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M&T Bank Corporation  (NYSE:MTB)
Q3 2018 Earnings Conference Call
Oct. 17, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the M&T Bank Third Quarter 2018 Earning Conference Call. It is now my pleasure to turn the floor over to Don MacLeod Director of Investor Relations. Please go ahead sir.

Don MacLeod -- Director of IR

Thank you, Maria, and good morning everyone. I'd like to thank you all for participating in M&T's third quarter 2018 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website www.mtb.com and by clicking on the Investor Relations link and then on the Events & 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 complete discussion of forward-looking statements.

Now, I'd like to introduce our Chief Financial Officer, Darren King.

Darren King -- EVP & CFO

Thank you, Don, and good morning everyone. We were quite pleased with M&T's results for the third quarter, which we characterized as strong in this morning's press release.

Some highlights from the quarter include; continued growth in net interest income both on a linked-quarter and year-over-year basis; fee revenues that remain steady with softness in mortgage banking and trust income seasonality being offset by higher commercial loan fees; well controlled expenses, notwithstanding the steps we're taking to invest some of the savings from tax reform into higher compensation for certain employees; and credit performance that is stable to a point beyond our expectations, with the current run rate of credit losses benefiting from a sizable recovery this quarter.

These higher levels of profitability, both pre-provision and after tax, afford M&T many opportunities to deploy capital, including through the return of capital to our shareholders. During the quarter, we increased the quarterly common stock dividend by 25% to $1 per share per quarter and repurchased nearly $500 million of M&T common stock.

Now let's look at the specific numbers. Diluted GAAP earnings per common share were $3.53 for the third quarter of 2018, improved from $3.26 in the second quarter of 2018 and $2.21 in the third quarter of 2017. Net income for the quarter was $526 million, up from $493 million in the linked-quarter and $356 million in the year ago quarter.

On a GAAP basis, M&T third's quarter results produced an annualized rate of return on average assets of 1.8%, and an annualized return on average common equity of 14.08%. This compares with rates of 1.70% and 13.32%, 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 $5 million or $0.03 per common share, little change from the prior quarter. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur.

M&T's net operating income for the third quarter, which excludes intangible amortization, was $531 million, up from $498 million in the linked-quarter and $361 million in last year's third quarter. Diluted net operating earnings per common share were $3.56 for the recent quarter, up from $3.29 in 2018's second quarter and $2.24 in the third quarter of 2017.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholder's equity of 1.89% and 21% for the recent quarter. The comparable returns were 1.79% and 19.91% in the second 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.

As a reminder, the year-over-year comparisons for both GAAP and net operating earnings are impacted by the reduction in the federal income tax rates for 2018 and beyond, with M&T's effective tax rate for the first three-quarters of 2018 some 12 percentage points lower than in 2017.

Recall that both GAAP and net operating earnings for the third quarter of 2017 were impacted by a non-deductible $44 million payment to the US Department of Justice that related to matters at Wilmington Trust Corporation prior to its acquisition by M&T, and a $50 million addition to M&T's reserve for litigation matters. Net of tax impacts, these actions reduced net income by $48 million or $0.31 of diluted earnings per common share in that quarter.

GAAP pre-tax income in the recent quarter improved by 10% from the year-ago quarter, excluding the prior year's increase to the reserve for litigations.

Turning to the balance sheet and income statement, taxable-equivalent net interest income was $1.03 billion in the third quarter of 2018, up $20 million from the previous quarter. The comparison with the prior quarter reflects an expansion of net interest margin to 3.88%, up 5 basis points from 3.83% in the linked-quarter, combined with the impact from one additional accrual day in the recent quarter.

The primary driver of the wider net interest margin was the further increase in short-term interest rates arising from the Fed's June and September rate actions lifting overall asset yields. A big difference between this quarter and the prior two was the relationship between the Fed funds rates and short-term LIBOR. That spread widened to a lesser extent than in recent quarters, resulting in a margin improvement, consistent with our previous estimates.

Average loans declined by $274 million or less than 0.5% compared with the previous quarter. As has been the case for the past several quarters, the continued planned runoff of the mortgage loan portfolio acquired with Hudson City was the main factor. The other higher yielding loan categories grew about 0.5% in the aggregate.

Looking at the loans by category; on an average basis, compared with the linked-quarter, commercial and industrial loans were essentially flat compared with the linked-quarter, with the usual seasonal third quarter slowdown in dealer floor plan balances offsetting growth in other C&I loans. Commercial real estate loans were also effectively flat compared with the second quarter.

As noted, residential real estate loans continued the expected pace of pay down. That portfolio declined by some 3% or approximately 14% annualized, consistent with previous quarters. Consumer loans were up about 2%. Continued strength in recreation finance loans complemented modest growth in indirect auto loans. The ongoing longer term trend of softness in home equity lines and loans continue to offset the gains in the indirect portfolio.

Regionally, the pace of commercial loan growth is fairly consistent with no particular region standing out either positively or negatively. The notable exception is New Jersey, where we're seeing decent growth over what remains a modest base. On an end-of-period basis, loans declined some $1.1 billion or just over 1% compared to the previous quarter.

Excluding residential mortgage loans, the other loan categories declined by about $500 million in the aggregate, which was almost entirely due to a decline in commercial mortgage loans held for sale at September 30th compared with June 30th. Average earning assets also declined by about 0.5% or about $376 million, which includes the $274 million decline in average loans. Average investment securities declined by $425 million, notwithstanding the fact that we did purchase some short duration treasury securities during the quarter.

Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office, CDs over $250,000, and brokered deposits, declined an estimated 2% compared to the second quarter. This primarily reflects the decline in commercial escrow deposits as noted in prior quarters, as well as the seasonal decline in municipal money market balances.

Average time deposit balances declined by 3%, a slower pace than in recent years. The increase in market rates has contributed to higher growth in long duration CDs, while the runoff of acquired Hudson City time deposit balances continues to slow.

Turning to noninterest income; noninterest income totaled $459 million in the third quarter compared with $457 million in the prior quarter. Mortgage banking revenues were $88 million in the recent quarter compared with $92 million in the linked-quarter. Residential mortgage loans originated for sale were $545 million in the quarter, down about 15% from the second quarter.

Total residential mortgage banking revenues, including origination and servicing activities were $59 million, down very slightly from $61 million in the prior quarter. During the third quarter, we entered into a sub-servicing contract, which brought an additional $9 billion of servicing assets. We expect to see the full run rate benefit to mortgage banking revenues from this contract during the fourth quarter.

Commercial mortgage banking revenues were $29 million in the third quarter compared with $31 million in the linked-quarter, reflecting some of the same pressures on loan margins that balance sheet lenders are seeing. Trust income was $134 million in the recent quarter compared with $138 million in the previous quarter, and 7% above the $125 million earned in last year's third quarter.

Recall, that results for the second quarter included some $4 million of seasonal fees earned for assisting clients in preparing their tax returns, which did not recur in the third quarter. Service charges on deposit accounts were $109 million, improved from $107 million in the second quarter, largely the result of seasonal factors.

Losses on investments securities were $3 million in the quarter compared with a $2 million gain in the second quarter. As we've noted previously, this volatility comes as the result of changes in the fair value of our GSE preferred stock, which prior to 2018 had been recorded in accumulated other comprehensive income.

Included in other revenues are certain categories of commercial loan fees including letter of credit and loan syndication fees which improved sharply compared to what we saw in both the first and second quarters.

Turning to expenses; operating expenses for the third quarter, which exclude the amortization of intangible assets were $770 million, unchanged from the previous quarter. Salaries and benefits increased by $13 million to $431 million, reflecting, in part, the impact from our plan to invest a portion of the savings from the lower federal income tax rate toward higher wages for certain employees as well as a modest headcount increase.

Other cost of operations declined by approximately $18 million from the second quarter, reflecting, in part, lower legal related expenses. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 51.4% in the recent quarter. That ratio was 52.4% in the previous quarter and 56% in 2017's third quarter.

Next, let's turn to credit. Credit quality has largely been in line with our expectations, however, this past quarter's results exceeded even our expectations due to a sizable $13 million recovery on a previously charged off commercial loan. Annualized net charge offs, as a percentage of total loans, were 7 basis points for the third quarter, down from 16 basis points in the second quarter.

The provision for credit losses was $16 million in the recent quarter which matched net charge offs. The allowance for credit losses was unchanged at $1.02 billion at the end of September. The ratio of the allowance to total loans increased slightly to 1.18%, reflecting the lower level of loans at the end of the quarter as well as the ongoing mix shift in the balance sheet.

Non-accrual loans were $871 million at September 30, up from $820 million at the end of the second quarter, and remaining within the range seen over the past several quarters. The ratio of non-accrual loans to total loans increased by 7 basis points, ending the quarter at exactly 1%.; also impacted by lower quarter-end loan balances.

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 $254 million at the end of the recent quarter. Of these loans, $195 million or 77% were guaranteed by government related entities.

Turning to capital; M&T's common equity Tier 1 ratio was an estimated 10.44% at the end of the third quarter compared with 10.52% at the end of the second quarter, reflecting strong capital generation during the third quarter, net of share repurchases, as well as the impact from a modest end-of-period decline in risk-weighted assets. During the third quarter, M&T repurchased 2.8 million shares of common stock at an aggregate cost of $498 million.

Now, turning to the outlook. Going into the final quarter of 2018, our outlook for the year remains consistent with the commentary we've offered previously. As we highlighted at a recent investor conference, the soft commercial lending environment combined with our mortgage loan portfolio runoff makes it difficult to grow loans on a full-year average basis.

That said, we do see the potential for growth in the coming quarter compared with the last, aided by seasonal strength in the dealer floor plan loans. We continue to anticipate improvement in the net interest margin for the remainder of 2018, consistent with our prior guidance.

Throughout 2018, we have seen the margin improvement from each Fed funds hike gradually decrease as markets normalize and deposits become more expensive, behaving in a manner more consistent with prior cycles. We will offer our updated thoughts on the net interest margin and the outlook for growth in net interest income on the January call, after we report our full-year results.

Residential mortgage origination activity will remain challenged by higher long-term interest rates but the mortgage sub-servicing contract, I mentioned previously, will provide a partial offset to the revenue pressures that come with the natural aging of the servicing book. The outlook for the remaining fee businesses remains little changed.

The expense outlook is also unchanged. We continue to expect low, nominal annual growth in total operating expenses, excluding the first quarter's $135 million addition to the reserve for the Wilmington Trust Corporation shareholder litigation. The growth rates of the individual expense categories may vary from quarter-to-quarter as we continue to manage across the bank's total expense base.

As a reminder, our outlook does reflect our view that the FDI surcharge on large banks will end in the fourth quarter of 2018. Our outlook for credit also remains little changed. The sizable recovery that benefited the third quarter results was indeed a positive event, but one that we don't anticipate repeating next quarter. We also anticipate continuing to execute our 2018 capital plan, given our strong profitability and capital ratios.

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

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Ken Zerbe of Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

I guess, maybe just starting with deposit costs a little bit. I understand, you guys have a really low deposit beta relative to many other banks that we're seeing. But I was hoping you could just talk about where are you seeing pressures? And if you are whether it's specific markets, certain products? Is there anywhere this getting incrementally more challenging on the margin? Thanks.

Darren King -- EVP & CFO

Ken. I think when we look at our deposit costs and the change quarter-to-quarter, it's not any one region in particular but the place where we see movement varies by segment. So we'll start with commercial. In the commercial portfolio, it's really been in interest checking and in noninterest checking in the form of earnings credit rates. And so we've started to see some pressure there. We have some balances in commercial that are linked to an index, so as the index moves up, the price moves up there.

But we continue to see corporate treasurers paying a lot more attention to their excess balances and considering moving them to interest checking, sometimes into on-balance sheet sweep, and in the end to off-balance sheet sweep as well. But we've been very active with our customers, making sure we're out working with them to help them put their excess balances to effective use.

In the consumer space, we're seeing behavior that's fairly typical as you work your way through a rising rate cycle. The main event so far has been balances moving from money market, savings accounts into time accounts. And as we mentioned in the, I guess prepared comments that, within the CD book, we're starting to see people lengthen out the terms that they're signing up for.

So early on, if you probably looked about a year ago, we would have said most of the action was in the one-year CDs base and with the changes in the curve, a little bit of late, we've seen a little more activity in the 18 and 24 month space. And so you're seeing a little bit of remixing, where balances are shifting from money market into time.

But, generally, both of those are pretty consistent with what our prior experience has been as well as what we tend to model when we do our ALCO runs, and we put in our asset sensitivity in the K and the Q. The one thing that's probably a little bit unique to us perhaps compared to some of the others is just the percentage of our deposit base that sits in non-interest bearing and operating accounts of business or consumer, and obviously that helps mitigate, to some extent, the impact of rising rates.

Ken Zerbe -- Morgan Stanley -- Analyst

And then, last question, just in terms of, I guess, capital returns, given that your loan growth has incrementally gotten a little bit slower, hence your revised guidance that it's hard to grow the average balances. At what point would you go or can you go back to the Fed and ask for maybe a revision to your capital return approval? Or is that even an option or something that you guys would consider? Thanks.

Darren King -- EVP & CFO

So technically, the option always exists that you can go back to the Fed and do a resubmission after you've gone through and done your initial CCAR ask and been approved as well as an update, like we did last year after mid-cycle. When we look at where things are right now, this is one quarter that was maybe a little bit slower than we anticipated.

Fourth quarter, things usually pick up and we're not materially off where our capital plan was. And when you combine that with, still waiting for a little bit of clarity on how the regulations might change, I would suggest that it's probably a low probability that we would go back this year, as we did last year.

Operator

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

Matt O'Connor -- Deutsche Bank -- Analyst

You guys talked a little bit about kind of the loan growth outlook on a near-term basis here, and it seems like most of the optimism is based on maybe seasonality. As you kind of look more medium-term, can you talk about your confidence in growing loans and maybe just the overall balance sheet because obviously the securities balances have come down. You've got some capacity to buy there if you wanted to and also to extend. So, maybe just talk about the medium-term outlook for loan and balance sheet growth. And then, if there is any kind of added thoughts on the securities his portfolio that are worth mentioning?

Darren King -- EVP & CFO

I'll start with the securities portfolio and then worked to the loan growth, because the securities portfolio, really our preference is to invest our deposits into loans with our customers. The securities portfolio really is meant to help with our liquidity coverage ratio, and so, depending on the deposit balances as well as the mix of loans, that will impact our liquidity coverage ratio requirements and we'll set our securities accordingly.

And when we think about what we need for the liquidity coverage ratio, we think about not just what's in the securities portfolio, but what's in cash. And the combination of those two is what we look at the securities portfolio, a little bit more of it of late is sitting in cash than in securities, just because when we look at the overnight rates compared to the one-year treasuries, there's not enough of a premium to make it worth stepping in.

If you go to the loan book, when we think about the loan book, it's really important to take our portfolio and separate out the residential real estate portfolio from the other asset categories. So, we expect to continue to see runoff in the residential real estate portfolio. Given its characteristics, we don't see any reason to believe that the pay down rate that we've been seeing for the last several years is likely to change, and that's kind of been around 13% to 14% annualized.

The only thing that will happen, obviously, is as that portfolio gets smaller, the dollar amount of decrease will also get smaller and therefore the amount of growth needed in the other portfolios to create absolute loan growth will get a little bit easier.

In consumer loans, we've been pretty consistent with our positioning in indirect auto as well as rec-fi and anticipate that that will continue, obviously depending on the strength to the consumer. But right now, I have no reason to believe that that will slow materially.

And then, in commercial real estate and C&I, they've been relatively flattish the last couple of quarters actually and I think that that performance is a little bit masked by the overall loan decreases. And really, the challenge there has been pay offs and pay downs and they're in -- the place those are coming from differs by the portfolio. So, our commercial real estate portfolio, we're seeing some pay downs of construction balances where construction projects are coming to completion; and then we see some permanent financing going into the insurance companies.

Now, we have seen a little bit of movement in our construction commitments, which gives us little bit of optimism for the next 6 months to 12 months. But those balances obviously build as projects move through their completion cycle and so we'll be watching that.

In the C&I portfolio, obviously we talked about the seasonal factors. While we continue to be active in the floor plan business, we see some activity in healthcare and in certain segments of healthcare and we've seen some increases in commitments. So, there are some reasons to be optimistic as we look forward and really the wildcard is some of the things that are a little bit outside of our control and that's activities around private equity, which has really kind of been the issue in C&I lending, where we see private equity coming in and buying out some of our customers and injecting equity and/or coming in and putting debt on top of ours with their loan funds.

And so that's a phenomenon that's likely to continue for a little while longer but what we've learned through time is to be patient and to not reach and to be there for our customers. And that's what we've been doing for the last 12 months to 24 months and what we'll continue to do.

Operator

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

John Pancari -- Evercore -- Analyst

Related to that loan growth commentary you just gave, that's helpful. Just wondering, how would you view the 2019 trajectory in terms of growth? I know you implied it's tough to grow 2018, but are we looking at something that could be in the GDP range for 2019 excluding the runoff remaining in the resi book?

Darren King -- EVP & CFO

John, we're going through right now finalizing our thoughts on 2019 and putting our plan together. We'll be back in January with more specifics about how we see 2019 unfolding. So I think it's a little premature to comment. Also our thoughts on 2019 will be impacted, to some extent, by the fourth quarter that we've seen in years go by, some substantial movements can happen in the fourth quarter and can have a big impact on your start point for 2019. So I'm going to defer my thoughts on that until January.

John Pancari -- Evercore -- Analyst

And then, on the margin, just a couple of quick things here, what is the impact to the margin that you expect from the incremental moves by the Fed, so for the next 25 basis point Fed move. What does that equate to by your latest math in terms of a margin benefit? And then separately, curious about your updated thoughts on the loan-to-deposit ratio, I know it's around 97.5% here and moved up a little bit. Where do you think that could go just as you leverage other parts of your loan book to fund new loan originations? Thanks.

Darren King -- EVP & CFO

So, for net interest margin, we're not changing our expectations that for a 25 basis point increase that it would be outside of the 5 basis point to 8 basis point range. That number, when we talked about that at the start of the year was an average for the year for each 25 basis point.

What's been true is it started out at the higher end of that and in fact above early on in the year and it's come down toward the lower end of that more recently as we start to see deposit pricing look more like prior cycles. And so, for the rest of the year, that's kind of where we see things going. As we go into 2019, again, we'll be updating our models and looking through our thoughts on, in particular, deposit reactivity and we'll give you a new guidance at that point. I should have wrote down your other question.

John Pancari -- Evercore -- Analyst

It was the loan-to-deposit ratio.

Darren King -- EVP & CFO

So the loan-to-deposit ratio has kind of hovered around 97%, 98%, 99% in each quarter for the last three depending on combination of some of the held-for-sale balances at the end of the quarter or what happens during the quarter as well as the pace of loan run-off and originations. And kind of the combination of those factors, we expect to be in play for the coming several quarters, hard to foresee us getting down to a 95% ratio, although you never say never; equally hard to see us going meaningfully over 100%. I expect we'll be in this range for the foreseeable few quarters, but something else that we'll look to update in January.

Operator

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

Frank Schiraldi -- Sandler O'Neill -- Analyst

Just a couple of questions, I wanted to ask about the rate of runoff in resi. I mean, I believe most of that Hudson City production is variable rate, so I'm not sure rates are doing anything to it. But just wondering or if you could remind us on your thoughts on how that rate of runoff changes, if at all, in coming quarters?

Darren King -- EVP & CFO

Sure, Frank. There's a mix of different things within that Hudson City book. There are some five-ones and seven-ones and as you pointed out, rates aren't impacting them. There are some jumbles in there as well as a small portion actually of good old all day.

And what we've seen over the hikes since 2015 is really not much of a change in the prepayment speed or payoff ratios in that book. And so we're not anticipating a material decrease, it's probably down slightly maybe a point, '18 over '17 and if rates continue on their trajectory, maybe another point reduction in 2019. The bigger factor there really is just the size of the portfolio and how much in dollars runs off each quarter as much as the rate of decline.

Frank Schiraldi -- Sandler O'Neill -- Analyst

And then, you already mentioned, you talked about on the deposit side about the amount of balances sitting in non-interest bearing, I think it seems to be a focus of investors this quarter is non-interest bearing and some contraction we've seen at other banks. Look like your balances were pretty flat linked-quarters. So I'm just wondering if there's any noise there or just if you could talk a little bit about the ability to defend those balances or if you're starting to see pressure there?

Darren King -- EVP & CFO

So, for the non-interest bearing deposits, it's a keen area of focus for us, whether that's within our consumer portfolio, where we actually did see some checking account growth in the third quarter, which was nice to see; as well as in our small business and in our commercial customers. And that's the number one thing we focus on every day in our calling activity, because that's really the anchor relationship product, no matter which business we're in.

And so, in the commercial space, our teams have been out talking to customers, helping them optimize their cash, which obviously will mean some of that will move into the interest-bearing, be it on balance sheet sweep, on balance sheet interest checking, but also some remains in the operating account. For our small business customers, that tends to be a place where operating balances tend to stay, and is a category where deposit balances typically exceed loan balances, and that continues to be the case, and a place where we're strong.

When you look at our market share in SBA across our footprint, we tend to be a one, two or three position in most of those markets and it's an area of focus that we'll continue to spend time on. And then, as we mentioned in consumer, there's obviously some excess balances in checking accounts today and some of that you might start to see move but not likely until there's more movement in savings rates and money market savings rates.

And you've seen a little bit of that in the banks but not much. Most of that action has been in the non-bank space and the online savings account space. So, you see a little bit of migration but we're keenly focused on it. We expect that it will decrease slowly over time just as rates move, which is pretty normal but we're not expecting a mass exodus of funds.

Operator

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

Ken Usdin -- Jefferies & Co. -- Analyst

It was nice to see the flattish trajectory on the expenses this quarter. Just wondering if you can give us a little bit more color first on just the -- what led the increase in salaries and benefits on one side. And the other you mentioned, I think, the legal and professional fees came down another and if this is a more kind of normal starting point for that, as that looks like started to tail off?

Darren King -- EVP & CFO

Sure Ken, happy to discuss those. For salaries and benefits, there is really two main drivers of the increase that were sustainable. Number one is the increases that we've made to compensation for many of our employees, which was really an outgrowth of the tax reform. We were one of the places that didn't actually do a one-time bonus at the end of last year, opting rather to invest in permanent increases to the comp for many of our employees. That included raising the minimum wage to $14 up to as high as $16 an hour, depending on the geography.

And that went-in in stages. Some of it went-in in the first half of the year and the second step went-in when it became effective starting July 1st. So you started to see that come through in the third quarter. The other thing that happens for us is, we have an influx of new graduates into our management development programs usually in the summer, and so you get a little bit of an uptick in headcount and salary there. Some of that will come down.

And then the other part where we're spending a lot of time is with our professional services in the technology realm. And it's our objective to overtime switch much of the professional services or some of the professional services I guess I should say, from kind of contractors to permanent on-staff employees. So we'll see some headcount growth there.

The $13 million, it was probably a little bit higher than what would be a more normal rate. There is probably about $3 million or $4 million of what I would call seasonal expense in there that likely won't repeat. But the movement is definitely up from where we were in the second quarter.

On the professional services side, there is always some movement in that category from quarter-to-quarter. This quarter, we saw a substantial decrease mainly because we had such a big quarter in the second quarter in terms of litigation related legal expenses. Those have come down fairly dramatically since then.

And then, one of the other big professional services expenses is some of the IT help that we have, and that can bump around a little bit from quarter-to-quarter. But where we were this -- in the third quarter is probably a reasonable starting point. Maybe I'd add a few million dollars to that. But I think it's a reasonable starting point for going forward.

Ken Usdin -- Jefferies & Co. -- Analyst

And then, the just bigger picture, I think you've talked about just continuing to expect this quarter, nominal amount of expense growth as you go forward and you've mentioned both -- can you balance this out as far as -- you know you've mentioned the needs to invest but you've also mentioned self-help stuff, whether it's from branches or some of this decline in legal et cetera. Can you just talk us through some of the moving parts of that and your ability to continue this nominal type of growth rate in expenses? Thanks.

Darren King -- EVP & CFO

Sure. So, what you saw a little bit this quarter in the expense line item is kind of the explanation or story we've been talking through for the last several quarters that things will remix on the income statement. So we saw that the professional services came down, but the salaries and benefits went up.

As we change the mix of contractors to staff those two line items, you'll see some shift. And when we talk about investments in technology, some of it you see on the line that is professional -- sorry outside data processing and software, and that's the software piece. But oftentimes the expense shows up in the salary and benefit line because that's where a lot of the teams are that are doing the work of installing and adding any customization or integration shows up on that salary and benefits line.

And so while there will be some increases in what we invest in our technology teams, those over time can be offset and have been in the past by reductions in the branch network, which will affect both the furniture and equipment expense line item as well as the salary line item. So, when we think about the Bank and we think about our expense trajectory, we look across the whole $3.2 billion of expenses and we're always thinking about how investments that we made yesterday can be monetized today to help offset the investments we're making today for the future.

And you see some of that move from time-to-time. You've seen us invest a little bit more this year in advertising and promotion to drive some customer growth, which we talked about on the consumer checking side. So we're always looking across the various categories. And as you mentioned, we'll see some move from quarter-to-quarter.

But overall, we focus on the bottom line and part of what's helping us is, we looked forward knowing that some of the legal related expenses would come down as things got settled as well as the FDIC surcharge will go away. So we'll be looking to invest some of that in the franchise.

Operator

Our next question comes from the line of Steven Alexopoulos of JP Morgan.

Steven Alexopoulos -- JPMorgan -- Analyst

I wanted to start with a follow-up on Frank's earlier question and the comments you gave that you don't expect a mass exodus of non-interest bearing. If we think about the $32 billion and you're working with your treasures now, how much do you think could be a risk to migrate out into alternatives overtime?

Darren King -- EVP & CFO

I guess my starting point to think about that Steven is to look at where we were before the crisis and what percentage of the liabilities of the Bank sat in non-interest bearing deposits. Now obviously we've had some growth in customers since then, so the absolute dollar amount of where we end up post normalization, if you will, should be higher.

But we anticipate that the mix of non-interest bearing to interest checking to money market and savings and time would look pretty similar to where we were then, and the only question mark will be how much ends up off balance sheet and off balance sweep? And I'll be off by a little bit but my recollection is that during that time period, about $3 billion to $4 billion came on balance sheet from off balance sheet.

Steven Alexopoulos -- JPMorgan -- Analyst

Just one separate question, can you give some color on the C&I loan growth in the quarter if you exclude the seasonal decline in dealer that you saw?

Darren King -- EVP & CFO

Yes, if you exclude the seasonal dealer decline, which is actually a little bit less this year than what we've seen in prior years. Dealer decline this quarter I think was around $150 million, $200 million, which is a little bit less than what we saw in the third quarter of last year. I'm not sure, I suspect that has a lot to do with how vehicle sales have kind of slowed down a little bit that the current model year isn't going off the lot quite as quickly.

But outside of that, we've seen some increases, in particular in the healthcare segment, really in assisted senior living and acute care. And you know, I guess, given the demographics of the population that probably makes some sense that you see some of that. Over time, those stabilized projects also can lend themselves to fee income because oftentimes those also get taken over by some of the capital markets or the insurance companies. But that's some of the places where we've seen some increase that offset the floor plan, at least this quarter.

Operator

Our next question comes from the line of Gerard Cassidy of RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Can you share with us -- coming back to the deposit -- your comments just a moment ago about non-interest bearing deposits to total deposits? And when we look back over 20 years, the numbers today are considerably higher than what you had even before the financial crisis, as a percentage of total, and I'm assuming that's because of acquisitions of companies like Wilmington Trust and if you go back even further of Keystone Financial. So on an apples-to-apples basis, the percent today around, say the mid-30% range, is that equivalent to where you were when you kind of do a pro forma with the deals that you've done over the years?

Darren King -- EVP & CFO

If you look at the recent deals, and the two most notable being Hudson City and Wilmington Trust, they brought a different deposit profile. So I think going back over 20 years is probably not likely to repeat itself. I think we got to look at a little bit more like where we were going into the crisis. And when I think about Wilmington Trust and what it brought, they've brought definitely a nice base of non-interest bearing deposits, because we have a number one share in the state of Delaware in consumer and in small business, and those tend to be drivers of non-interest bearing deposits.

But it also brought a big private banking book and that tends to skew more toward interest checking and money market savings. So that's kind of an offset there that would look a little bit different than what we would have looked like prior to merging with Wilmington Trust.

And then on Hudson City; Hudson City, obviously, was very skewed toward interest bearing in particular time accounts, but also money market and interest checking. And so those will -- because of the nature of those balances, they would tend to decrease non-interest bearing as a percentage of the portfolio.

So, if I was thinking about run rate, maybe through 2019 and into 2020, I would start to look at where the bank was in kind of 2008, 2009 and then, adjust for time deposits being a little bit bigger percentage today and going forward as rates change and balances migrate in there and a little bit more in money market due to private banking customers, and then non-interest bearing making up the rest. And I guess I would expect that that would -- I haven't looked at the math, but in that range of 25% to 30% of what our deposit balance space might look like.

Gerard Cassidy -- RBC Capital Markets -- Analyst

And then, follow up question. If I recall, I think you guys introduced Zelle recently to your customers.

Darren King -- EVP & CFO

We did.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Could you share with us, two things, just how did the rollout go? Are you seeing client engagement or how is the client engagement? And second, technology spending is obviously critical. Do you find that if you're not the first one to have the latest bell and whistle that it's still OK you're not losing customers because you're not the first one in line to get the latest ingress?

Darren King -- EVP & CFO

So, I can answer the second part easier than I can answer the first. And the answer is, we've been both the first and not the first and it hasn't made a material impact in our customer acquisition rates or retention rates. Back when Apple Pay came out, we were actually one of the first banks in on Apple Pay and the adoption was, as we know, slow and it didn't move people into or out of our checking accounts.

With Zelle, which has been live now for about two weeks, we've been pleased with the number of sign-ups that we've seen and the level of activity. I don't have exact numbers for you, Gerard, on how that's moving, but it's moving in a nice direction. And we were not the first to implement Zelle, but we're certainly not the last, so it characterizes us as more toward the middle of the pack, maybe toward the middle end. But we haven't seen a meaningful uptick in customer acquisition since and we hadn't seen a meaningful decrease in acquisition or conversely, an increase in attrition with the delay.

Our take on it, Gerard, is that customers look at the Bank and they look at the total package of benefits that are offered and that's things like Zelle, it's things like mobile check deposit, it's the quality of the mobile app, it's how many branches you have, it's whether they are in good shape, it's access to ATM's and the call center and not to mention the product feature functionality.

And so, it's really the combination of everything and you need to be collectively competitive. And so any one factor in a moment in time generally doesn't tend to move the needle positively or negatively, but overtime, if you're not competitive, then that's when problems occur.

Gerard Cassidy -- RBC Capital Markets -- Analyst

And just quickly, what's the duration of the securities portfolio now?

Darren King -- EVP & CFO

It's just about three years. It was a little shorter than that, but as rates went up and some of the mortgage-backed securities in there extended, the duration has gotten a little bit longer.

Operator

Our next question comes from line Saul Martinez of UBS.

Saul Martinez -- UBS -- Analyst

First, can you just give us an update on CECL preparations, where you're at there and any thoughts on when we might actually see an estimate of the financial impact and in what parts of your portfolio also just might be more susceptible to reserve increases or conversely to reserve releases, since it does seem like you're pretty well reserved, in part to your portfolio even under the incurred loss model?

Darren King -- EVP & CFO

Sure. So, we will continue to work through the CECL process from the work we've done and talking to our peers as well as talking to the regulators. We're pretty much in line with where everyone else is in those preparations. It's our objective to start to run somewhat in parallel in 2019 in terms of making sure the CECL process is up and running and ready to operate on a quarterly basis given some of the technical aspects of it compared to the current ALL process.

But at this point, we don't have an estimate on what we expect the impact of CECL to be. I guess in the grand scheme of things, given our reserve and where it is, and when you think about it in relation to capital, you'd have to have a pretty meaningful change in your allowance to have a big change in your capital ratios, and so, as we think it through and look at it we're not anticipating a meaningful change in either direction to our capital ratios as a result of CECL.

Saul Martinez -- UBS -- Analyst

And if I could just follow up on deposit costs, you're obviously still outperforming peers in terms of betas and you've highlighted that the Hudson City runoff, the benefits from that are tailing off, but is the expectation still that you will be an outperformer in terms of deposit betas or do you feel like we're getting closer to a point where maybe your beta start to converge with the peer group?

Darren King -- EVP & CFO

We're expecting that the cost of deposits is going to increase from here forward. And you know you saw this quarter, time deposit cost increase, I think about 12 basis points. And when we look at the cost of our time deposits in our legacy portfolio and our Hudson City portfolio, they're identical. So from our perspective, those two portfolios are now merged and we price the whole network the same way. There's nothing special for New Jersey anymore.

So that book will start to move in concert, and as we mentioned, we expect to continue to see migration from money market savings balances into time, and the rate of increase in the time costs will be a function of mix and how much goes into two year CDs or even three year, depending on where Fed funds go versus what stays in one year or less.

As we mentioned, in the commercial space, we have a number of balances that are related to the index and obviously those will move exactly with the index and then the other costs of deposits will move in lockstep with the markets. We operate our Bank in competitive markets and we have to maintain our pricing equal to that of our competition and so the rate of increase did go up a little bit this quarter. It's probably going to go up a little bit next quarter, and overtime, I think will start to normalize to what we've seen in terms of reactivity that we've seen in prior rising rates cycles.

As we mentioned, I think the thing that is a little bit different for us compared to maybe some of our peers is just the mix and the things we've been talking about before about the mix of non-interest bearing deposits in the overall book and that helps minimize the overall cost of our deposits.

Saul Martinez -- UBS -- Analyst

Have you given an estimate of where you think the terminal beta on your interest-bearing account to trend to and we get closer to a more normal or the terminal Fed funds rate?

Darren King -- EVP & CFO

We haven't talked about that and we don't have a thought on that at this point.

Operator

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

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

I guess, just a follow up on the dealer floor plan discussion from earlier. Can you remind us what the size of that portfolio is and what was the growth that you saw in the fourth quarter of last year from the third quarter?

Darren King -- EVP & CFO

Brian, I got to be honest with you, I don't know that the growth rate that we saw quarter-to-quarter in that portfolio, off the top of my head. The total balances of floor plan are about $3.50 billion to $4 billion, and obviously those are on online. The increase or decrease from -- certainly from third quarter to four is much a function of what's going on in the industry in delivery of models as well as how fast they're rolling off the lot. So I don't have an exact number for you on how much those might grow. If you think about what came off this quarter, it's about $150 million, $200 million. We expect that that will go back on in a little bit beyond that. So I guess I'd be thinking kind of $200 million to $300 million increase from where we ended the quarter.

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

And on the mortgage banking side, thanks for the details you gave earlier. So it looks like, in the quarter versus second quarter, resi mortgage banking was essentially flat, you said around the $61 million. And the last quarter, you had a pretty decent commercial real estate gain on the sale. So, I guess, that implies that somewhere in the -- you had a much smaller ones in servicing fee on the commercial real estate, somewhere around $13 million, $14 million a quarter. So do you think that going forward, we're going to be more in the kind of average $26 million, $27 million for the first half of the year and it's below that for the third. So is that something you think we should expect to be in the mid-20s going forward or should we thinking about the commercial real estate side of it?

Darren King -- EVP & CFO

So, I guess, if you think about this quarter versus last, total mortgage banking revenues were down about $4 million. Now it's about $2 million in the residential side, both combined between origination servicing and about $2 million on the commercial side. The consumer side is a little more predictable because a bigger chunk of our revenues is from servicing, and obviously the servicing portfolio is declining asset. So it slowly marches down. We mentioned that we added about $9 billion of the servicing over the course of the quarter and so the full impact of that will show up in the four.

On the commercial side, there tends to be a little bit more volatility. History has suggested that that business tends to be back-end loaded or weighted, meaning, we tend to see historically, a little bit more volume in the second half of the year than the first half of the year. What we've seen and saw this past quarter in particular was a little bit of a slowdown in volume as rates were going up that people were reticent to lock with some of the movement and the other thing we saw is a little bit of a remixing between Fannie and Freddie, which caused a little bit of margin decrease which lowered the revenue we received.

The good news is the mix also shifted to a space that's a little bit more capital friendly. So not surprisingly, as the yields go down, so do the capital requirements to support it.

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

And I guess, just on the sub-servicing, if I calculate the math right on the entire servicing portfolio, you're getting about a 26 basis point fees. Now sub-servicing is usually something lot, so you would be thinking something like $3 million to $4 million of income a quarter from the new sub-servicing book for a full quarter or is it something a little higher than that?

Darren King -- EVP & CFO

I would think it's a little bit less than that, because usually the way sub-servicing works, you get higher rates if you got MSR and you own the asset and little bit lower if you're just the sub-servicer. So, I would be more in the range of $1 million to $2 million.

Operator

Our next question comes from the line of Christopher Spahr of Wells Fargo.

Christopher Spahr -- Wells Fargo -- Analyst

I just want to take a step back and look at the overall tech budget that M&T has. Maybe you can talk about how it is -- as of the $3.2 billion of annual expenses it is today, how does it compare to like after the first full-year of merger close in 2016? And what do you think it's going to be in 2020?

Darren King -- EVP & CFO

If you look at our spending, our total spending on tech, as a percentage of our operating expense, it's increased each year for the last four. If you look at our compound annual growth rate in our technology-related spending for the last four years, it's up kind of 8% to 10% a year on average. And we see that rate continuing into or we see growth continuing into 2019 and 2020 but we see the rate actually starting to moderate a little bit.

And especially as we remix the talent that is doing the technology work that that will help moderate that expense growth. But what it doesn't mean is that it slows down our ability to invest and deliver new product and capabilities for our customers and for our employees. So we are in an industry that is very tech-driven and we're committed to making sure that we're investing in the franchise at a pace that keeps up with the demands of our customers and employees but manages the risk of how fast you do it.

Christopher Spahr -- Wells Fargo -- Analyst

And as a percent of the total expense base, I know you've talked about some of it's buried in salaries. You have outside data processing and some professional services.

Darren King -- EVP & CFO

Those are the two primary line items which you see the tech expense.

Christopher Spahr -- Wells Fargo -- Analyst

But you don't break it out as kind of as a percent of total or as a dollar amount?

Darren King -- EVP & CFO

We don't, no.

Christopher Spahr -- Wells Fargo -- Analyst

And then, finally, just kind of seeing the progress you're making in tech, can you give us the percent of customers that are mobile and digital, either a number or a percentage?

Darren King -- EVP & CFO

From a digital perspective, that number is quite high. The number of customers as a percentage of customers that are online is well over 60%. When we look at those that are mobily active that numbers continues to grow each quarter and right around 30% of the customer base, which is up from about 25% last years. So, steady growth each month and each quarter.

Operator

Our final question comes from the line of Kevin Barker Piper Jaffrey.

Kevin Barker -- Piper Jaffrey -- Analyst

In regards to some of your markets that you mentioned, I noticed that you said New Jersey was pretty strong. Are you seeing growth in any other markets or are you looking to expand outside of your existing footprint more specifically up in New England?

Darren King -- EVP & CFO

So, we have expectations to grow in every one of our markets by and large. No one gets a free pass at M&T. If you look at our expectations based on our market share, we would expect higher growth rates in New Jersey, in Philadelphia, in Baltimore, Washington, and perhaps in the surrounding areas of New York City, just given our share there.

As you point out, we have an office in Boston, that's been officially opened for just about two years now. It's a combination of our Wilmington Trust Franchise as well as our core banking franchise and we've been making inroads there. But the basis of our expansion is always the same and it starts with our customers and we follow our customers into new geographies and take care of them. Oftentimes, our real estate customers lead the way and we follow them into those geographies.

And then, once we're in there, we get involved in the market like we normally do, both from a philanthropic perspective as well as being on Boards and getting to know folks in the community and that's usually how we expand from there. We're very selective in how we grow that we never compromise on our credit standards as we do that. But those are markets where we were definitely looking to expand, and Boston and Massachusetts is certainly on our radar screen.

Kevin Barker -- Piper Jaffrey -- Analyst

When you look at that opportunity and potential expansion outside your existing markets or even like where you have smaller presence, there has been obviously a lot of changes that have been going on, specifically in the Boston market, with Chase coming into that market. Does that change your perspective on being a potential growth opportunity?

Darren King -- EVP & CFO

Can you ask the question again there is -- because Chase is coming into Baltimore we're more interested in growing somewhere outside of Baltimore?

Kevin Barker -- Piper Jaffrey -- Analyst

I'm saying JPMorgan coming into Boston, in particular and some of the changes that are occurring within Boston. I mean you obviously have very strong presence in Baltimore already.

Darren King -- EVP & CFO

Sure, yes. So, obviously in Baltimore, our focus will be on protecting our customer base and continuing to grow and be meaningful and relevant in that geography, which for us is basically our second hometown. In Boston, just because of our physical presence, we'll be selective there and we'll focus on the relationships that we have and in expanding them judiciously.

Boston is a very large market and actually if you look at the top 20 MSAs in the country, one where the presence of the big four is actually quite small, with the exception of Bank of America. So I'm sure that's part of what's on JPMorgan's minds as they go up there. Our view is that it's an attractive market. It's a place where our way of banking, we think, fits and we'll look to grow at a measured pace and watch and see what opportunities present themselves.

Operator

And thank you, that was our final question. I would now like to turn the floor back over to Don MacLeod for any additional or closing remarks.

Don MacLeod -- Director of IR

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

Operator

Thank you ladies and gentlemen. This does conclude today's M&T Bank's third quarter 2018 earnings conference call. You may now disconnect.

Duration: 71 minutes

Call participants:

Don MacLeod -- Director of IR

Darren King -- EVP & CFO

Ken Zerbe -- Morgan Stanley -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

John Pancari -- Evercore -- Analyst

Frank Schiraldi -- Sandler O'Neill -- Analyst

Ken Usdin -- Jefferies & Co. -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Saul Martinez -- UBS -- Analyst

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

Christopher Spahr -- Wells Fargo -- Analyst

Kevin Barker -- Piper Jaffrey -- Analyst

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