is inventing customers vote with their feet every day, and we get to use the results of that vote to help us save the network. And that's what we've always thought about distributing and will continue to.

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

Yeah, I think it's really both. You know, we will clearly over time have to take what's for all of our colleagues in that theodicy. They will be placed in one of the branches that we're building. And then we will turn over in those offices and over time, whether that's a place or not will be a function of how companies' locations are. But we will be saving some of the options we've spent. We'll reinvest a little bit of that into the existing locations, and some of that we'll take.

Great, thank you.

Your next question comes from the line at South Martinez with UBS.

Hello, good morning. A couple questions, more clarification than anything. First, on the Net Interest Income Guide, I forget the exact terms we used, but you said you'll expect some growth in 2019 full year versus 2018. Why am I calculating that? You're basically taking, and I think something in the neighborhood of a billion and change in that interest income run rate for the second half of the year quarterly. Is that, in my, obviously, some reduction in the run rate, but is that more or less correct, that map? Yeah, that's correct. It's probably, you know, based on

the current total return, it probably comes down a little bit each quarter, but we'll do a little bit over a billion dollars.

Okay, and then, again, a clarification. There's a great color on all the moving parts on deposit costs. It's why you think, you know, that it could be stickier even as the Fed cuts. So, just putting all of that together, would you expect deposit costs to actually rise in the third quarter versus the second quarter, if I'm looking at your overall cost of expense deposit? That wasn't clear if that's what, to be released, 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 more to get go balances that we anticipate. If those weren't there, we would expect, you know, a little bit of increase in our deposit costs just because of the last little bit of remissing that seems to happen for the 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 it gets to the fourth quarter. Will it slow more quickly? You know, it's a zero in the third quarter if the Fed reduces. Part of the end gap, you know, just given some of the re-pricing of two weeks and the fact that they're rolling off at a lower rate than they will roll on to, there's probably still a little bit of push there. But that's, those are the two elements, and I want to be clear and explicit about what's driving it because one of the things is kind of in the five days and the other one is kind of not.

Okay. So if you were to think two cuts, say, 1 July and I don't know, September or October, when would you think you would actually start to think about the cost starts to come down? Is it sort of late year for early part of next year? And how do you think about that lag in the cycle?

Yeah, that's, you know, so then with the new offer of the escrow balance, I think if you hold the whole, again, holding that to the side, you would see a modest increase in deposit costs in the third quarter and I think you'd start to see them either flatten out or decrease in the fourth quarter, you know, just because of the fact that there are several categories that are in that. Those would give you a benefit right away with the cuts. And if those other categories like the kind of deposits as well as the people sitting still from non-experience into experience, I put on a modest upward pressure on it, but I would expect that you see a little bit in the third quarter and by the time you get to the fourth quarter, you'll probably start to see a level average increase.

Great. Thank you very much.

The next question comes from the line of Kevin St. Pierre with KSPU Research.

Good morning. Thanks for taking my question. I just want to go back to expenses in conjunction with overall strategy. Ben, you and both you and Renee have characterized M&T as being somewhat behind from a tech perspective and needing to patch up. Maybe you could characterize for us, you know, what do you think you are from that perspective along the timeline in patching 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 apps continue to get updated on a regular basis with new future functionality coming basically every six months if not sooner. And it's been a pretty good spot. When we look at the future functionality that is most used by customers, we feel pretty good about what we have. I think the next focus in there is on security features and more self-service on 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. We can even make investments in our treasury management platform, which will make things easier both for our employees and for our customers. And it should bring us a lot closer to parity with our peer groups 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 security, in cybersecurity, in how we protect the bank and our customers as well as in data. So we're investing along all of those categories. And we continue to make progress. But I think that we know and we all know that it's a bit of a moving target, too. So each time we check up, someone does something to get a little bit ahead. And I think that's the nature of Renee's comments and my comments about, you know, you're never really there because the bar is always moving and you're continually investing. And we just kind of think about our test vendors. We've got to extend to keep them in the game to stay competitive and to react to the things 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, you know, as technology continues to become a bigger part of banking, then you want to control that new work and not have to lock out the door and do someone else's operations. The next day you take their outside contractor. Their outside contractor can help you get there quickly and you can do very much skillset if you don't have it in the short term. But over the long term, we've set the specific assets that we would rather control and that's why we see us making those investments. Great. And so as we think about the impact on the income segment, we can expect that the salaries and benefits are just going to have this natural upward drift as we continue investing people. Yeah, you'll see that happen. You know, we'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 helped with that. You know, the offset over time will be in that other cost of operations line that we talked about. You know, the shift is, and the thing to keep in mind is just the timing of that. And if you have to add the new facilities and build it out and get people there, the full-weekend consultants, other states, so we have some double-counting if you will in that time period. If you bring on new folks to the team and train them up, whether sometimes they're experienced professionals and they say come up to speed faster or they could be re-recruits and they take a little bit longer, but you've got that overlap in times where you get the new ones up to speed before you can reduce the expense on the other side. You know, we don't expect that this is hundreds of millions of dollars by interest, you know, because we'll take it in increments. We think that's also what federated manage the change as well as the cost. But it's going to be something that will be consistent over the next several quarters. Got it. Thanks.

So our next question comes from the line of Gerard Pasadie with RBC.

Hi, Darren. Morning, Gerard. How are you? Good, thank you. A couple 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. When you look at payoffs and paydowns and we talk about that, you track it by what the source of the payoffs and paydowns 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. When we compete in the market, from our perspective, we always feel like others are more on structure and more on preference than we would want to be, so it's hard for me to say that there's been 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 curve to forecast out your margins. This is now something new, of course. How accurate, in your opinion, are the forward curves in predicting where rates actually go at this, you know, in this kind of new rate environment we're in when you have to forecast out 12 months? I would think they're very accurate over a very short period, 30 days or so, but how about if you go out into 6 and 12 months in your experience, are they 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 curve at the moment in time against the actuals, and I guess what my experience has been is that the forward curves are not very good predictors of the actuals, but they're good predictors of the direction. That's correct. So we obviously use that in the absence of a better rate to forecast, but also that's why we use the hedges, is that we look at where the margin is and how that compares to the long-term average, and we take into account some of the deposit reactivity and just the shape of the balance sheet, and that's why we use the hedges to try and take that volatility out of our earnings. And that's what gives us the wherewithal when things get a little volatile, like they didn't really need to, they don't have to be overly draconian on expenses and allows us to make sure that we continue the investment. Back to the question that Kevin was asking in particular about our other ways to invest in technology.

Very good. Thank you.

Your next question comes from the line of Brian Clark with Keefe, Brewer, Inwood.

Hey, good morning, Darren. Good morning, Brian. One real quick question, I know there's a lot of conversation around the expenses, so it's going to keep up with everything, but I mean, do I actually, if you want to take that operating expense base from the second quarter, does it sound 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 the right way to think about it? Yeah, so the way that I would look at the second half is, if you look at our expenses in the first half and we take out the big things, the write-downs and the asset manager and the litigation reserve, that's probably a good guide for where the second half will show up. You know, it's pretty similar to that. That's the account, the investments that we're making in the text of the full year cost of mortage servicing, college that we added, and some of the other expenses that we're seeing in the second half. Okay, great. That's helpful. And just another follow-up on the capital discussion. It does sound like when you look at the billion nine nets that you talked about, you know, having in the capital plan, and now yesterday the board approved up to about a billion 645 in a buyback. Does that imply that, as you mentioned, something in the neighborhood of about 300 million or 350 million of a preferred insurance possible in the future? What's your thinking? Yeah, that's in the ballpark of where our thought process was. You know, I think the logic there is when you look over the last several years of CTAHR, tier one capital has become our binding constraint as much as CEP1. And so as we contemplated the plan this year, we were looking at the mix and the races of tier one to CEP1, and I think there's an opportunity for us to brief that, the capital a little bit, to make sure that we're interested going into CTAHR 2020. Okay, thank you for your time. Very helpful.

There are no further questions at this time.

Again, thank you all for participating today. And as always, if any clarification and any of the items on the call or mutual release is necessary, please reach out to our Investor Relations Department at -842-5138.

This does conclude today's conference call. Human Apps disconnect your lines.