M&T Bank Corporation (MTB) Q1 2019 Earnings Call Transcript

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M&T Bank Corporation (NYSE: MTB)Q1 2019 Earnings CallApril 15, 2019, 11:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the M&T Bank First Quarter 2019 Earnings Conference Call.

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

Donald J. MacLeod -- Administrative Vice President, Assistant Secretary and Director of Investor Relations

Thank you, Laurie, and good morning. I'd like to thank everyone for participating in M&T's first quarter 2019 earnings conference call, both by telephone and through the webcast. If you've not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link and then on the Investor -- 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.

Darren J. King -- Executive Vice President and Chief Financial Officer

Thanks, Don, and good morning, everyone. M&T's results for the first quarter largely reflected another quarter of solid financial performance. As noted in this morning's press release, some highlights include commercial loans both real estate and middle market, which showed a second consecutive quarter of solid growth on the back of strong originations and subdued payoff activity compared to last year.

The net interest margin remained strong, thanks to the December rate action by the Fed as well as some seasonal factors. The mortgage business was buoyed by the late quarter move in the 30-year rate, which combined with the impact of our purchase of mortgage servicing rates during the first quarter, position the business for a better year in 2019.

Trust revenues slowed slightly in the past quarter, mainly due to market volatility, impacting balances and keeping some customers on the sidelines. Expenses remained generally well controlled despite our investments in technology, both in talent and hardware, which are being somewhat front-loaded in 2019.

Now, let's look at some of the specific numbers. Diluted GAAP earnings per common share were $3.35 for the first quarter of 2019 compared with $3.76 in the fourth quarter of 2018 and $2.23 in the first quarter of 2018. Net income for the quarter was $483 million, compared with $546 million in the linked quarter and $353 million in the year-ago quarter.

On a GAAP basis, M&T's first quarter results produced annualized rate of return on average assets of 1.68% and an annualized return on average common equity of 13.14%. This compares with rates of 1.84% and 14.80%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were 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 first quarter, which excludes intangible amortization was $486 million, compared with $550 million in the linked quarter and $357 million in last year's first quarter. Diluted net operating earnings per common share were $3.38 for the recent quarter, compared with $3.79 in 2018's fourth quarter and $2.26 in the first quarter of 2018.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.76% and 19.56% for the recent quarter. The comparable returns were 1.93% and 22.16% in the fourth quarter of 2018. 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 fourth quarters of 2018 and the first quarter of 2019 were impacted by certain noteworthy items. Our results for the first quarter of 2019 included $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, included in results for the first quarter was an addition to our reserves of $50 million relating to a subsidiary's role as trustee for customers' employee stock ownership plans. This amounts to $37 million after-tax effect, or $0.27 per diluted common share. Included in the fourth quarter 2018 results was a $20 million contribution to The M&T Charitable Foundation. That amounted to $15 million after-tax effect, or $0.11 per common share.

Also included in 2018's fourth quarter results was a $15 million reduction in M&T's provision for income taxes, arising from an IRS-approved change in tax treatment of certain loan fees, which was retroactive to set 2017. This also amounted to $0.11 per common share.

During the first quarter of 2018, M&T received a cash distribution of $23 million from Bayview Lending Group. This amounted to $17 million after-tax effect, or $0.11 per diluted common share. Also during last year's first quarter, M&T increased its reserve for litigation matters by a $135 million to reflect the status of then-current litigation. That increase on an after-tax basis reduced net income by $102 million, or $0.68 of diluted earnings per common share. And lastly, included in the first quarter of 2018 results was a $9 million tax benefit amounting to $0.06 per diluted common shares related to the vesting of equity compensation that reduced M&T's effective tax rate for the quarter.

Turning to the balance sheet and the income statement. Taxable-equivalent net interest income was $1.06 billion in the first quarter of 2019, down by $9 million from the linked quarter. This reflects the impact of two less interest accrual days in the recent quarter, as well as a lower balance of cash placed on deposit with the Federal Reserve Bank of New York. Partially offsetting that was expansion of the net interest margin to 4.04%, up 12 basis points from 3.92% in the linked quarter, combined with higher loan balances.

The increase in short-term interest rates resulting from the Fed's December 2018 rate action, combined with an improved mix of earning assets and funding on the balance sheet, added a benefit to the margin of about 4 basis points in 2019's first quarter. A lower level of average balances of funds placed on deposit with the Fed had an estimated 5 basis point positive effect on the margin.

The lower cash balances were primarily the result of reduced levels of trust demand deposits, combined with seasonal volatility in commercial balances. As is usual, the shorter first quarter compared with the previous quarter reflected an estimated 3 basis point benefit to the margin, arising from the impact of earning assets with the 30 over 360 interest rate basis.

Average loans grew more than 1%, compared with the previous quarter. Improved customer sentiment during the fourth quarter appears to have carried through to the recent quarter with paydown and payoff activity remaining low.

Looking at loans by category, on an average basis compared with the linked quarter, commercial and industrial loans increased 3% compared with the linked quarter. Commercial real estate loans also grew 3% compared with the fourth quarter, with a slightly different mix between construction loans and permanent financing.

Residential real estate loans, which are largely comprised of mortgage loans acquired in the Hudson City transaction, continued their planned runoff. The portfolio declined by some 3% or approximately 11% annualized, consistent with the pace in recent quarters.

Consumer loans were up a little less than 1%. Activity here is also similar to what we've seen in recent quarters, with growth in indirect auto and recreation finance loans outpacing declines in home equity lines and loans. Regionally, we saw our best growth in our metro region, which includes New York City, Philadelphia and Tarrytown, the New Jersey region and the Mid-Atlantic, which includes Baltimore, Washington, and Delaware.

Average core customer deposits, which exclude deposits received at M&T's Cayman Islands Office and CDs over $250,000, declined an estimated 2% compared with the fourth quarter. This primarily reflects the decline in trust demand, as well as seasonal factors and commercial deposits I mentioned earlier.

Foreign office deposits increased by $279 million. In today's higher rate environment, commercial customers are seeking to earn a yield on excess funds in demand accounts by sweeping them into short-term interest-bearing deposits.

Turning to non-interest income. Non-interest income totaled $501 million in the first quarter compared with $481 million in the prior quarter. The recent quarter included $12 million of valuation gains on equity securities, while 2018's final quarter included $4 million of similar valuation gains. As I noted, included in other revenue from operations for the recent quarter is a $37 million distribution from Bayview Lending Group.

Mortgage banking revenues grew $95 million in the recent quarter, compared with $92 million in the linked quarter. Residential mortgage loans originated for sale were $422 million in the quarter, up about 2% from $412 million in the fourth quarter.

Total residential mortgage banking revenues, including origination and servicing activities, were $66 million in the first quarter, improved from $57 million in the prior quarter. Most of the increase was the result of the additional residential loan servicing that we purchased during the first quarter.

Commercial mortgage banking revenues were $29 million in the first quarter compared with $35 million in the linked quarter, reflecting seasonally lower originations activity. The comparable figure was $25 million in the first quarter of 2018. Trust income was $133 million in the recent quarter, down slightly from $135 million in the previous quarter but slightly above $131 million in last year's first quarter.

Results for the first quarter were dampened by the fourth quarter sell-off in the equity markets. Service charges on deposits accounts were $103 million, down from $109 million in the fourth quarter. The decline from the linked quarter reflected lower levels of consumer activity, much of which is seasonal.

Turning to expenses. Operating expenses for the first quarter, which include the amortization of intangible assets, were $889 million. As previously noted, the recent quarter's operating expenses include a $50 million legal-related accrual.

Operating expenses for the recent quarter included approximately $60 million of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense for certain retirement eligible employees as well as the HSA contribution, the impact of annual incentive compensation payouts on the 401(k) match and FICO payments, as well as the annual reset and FICO payments and unemployment insurance.

Those same items amounted to an approximately $56 million increase in salaries and benefits in last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter.

Excluding those seasonal factors, salaries and benefits were little changed from the prior quarter. The year-over-year increase reflects the salary adjustments we made in conjunction with the Tax Cuts and Jobs Act, as well as a somewhat higher headcount as we've been deepening our bench for IT talent, which will allow us to reduce the use of contractors overtime.

The increase in equipment and occupancy expenses compared with the linked quarter primarily reflects equipment upgrades that will improve our customers' experience and the productivity of our employees. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 57.6% in the recent quarter compared with 51.7% in 2018's fourth quarter and 64% in the first quarter of 2018. Those ratios in the first quarters of 2018 and 2019 each reflect the seasonal compensation expenses as well as the legal-related accruals.

Next, let's turn to credit. Overall, credit quality continues to be very strong, better than our somewhat conservative expectations. Annualized net charge-offs as a percentage of total loans were 10 basis points for the first quarter, compared with 17 basis points in the fourth quarter.

The provision for credit losses was $22 million in the recent quarter, matching net charge-offs. The allowance for credit losses remained at $1 billion at the end of March, while the ratio of the allowance to total loans was also unchanged at 1.15%.

Non-accrual loans declined by $12 million at March 31st compared with the end of 2018. The ratio of non-accrual loans to total loans improved by 2 basis points, ending the quarter at 0.99%. 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 $244 million at the end of the recent quarter. Of these loans, $195 million or 80% were guaranteed by government-related entities.

Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.05% compared with 10.13% at the end of the fourth quarter and which reflects the net impact of higher loans, earnings retention and share repurchases. During the quarter, M&T repurchased 2.2 million shares of common stock at an aggregate cost of $366 million.

Now, turning to the outlook. Based on the first quarter results, our outlook for 2019 remains largely consistent with what we shared with you on our January conference call. Just to reiterate those thoughts, we expect 2019 overall to look slightly better than 2018, with growth in total loans at a low single-digit pace. With continued run-off, our residential mortgages more than offset by aggregate growth in other loan categories as well as a more moderated payoff activity.

Comments by several of the Federal Reserve Governors as well as what's being reflected by the forward curve seem to be implying that the likelihood of any change in the Fed funds target either up or down is low for the remainder of 2019. Based on specific factors I mentioned earlier, including the day count and the impact of a lower level of cash on deposit with the Federal Reserve, the net interest margin we reported in the first quarter is higher and than what we view as the run rate.

Over the remainder of 2019, we expect a degree of stability in the net interest margin, consistent with the expectation of no further changes in rates. Following the Fed's December rate action, we took further steps to hedge our asset liability position by layering on additional receipt fixed, pace loading, interest rate swaps. Thus, our sensitivity position is much closer to neutral than it was previously. Based on those balance and margin assumptions, we continue to expect low single-digit year-over-year growth in net interest income.

While mortgage rates have rallied recently, we're uncertain whether that can lead to a sustained uptick in residential mortgage loan originations. So, our outlook for mortgage banking revenues remains cautious. We noted at a conference last quarter that we'd be bringing on a book of own servicing, plus a subservicing contract that should lead to some $60 million of residential servicing fees over the full-year of 2019. We also anticipate seasonal improvement in commercial mortgage banking revenues as the year progresses.

The outlook for the remaining fee businesses remains unchanged, with growth in the low single-digit range with the exception of trust income, which should be in the mid single-digit range, but as we've recently seen, can be impacted by market volatility. Excluding last year's addition to the litigation reserve as well as the recent accrual, we continue to expect low nominal growth in total operating expenses in 2019 compared with last year.

As noted, we expect seasonal surge in salaries and benefits we report in the first quarter to normalize in the second quarter. The servicing business, I referenced, should add an additional $40 million of full-year operating expense above that guidance. Our outlook for credit remains little changed. We are conscious as to our and the industry's ability to report the sixth consecutive year of relatively benign credit costs, but there continue to be no apparent significant pressures on particular industries or geographies.

We're seeing some upward pressure on criticized loans, but given our conservative underwriting, stress on borrowers doesn't really portend a meaningful acceleration in losses. M&T's capital allocation philosophy and policies remain consistent with what we've discussed previously. 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 overtime. As most of you know, the Federal Reserve following the Crapo Bill, has proposed rules that group the larger US banks into four categories based on factors representative of their size and systemic risk.

The proposal slots M&T into Category IV, which calls for biannual stress test instead of annual. As a result for the 2019 CCAR cycle covering the third-quarter of 2019 through the second quarter of 2020, Category IV banks were given an option to distribute up to a maximum amount of capital based on a predefined template calculation. That calculation reflects the distribution that would been permitted in last year's supervisory stress test adjusted for changes in the bank's capital ratios during 2018.

Alternatively, Category IV banks may opt into the full CCAR process, which would involve a stress test administered by the Federal Reserve as in prior years. Based on our analysis, the amount of capital that we could return under the template approach might not be materially different from the likely outcome of following the full 2019 CCAR process.

The proposal slots M&T into Category 4, which calls for biannual stress test instead of annual. As a result, for the 2019 CCAR cycle, covering the third quarter of 2019 through the second quarter of 2020, Category 4 banks were given an option to distribute up to a maximum amount of capital based on a predefined template calculation.

That calculation reflects the distributions that would have been permitted in last year's supervisory stress test adjusted for changes in the bank's capital ratios during 2018. Alternatively, Category 4 banks may opt into the full CCAR process. which would involve a stress test administered by the Federal Reserve as in prior years.

Based on our analysis, the amount of capital that we could return under the template approach might not be materially different from the likely outcome of following the full 2019 CCAR process. We will continue to manage capital according to our long-standing philosophy, while monitoring any further regulatory developments on the capital front as we look forward to CCAR 2020.

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

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

Questions and Answers:

Operator

(Operator Instructions) So, our first question comes from the line of John Pancari of Evercore.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning, John.

John Pancari -- Evercore ISI -- Analyst

Just on the net interest margin front. I know you had indicated that it's not -- we're at the 404 levels not at the, which you will consider a normalized rate. So, does that imply that the second quarter you'll see some compression off of that level then stable, so more like a 395 level? Or is it stable from here? Just wanted to clarify that?

Darren J. King -- Executive Vice President and Chief Financial Officer

No. Thanks for clarifying. If you look at the day count and adjust for that, as well as cash balances, normalizing somewhat, those two factors should bring the net interest margin down. And from that level, we expect to be fairly stable over the course of the remainder of the year based on what we see today reflected in the Fed's statements as well as what the forward curves are implying.

John Pancari -- Evercore ISI -- Analyst

Okay. All right. And then, separately, on the expense side, you indicated something in your prepared remarks that some front loading on the IT side. Could you give us a little bit color there? And would that have any impact on your -- could that have any impact on your nominal expense growth expectation as you make these investments?

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah. Sure. On the expenses, in aggregate, there is couple of things going on related to our investments in IT. So if you look first in the furniture, fixtures and equipment line, you can see that it moved up fairly -- sizably, I guess, from where our normal run rate has been. And that reflects some investment in hardware that we're making for our colleagues. And those devices since the average cost is less than a $1,000 get expensed. And so any time you make those investments, you kind of get a blip in that and it should -- that number should start to come back down.

And then the other thing that we are doing, which we've been talking a lot about is bringing much of the IT talent in-house from using outside contractors. And as we do that, we bring on the folks on our teams and it takes about 90 days to 120 days to get them in a position, where we can then reduce the professional services or the contractor expense on the other side.

So, there's a little bit of a carrying cost as you make that transition and we expect that to happen a couple of times during the year. We were just happened to be very successful in recruiting and adding some folks to the team in the first quarter little faster than we thought. And that's why you get a little bit of a front loading that I mentioned.

John Pancari -- Evercore ISI -- Analyst

Okay. All right. That's helpful. One more follow-up there. So -- do you still expect modest positive operating leverage for 2019 given that? And then separately, what's the size of your IT budget? Thanks.

Darren J. King -- Executive Vice President and Chief Financial Officer

So, I'll talk about the last one second. We don't actually talk about what the size of our IT budget is specifically because it crosses a bunch of categories, but obviously something we pay a lot of attention to, to make sure that we're making the appropriate investments that we need to make sure the bank is safe and sound and more competitive.

When you look at the operating leverage for the year, we expect to be modestly positive. Some of that obviously is going to depend on what happens with rates as well as our rates moving around can move that in one direction or the other. But we expect to be modestly positive.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, Darren.

Operator

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

Ken Usdin -- Jefferies -- Analyst

Thanks. Good morning, Darren. Hey, on the loan front, I heard you say that you're still expecting modest average loan growth through the year. And I'm just wondering, could you help us understand what's the expected pace of decline on the resi real estate side from here? Are we getting to a point where the burden is getting less bad?

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure, Ken. On the loan growth, when you look at the rate of decline in the resi mortgage portfolio, the rate is maybe slightly lower than what it had been. I think we are running about 13% annualized for the last several quarters with some of the movement up in rates. That dropped slightly to about 11%. But the bigger factor is the size of the portfolio continues to decline. And in the first quarter, I think it was about $430 million of payoff and paydown activities in that book.

And if you went all the way back to 2015 and early 2016 when that book first came on our balance sheet, it was probably more like $900 million. So the ability to add in other loan categories to outrun the payoffs and paydown activity in the resi book is getting a little bit easier in dollar terms. And so, that's part of why we expect to see some low nominal growth in balances over the course of the year.

Ken Usdin -- Jefferies -- Analyst

And to expand upon that, on the commercial side, you had good average loan growth because of a good period end December, but the March 31st period end was flatter or flattish. Can you just talk about pipelines seasonality and just where you're expecting that kind of net positive growth to be coming from to offset the resi side? Thanks.

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah. So, I guess, when you look across the other categories, we don't expect any one category to be a standout in terms of where the growth will come from that will offset that. We continue to see strong activity in the consumer loan book. The pace of home equity payoffs continues to be fairly similar, but again, it's getting to be a smaller book of business. And in indirect auto and in indirect recfi continued to be strong as well, as we see some small growth in our credit card portfolio.

On the commercial loan side, when you look at real estate, in commercial real estate, we've seen -- we had a nice quarter and some permanent mortgage activity. And I think we mentioned in the fourth quarter earnings call that we've had some good origination in the construction side of things. And those balances will continue to grow over the course of the year as those projects go through their normal life stage.

And then in the C&I space, it's kind of a combination of some new customer growth in the dealer commercial services business as well as growth in more traditional middle market, which we see some nice pockets in healthcare and other sectors. So, I guess, I would say it's fairly broad-based and both in terms of the line items on the balance sheet, as well as some of the industry sectors and geographies where we expect to offset the declines in resi real estate.

Ken Usdin -- Jefferies -- Analyst

Okay. Thanks a lot, Darren.

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. Thanks. Good morning.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I was hoping you guys can just talk a little bit about deposit gathering. I didn't -- I don't think I heard anything about that in your outlook comments. But obviously, you had decent loan growth this quarter, but is it getting harder to fund the loan growth with deposit growth? I mean, it seems like security balances were a little bit lower even though some of it was planned, but wanted to know how you think about that?

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure. So, when we look at the deposits and you look at the deposits on the balance sheet, there's a set of deposits that as you've seen through time, tend to have a little bit of volatility to them and those are some of the trust demand deposits. So much like you would think about non-interest bearing or indeterminate deposit accounts, we look at those and have a kind of tranching that we know a certain amount will be on the balance sheet and we think about that when making our lending decisions.

When you hold that to the side and you look at what's going on, in total deposit balances, what we see is more of a remixing than a real decrease in the balances. And so, when we look at the consumer portfolio, the balances have been pretty stable. We're seeing some mix shift where we're seeing people move money from money market accounts into the time accounts. And you can kind of see that reflected to some extent in the average cost of time deposits. Think it was up above 30 odd basis points this quarter. And a large chunk of that was remixing, and that customers are going from money market and not into short-term CDs, but into one year to two year. And as that mix happens, that's driving up that interest rate costs. But in total, the balances are staying on the balance sheet.

When we look at our commercial customers, we see, again, a remixing. We see some movement from non-interest-bearing to interest-bearing checking, and we see some move into suite both on balance sheet and off balance sheet. I think when you look at our deposits information and you look at what's referred to as deposits at the Cayman Islands Office, that's really where our balance sheet suite is and you can see that movement there.

So, again in aggregate, the balances are relatively flat. They are just remixing. And so, we're able to trade-off a little bit. If we have loan growth, we can fund some of it from the residential real estate run-off and then a little bit out of the securities portfolio. And overall, when we look at our loan-to-deposit ratio, it was relatively flat quarter-over-quarter. So, there is nothing that we are worried about at this point in our ability to fund loan growth.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Understood. I guess -- and then just taking that to the NIM, though, I'm not sure if I caught sort of your expectation of how much you think NIM should be lower in second quarter, but presumably the deposit mix shift puts further pressure on the NIM outlook. Is that the right way to think about it?

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah, there's a little -- there will be a little bit of pressure on that going forward, but there will be a little bit of offset in remixing on the asset side as well, right. We will be trading -- we expect to continue to see some trade between residential mortgage and some of the other loan categories that tend to carry a little bit of a higher yields as well as a little bit of movement in the securities portfolio, which is a lower yielding asset as well.

So based on some of those changes in the composition of the balance sheet, it's our expectation that the NIM should be barely stable. It might move a couple basis points in either direction off of a level that reflects the cash balances and the day count, but should be fairly stable around there.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. I'm sorry -- and just to ask a very specific question, though, with the NIM, if we back out the cash balances, I think it was 5 basis points and then day count was about 3 basis points. There's -- and correct me if there is anything else, but that's 8 basis points to NIM and 2Q is sort of stable around 3.96%. Is that what you are thinking?

Darren J. King -- Executive Vice President and Chief Financial Officer

I think you're in the right ballpark area. You can move around a little bit obviously with those cash balances. They can move back up which could drop. They could stay low which could keep it high. So, there is a little bit of volatility, couple of basis points here or there around that -- around those numbers and really the big thing is balance growth.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. Perfect. Thank you very much.

Operator

Your next question comes from the line of Steve Alexopoulos of J.P. Morgan.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, Darren.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning, Steve.

Steve Alexopoulos -- J.P. Morgan -- Analyst

So, I want to understand the NIM guidance too on the stability point. If we look at deposit cost that's been going up somewhere 9 basis points or 10 basis points a quarter for at least a last few quarters. Do you see that materially dropping off in terms of the rise in deposit cost you've been seeing?

Darren J. King -- Executive Vice President and Chief Financial Officer

I guess dropping off no, lower, yes. I guess the thing that we got our eye on is how much, how fast deposits are moving across categories and then how fast each category itself is moving up or down. And what we saw in the first quarter was a little bit of a slowdown in movement of rates in any category that because of where the Fed was that, there was a little bit less competitive pressure on deposit pricing in any given category. And now the big impacts of the deposit costs will be remixing in the piece of remixing that we might see on a go forward basis.

And usually, there is some degree of that that continues after the Fed stops hiking. The offset is what I mentioned before and some of the potential remixing on the asset side of the balance sheet, and how that might impact the overall yield on our loan book as well as changes we might make to securities portfolio. So, we think we've got some ability in the short-term to offset some of those little bit. And that's why we feel confident that we can maintain the margin absent any changes in the Fed around a relatively stable place over the course of 2019.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Okay. That's helpful. And then on the expense side, Darren, I believe in the past you defined the low nominal growth rate in the 2% to 3% range. Is that still the case for expense growth for the year extra $40 million from the servicing purchase?

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah, that's typically how we would think about things and low nominal is 3% or less. And some of that's obviously that we saw this quarter's timing and then some of the investments that we're making in the business and we've talked about our expense growth at the overall level as opposed to at any individual category, because we see some movement within the expenses across categories. And we don't try to worry about any one category but more watch the pace of our overall expense growth might move around a little bit, as you can see from quarter-to-quarter. But overall, that remains our expectation for the year.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Okay.

Darren J. King -- Executive Vice President and Chief Financial Officer

And of course absent the $40 million that as I mentioned before from the servicing, yeah.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Thank you. If I could just ask you one on credit. You said you saw upward pressure on criticized loans, which portfolio is that? Is there anything to note there? Thanks.

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah, sure. I guess the most interesting thing on credit is that the criticized are up, but there is nothing to note in terms of specific industries or geographies. So, we pay a lot of attention to that obviously. And we often use criticized as the classification to help make sure that within the bank, we have lots of eyes on things where we see a little bit of deterioration. And to jump on it quickly to make sure that between our credit folks, our frontline folks and our workout folks that were paying attention to early warning signs.

And as we kind of pointed out in the prepared remarks, that doesn't necessarily mean that there's going to be a charge up, but what our history has been as if we focus on things and get on top of them early that we can actually prevent that from happening. And so, we're very aggressive of moving things where we see even small size of trouble into that criticized portfolio.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Okay, terrific. Thanks for all the color.

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

Frank Schiraldi -- Sandler O'Neill -- Analyst

Good morning. Darren, just on -- and I think you touched on it last quarter, but just thinking through the relief. I think we're still expecting you'll get on the LCR. What that might mean for the balance sheet in terms of -- is it just an uptick in yield and the securities book? Or could we see some contraction along with greater buybacks? Just wondering, how you think about what M&T's reaction could be?

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure. So you know with the changes to -- potential changes to the LCR, you know, we will look at our total balance sheet. And number one, we'll make sure that we feel like we've got the right liquidity for the bank and for our customers. And look at that in relation to how the economy is how charge offs are as well as loan growth. And if you look at our bank through time we've always make sure we had the right amount of liquidity but that's also tended to run a little bit at the lower end of the peer group. And we're lower than the peer group right now, but above where we have historically been and we will continue to look at that and make those trade-offs between holding liquidity to make sure the bank is safe, versus using that liquidity to fund loan growth and provide access to capital for our customers.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. And then on the, I know you mentioned the tax benefit last quarter, but was there a tax benefit related to the vesting of equity comp this quarter? And is 25% still a reasonable place to be on the effective tax rate going forward?

Darren J. King -- Executive Vice President and Chief Financial Officer

So, the impact of the equity vesting this first quarter was nominal which is why we didn't mention it. It was slightly less than $2 million. And remember that the impact can be positive or negative to the tax line depending on how the stock price is at the vesting date compared to the price at the issue date. And so first couple of years with the stock price where it was, you know it resulted in a big impact, because the price was higher than what it was granted out when people received their award and this past year it was down from where things were issued last year. So, there's always going to be some movement around in that number, but if it's meaningful we'll let you guys know what it is. And then, what was the other part of the question, sorry I forgot.

Frank Schiraldi -- Sandler O'Neill -- Analyst

December 20 on the tax rate go forward --

Darren J. King -- Executive Vice President and Chief Financial Officer

The tax rate, right sorry. On the tax rate, I think the guide we gave in the first call this year was 24.5% to 25% and that's still a good place to be.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. Great. Thank you.

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

Peter Winter -- Wedbush Securities -- Analyst

Good morning, Darren.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning.

Peter Winter -- Wedbush Securities -- Analyst

So, the loan-to-deposit ratio at 98%, are you guys comfortable letting it not go above 100%? And I know you've got some flexibility with the funding from the runoff resi mortgage.

Darren J. King -- Executive Vice President and Chief Financial Officer

So, it's a measure that we pay attention to, but I wouldn't say that we run the bank based on it. So, we would be comfortable with the loan-to-deposit ratio going over a 100% for a quarter, maybe even two or three. We -- obviously, we don't expect to run at nor do we choose to run at the kind of levels we were at before the crisis. We don't think that's practical any more.

But as we look at the balance sheet and go quarter-to-quarter, we definitely have enough liquidity to fund loan growth at least loan growth that we would expect to see and we're always paying attention to how we fund it. And if things get a little more active as we go through the year then we'll figure out how to make sure we've got the right amount of funding to manage that loan-to-deposit ratio. But in any given quarter or couple of quarters, it's not something that we would worry a lot about.

Peter Winter -- Wedbush Securities -- Analyst

Okay, and then just a quick follow up. I was looking at average earning asset growth which was down both year-over-year and sequentially. Do you guys think you'll grow average earning asset growth this year?

Darren J. King -- Executive Vice President and Chief Financial Officer

So, average earning assets can be a tougher one to predict. And the reason is tougher to predict is just because of the movement in the trust demand deposit and in that line about cash that we have at Fed. So, that's why we try to breakdown the pieces and help you guys think through the pieces because that's how we look at it. And so, we first and foremost look at the loan balances and make sure that we're taking care of our customers and providing funding as they needed.

And over the course of the last several years, while loans in absolute have been down slightly, it's all been quite intentional in bringing down that mortgage book, but while growing C&I as well as CRE and some of the other consumer segments. And then really the difference is some of the cash balances that might move on and off our balance sheet that relates to that trust demand deposit that tend to come with our institutional business.

And those can move around a little bit as well as some of the balances that might be associated with mortgage servicing. So when we look at that, we look at where we are over the course of the year. We think it could be plus or minus 1%, but we're not expecting big movements in either direction.

Peter Winter -- Wedbush Securities -- Analyst

Got it. Thanks, Darren.

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, good morning, guys.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning, Brian.

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

Darren, I wanted to just follow up on the same sort of line of questioning after Peter's question on the average earnings assets. I think your NII guide for the year was to be low single digit growth year-over-year, is that right?

Darren J. King -- Executive Vice President and Chief Financial Officer

That's right.

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

If I don't have any -- if I don't put any growth into your returning assets and I use a NIM at 3.98%, which would kind of do the math, you said of just getting down, take the adjustments out of the first quarter and run that flat, that's 4% growth year-over-year. So, that would kind of think that even if you get a little bit better growth and average loan then 2% average loan growth, I mean it feels like, it's more like mid single digit growth in NII. So, I just was wondering, if that's -- that math seems to work and is that I guess what you're expecting with that guidance?

Darren J. King -- Executive Vice President and Chief Financial Officer

From what we've looked at and forecast over the course of the year, we would be kind of right in the range that we talked about earlier. We wouldn't see that being, what's really higher than that. There we do expect to see some movements in the net interest margin as we go through the next part of the year along the lines of what we had talked about earlier, might be a couple of basis points up or down in any quarter from where we think. We ended the first quarter on an adjusted basis. And then the thing right and this is probably the hardest to predict is just what those earnings assets are.

And if we maintain the position in particular in the trust demand balances where we ended the first quarter, then you probably got earnings asset growth that's more like slightly down than flat or slightly up. And then the pace of growth in commercial balances and what they've been, as you know we're probably a little more conservative and how we think about things, and how fast we might see those assets growth specially given the history of the last nine quarters and looking at -- we're -- feel good about things after the last two quarters, but the prior six were tough. So, we might not be at the upper end of where loan growth might be than others might have.

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

All right. Okay. Thank you for that. And maybe just as a follow-up. I know that you had some comments about LCR. Earlier you mentioned the CCAR. What -- I guess, how -- what are you guys planning on doing with your capital plan announcements for the third quarter of this year, the second quarter of next year? Now that you're not part of the official CCAR process for 2019, I guess when can we expect to hear your capital plans for that period and how are you guys thinking about what sort of target CET1 ratio you might get to? Your had one of your peers have talked about getting to 8.5% target on Friday and given out strong quality balance sheet and underwriting M&T has, I would think that that's a possibility for you guys in the future too. So maybe you can just let us know your thoughts on that?

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure. So, I guess as it relates to announcements, we would expect to announce at some point during the second quarter. What's going on from a capital perspective? We've submitted something to the Federal Reserve as well as for our -- to our board for approval. The Fed probably needs the loan information to come on the schedules before they finalized things, but our expectation will be out before the end of the quarter, hopefully not quite as late as last time with what the capital plans are. I guess I don't have a comment necessarily on what other folks have as a target capital level and what its impact, may or may not be on us.

But we have been fairly consistent with our thought process on where we think capital should be for M&T. And we think that's toward the low end of the peers and that's a bit of moving target. The challenge is how fast you can get there and really what the governor is on that is the stress test and how it works.

And so, I guess my answer to the question depends a little bit on what happens with the stress test framework and whether or not we start to see the SCB thought process emerged, how capital distributions and asset growth are handled under stress in the next CCAR scenario, because those tend to be some of the things that actually restrict a Company's ability to get from where they are to where their target might be.

And those are bunch of things that we pay a lot of attention to and are factors in our considerations in our capital distributions, but I guess in the short term, I think if you use the template and did the math as you're going forward, you probably be in the ballpark on likely capital returns for the third and fourth quarter of this year and the first two quarters of next year.

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

All right. Thanks for your time, Darren.

Operator

Your next question comes from the line of Marty Mosby of Vining Sparks.

Marty Mosby -- Vining Sparks -- Analyst

Hey, I wanted to follow up on the capital template that you've talked about. I got a couple of moving pieces. I want to make sure that when you think about how that work. The stress losses would remain constant because you're not running a new stress test. So, the losses kind of come from last year's numbers. You don't have to rerun them, you already know what that is. You then would probably add in your new level of capitals.

So whatever your capital was at year end this year, you would put that in there versus your stress losses. And then you would also have to change to the higher level of earnings. So I just want to make sure that as they went through that template, some things changed like where your capital was versus is now and what your earnings were versus is now while the risk is the one component that has stayed the same from last year?

Darren J. King -- Executive Vice President and Chief Financial Officer

So, generally in the right ballpark, the losses carry over and will be the same and you adjust the start point of your capital ratios and capital levels from where you are to December of 2018 versus December 2017. And then, earnings are the same as last year is kind of the way that works.

Marty Mosby -- Vining Sparks -- Analyst

And last year meaning 2018 or what you had in the CCAR process, because when you did the CCAR process, you didn't have the full benefit from the tax reform. So now that you had a full year of 2018, it would kind be the run rate there. Just wanted to make sure that we're getting the benefit of the higher earnings when you start thinking about payout ratios?

Darren J. King -- Executive Vice President and Chief Financial Officer

It's really 2018 numbers that are the basis for the earnings and the tax reform was by and large baked into the 2018 numbers already.

Marty Mosby -- Vining Sparks -- Analyst

Right. And what you had in your reported 2018 earnings, but not in the CCAR, because when you were kind of doing that, that was before you didn't have a full year that's just quite yet?

Darren J. King -- Executive Vice President and Chief Financial Officer

CCAR 2018 would have been based on 2017 for sure, but the losses that we would have had in last year's CCAR will be the losses that were going into the template. The capital ratio will be the 2018 December start point and the earning would be based on the 2018 earnings.

Marty Mosby -- Vining Sparks -- Analyst

Perfect. All right. Thank you.

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

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

Erika Najarian -- Bank of America -- Analyst

Hi. Good morning. Just two points of clarification on the capital question. So, if we're plugging in all those numbers we're getting to capital return of $2.069 billion which is in line with what you had asked for. And I'm wondering if that's the ballpark and if that is the ballpark, what is the decision tree between going, waiting to resubmit or waiting to go through the full process next year versus this year, given how punitive this year your losses seem to be last year to M&T relative to what this year's parameters look like?

Darren J. King -- Executive Vice President and Chief Financial Officer

So, I guess to start with Erika on the ballpark, you're in the right range maybe a little bit light on what our math would say, but basically in the right ballpark. And then the decision to submit or not submit was really, we look at what we thought the template would be and then what the pluses and minuses are going through the full CCAR process and how close those two might be. And when we looked at the two look-like they would end up in a pretty similar place, it really didn't have anything to do with the real estate losses from last year.

There's always some part of the portfolio that's gets stressed, commercial real estate might be a little bit harder for us, and there's always some uncertainty in the CCAR process in terms of how the models might work and how operational losses might be impacted, how PPNR might be. So, there's a bunch of unknown, whereas with the template there's a little bit more certainty about how things might work. That said, we still maintain our CCAR apparatus at the bank. We run a full stress test on M&T scenario, and we think about reducing credit growth and that's the process that we will continue to go through every year just because we think it's good governance and a good practice and makes us feel more certain about our thoughts on capital distributions. And obviously, you need to make sure that you're ready for the CCAR process that will happen on every other year basis. So, we will go forward from here.

Erika Najarian -- Bank of America -- Analyst

Got it. And just my last follow-up question has to do with some of the mix shift dynamics that you were referring to earlier. One is where are you reinvesting your securities cash flow today? And I also noticed that short-term borrowings were a little high at about a 1 billion on average basis. And in first quarter of last year and fourth quarter, this ran closer to 300 million. I'm wondering if that was also episodic and at 2.49%, if it rolls off but that's clearly going to be immediate supportive of NIM.

Darren J. King -- Executive Vice President and Chief Financial Officer

So, I am just going through some of the pieces. In securities portfolio, we have kind of a barbell of investments in there. Some of its mortgage-backed securities, which is the longer dated and treasury, US treasuries which we tend to do either one year or two year. So as those mature, they create cash and depending on where rates are right now or at the time that things mature, we tend to look at where the curve is and what the difference might be between one year treasuries and holding that money and cash at the fed.

And so, you will see some movement between those two categories and we tend to look at them as one as opposed to two unique buckets. And some of the cash or some of the rundown in the securities will sit in cash, some of that we might buy more treasury, and then some of that we use to fund loans for customers. And so with that given that we're going to be at a certain ratio of securities to total assets but more we're looking at as the trade offs across those categories, and that's what gets us comfortable that we can maintain the NIM relatively stable over the next few quarters.

Erika Najarian -- Bank of America -- Analyst

And just quickly on the short -- any comments on the short-term borrowings, so that's being elevated this quarter.

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah, so, if you look at toward the end of last year, we redeemed bonds that we're going to come due at the end of the year, and we redeem them early because they were inside of 30 days and bonds are inside of 30 days don't qualify for the FDIC benefit. And so, we redeemed them early and did a short term borrowing, which you would have seen on the balance sheet for part of the first quarter and then go away. And so kind of what you got in there some of the average over the quarter, but they want there at the end of the quarter and that just help with the FDIC insurance benefit.

Erika Najarian -- Bank of America -- Analyst

I see. Got it. Thank you.

Operator

Your next question comes from the line of Kevin Barker of Piper Jaffray.

Kevin Barker -- Piper Jaffray -- Analyst

Thank you. You guys have navigated the current rate cycle better than those two NIMs expanded dramatically probably better than they own it all your peers. When you think out given the where the rates are today, how the cycle is playing out and then the laying on the swaps that you put on. How long do you think you can maintain your guidance for, I guess somewhere between 3.9% and 4% NIM given the swap that you put on your portfolio today, given that rate environment?

Darren J. King -- Executive Vice President and Chief Financial Officer

Yeah. So I guess given the outlook from both the Fed and the forward curves with not a lot of movement and the swaps that we put on, we think we will be fairly stable over the course of 2019. And that's obviously a bunch of things that are going on in there. Some of it was swap and the hedging activity that we've done. Some of it is how deposit pricing might react from a competitive perspective over the course of the year, which I think to some extent will depend on how strong loan growth is in the industry. But as you pointed out, we've been taking steps to try and protect the margin that we built because of where it is, and you'll see when we filed the Q that some of our asset sensitivity has come down, and you'll see that in the numbers and it's because of that work that we've done to try and lock in the margin or keep it protected at a level close to where it is.

Kevin Barker -- Piper Jaffray -- Analyst

Yeah, yeah. What is the percentage of your swaps mature within like the next year and then what's the weighted average duration of those swaps?

Darren J. King -- Executive Vice President and Chief Financial Officer

So, the swaps when you look at the notional amounts that will be disclosed, it's probably going to be around $30 billion to $35 billion. And that's -- they're not all in effect right now. The notional amounts that's kind of out there right now is about $15 billion to $16 billion, and it's a combination of some swaps on our debt as well as some cash flow swaps against the loan portfolio. And the extra notional amount, the extra kind of doubling of the notional amount as to extent swaps that have been put in place earlier that are expiring. And the idea is to kind of have about two years forward in terms of the swaps that are in place.

Kevin Barker -- Piper Jaffray -- Analyst

Okay. Thank you very much.

Operator

Your final question will come from the line of Gerard Cassidy of RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Hi, Darren.

Darren J. King -- Executive Vice President and Chief Financial Officer

Good morning, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Quick question for you. Some of the bigger banks have given us their day one increase in reserves for CECL. I may have overlooked at if you've talked about it already today. But have you guys disclosed that and if you haven't, do you have kind of target date of when you might disclose that number?

Darren J. King -- Executive Vice President and Chief Financial Officer

Sure. You didn't miss anything Gerard. So, as usual, you are right on top of things. We are going through right now parallel runs of the existing ALLL dropped us and the new CECL and growing through, making sure that, that we can run at scale. We haven't made that announcement yet. We expect to probably as we get toward the end of the year, we'll start to be a little bit more definitive about what the exact impact will be. But from the work that we've done to-date what I've said before and it still holds that the impact on our capital ratios will be fairly nominal.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then just another quick question, you mentioned about credit quality being so strong which we all acknowledge. Is there any evidence of underwriting pressure from competitors that could lead to credit issues a year or two from now. Because they're underwriting more aggressively today. And you guys are passing on competing at that level.

Darren J. King -- Executive Vice President and Chief Financial Officer

I guess, Gerard, I wouldn't say that competitive environment isn't any more intense than what it has been for the last sort of while anything. I think we saw some of the outside, the regulated system participation slowdown a little bit with the disruption in markets and in December that carried a little bit into the first quarter. So I think that's why we saw pay-off and pay down activity moderate. We do continue to see competitors in the market and when we look at the source of funds for pay-offs and pay down to this first quarter a little bit more came from competing banks and came from non-banks, so that's kind of an interesting data point.

But in terms of pricing and or structure, there hasn't been a notable move this quarter compared to what we would have seen over the course of last year. I think more it's who is in the market and being aggressive and it's little bit more bank competition than what we've seen outside of the banking. But you know that said, I think it's more an essence of the non-banks as it is an increase in activity by the banks.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. Thank you very much.

Operator

Thank you, I'll now return the call to Don MacLeod for any additional or closing remarks.

Donald J. MacLeod -- Administrative Vice President, Assistant Secretary and Director of Investor Relations

Thank you all for participating today. And as always, if clarification 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.

Operator

Thank you for participating in the M&T Bank first quarter 2019 earnings conference call. You may now disconnect your lines and have a wonderful day.

Duration: 66 minutes

Call participants:

Donald J. MacLeod -- Administrative Vice President, Assistant Secretary and Director of Investor Relations

Darren J. King -- Executive Vice President and Chief Financial Officer

John Pancari -- Evercore ISI -- Analyst

Ken Usdin -- Jefferies -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Steve Alexopoulos -- J.P. Morgan -- Analyst

Frank Schiraldi -- Sandler O'Neill -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Brian Klock -- Keefe, Bruyette & Woods, Inc. -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Erika Najarian -- Bank of America -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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