M&T Bank Corporation (NYSE:MTB) Q4 2021 Earnings Conference Call January 20, 2021 11:00 AM ET

Company Participants

Brian Klock - Head of Markets and IR
Donald MacLeod - Director, IR
Darren J. King - EVP & CFO

Conference Call Participants

John Pancari - Evercore ISI
Ken Usdin - Jefferies
Gerard Cassidy - RBC Capital Markets
Christopher Spahr - Wells Fargo
Dave Rochester - Compass Point
Ebrahim Poonawala - Bank of America
Erika Najarian - UBS
Matt O'Connor - Deutsche Bank

Operator

Good morning and welcome to the M&T Bank Fourth Quarter and Full Year 2021 Earnings Conference Call. Currently, all phone participants have been placed in a listen-only mode. Following management???s prepared remarks, we will open the call for your questions. [Operator Instructions]. Today???s call is being recorded. [Operator Instructions]. I would now like to introduce hand the call over to Brian Klock, Head of Markets and Investor Relations. Please go ahead.

Brian Klock

Thank you, Brittany and good morning. I'd like to thank everyone for participating in M&T's fourth quarter 2021 earnings conference call both by telephone and through the webcast. Joining on the call today are Darren King, M&T???s Chief Financial Officer and Don MacLeod, M&T???s outgoing Director of Investor Relations who will be retiring after our Annual Meeting of Shareholders in April. As he has done for the past 17 plus years let me turn the call over to Don to read our disclaimers.

Donald MacLeod

Thank you, Brian. 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 by clicking on the Investor Relations link and then on the Events and Presentations link.

Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors. These statements speak only as of the date made, and M&T undertakes no obligation to update them. Now, I'll turn the call over to Darren King.

Darren J. King

Thank you Brian and Don and good morning everyone. Don, it's hard to believe that it???s the end of an era, 17 years at M&T and 40 years in the industry and you've been nothing but a true professional and certainly helped make my transition into the role a lot easier. I've learned a lot from you. I thank you and we wish you all the best in your retirement.

Before we get into the details of the recent quarter's results, I'd like to pause and reflect on a few highlights of the past year. While the impact of the pandemic is still being felt by M&T and the rest of the banking industry, the turnaround in 2021 has been remarkable. We've seen a transition from economic contraction and a zero balance interest rate environment to the prospect of persistent inflation and higher interest rates in 2022. Against that backdrop, GAAP based diluted earnings per common share worth $13.80 compared with $9.94 in 2020 up 39%. Net income was $1.86 billion compared with $1.35 billion in the prior year, improved by 37%. Those results produced returns on average assets and average common equity of 1.22% and 11.54% respectively.

Net operating income which excludes the after tax impact from the amortization of intangible assets as well as merger related expenses was $1.9 billion up 39% compared with $1.36 billion in the prior year. Net operating income for diluted common share was $14.11 compared to $10.02 in 2020 up 41%. Net operating income for 2021 expressed as a rate of return on average tangible assets and average tangible common shareholders??? equity was 1.28% and 16.8% respectively. We increased the common stock dividend for the fifth consecutive year to an annual rate of $4.80 per share per year. Tangible book value per share grew to $89.80 at the end of 2021 up 11.5% from the end of 2020. And as we build capital in anticipation of the merger with people's United financial, our CET1 ratio increased to an estimated 11.4% at the end of 2021 from 10% at the end of 2020. Although season, pardon me, the year had its ups and downs it sure felt like another division championship.

Now let???s turn to the results for the quarter. Diluted GAAP earnings per common share were $3.37 for the fourth quarter of 2021 compared to $3.69 in the third quarter of 2021 and $3.52 in the fourth quarter of 2020. Net income for the quarter was $458 million compared with $495 million in the linked quarter and $471 million in the year ago quarter. On a GAAP basis M&T???s fourth quarter results produced an annualized rate of return on average assets of 1.15% and an annualized return on average common equity of 10.91%. This compares with rates of 1.28% and 12.16% respectively in the previous quarter. Including GAAP results in the recent quarter or after tax expenses from the amortization of intangible assets amounting to $1 million or $0.01 per common share, little change from the prior quarter. Also included in the quarter's results were merger related expenses of $21 million related to M&T???s proposed acquisition of Peoples United Financial. This amounted $16 million after tax or $0.12 per common share. Results for 2021 third quarter included $9 million of such charges amounting to $7 million after tax or $0.05 per common share.

Consistent with our long term practice M&T provides supplemental reporting of its results on a net operating or tangible basis from which we've 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 fourth quarter which excludes intangible amortization and merger related expenses was $475 million that compares with $504 million in the linked quarter and $473 million in last year's fourth quarter. Diluted net operating earnings per common share were $3.50 for the recent quarter compared with $3.76 in 2021 third quarter and $3.54 in the fourth quarter of 2020. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholder???s equity of 1.23% and 15.98% for the recent quarter. The comparable returns were 1.34% and 17.54% in the third quarter of 2021.

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. Included in the recent quarters GAAP and net operating results was a $30 million distribution from Bayview lending group. This amounted to $22 million after tax effect and $0.17 per common share. We received a light distribution in the fourth quarter of 2020. Prior to 2020 we had generally received such distributions in the first quarter of each year.

Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $937 million in the fourth quarter of 2021, marking a decrease of $34 million or 3% from the linked quarter. The primary driver of that decrease was a $30 million decline in interest income and fees from PPP loans as that portfolio continues to decline following forgiveness of those loans by the small business administration. The net interest margin decreased by 16 basis points to 2.58% that compares with 2.74% in the linked quarter. We estimate that the higher balance of low yielding cash on deposit at the federal reserve diluted the margin by about 9 basis points in the quarter. The lower income from PPP loans including declines in the scheduled amortization and accelerated recognition of fees from forgiven loans contributed about 5 basis points of the margin pressure. All other factors including lower benefit from hedges accounted for an estimated 2 basis points of the decline. Average earning assets increased by $4 billion compared with the third quarter. This includes a $5.3 billion increase in cash on deposit with the Federal Reserve and a $785 million increase in investment securities. On an average total loans decreased by $2.1 billion or about 2% compared with the previous quarter.

Looking at the loans by category on an average basis compared with the linked quarter. Commercial and industrial loans declined by $1.4 billion or about 6%. That reflects a $1.6 billion decline in PPP loans primarily reflecting loan forgiveness. Our floor plan loans to vehicle dealers declined by $58 million on an average basis but grew by $554 million on an end of period basis. All other C&I loans grew about 1% compared with the prior quarter. Commercial real estate loans declined $830 million or about 2% compared with the third quarter. We've seen a higher level of pay downs and payoffs of some of the troubled loans often being refinanced by other lenders. Residential real estate loans declined by $89 million or less than 1%, as a result of principal repayments, as well as the ongoing repooling of loans previously purchased from Ginnie Mae servicing pools. That was largely offset by the retention of new loans originated and held for investment. Consumer loans were up over 1%, reflecting growth in indirect auto loans and positive but seasonally slower growth in recreation finance loans partially offset by lower home equity lines of credit. Average core customer deposits, which excludes CDs over $250,000 grew by $3.6 billion, or 3% compared with the third quarter, primarily reflecting non-interest bearing products.

Turning to net interest income, sorry, non-interest income. Non-interest income totaled $579 million in the fourth quarter, compared with $569 million in the prior quarter. The increase reflects the $30 million distribution from Bayview Lending Group that I previously mentioned. Mortgage banking revenues were $139 million in the recent quarter compared with $160 million in the linked quarter. As we noted on the October call, we have begun to retain a significant majority, around 85% of residential mortgage originations to hold for investment on the balance sheet, which utilizes a portion of the excess liquidity we currently have, this includes the roughly 20% normally held for investment.

As a result of increasing mortgage rates and the holiday slowdown, residential mortgage loan applications during the most recent quarter amounted to $1.7 billion, compared with $2.2 billion in the third quarter. Of those, we recorded gains on sale on the $191 million that were locked for sale in the fourth quarter versus gain on sale on the $1.1 billion that were locked in the third quarter. Total residential mortgage banking revenues, including origination and servicing activities were $91 million in the fourth quarter, compared with $110 million in the prior quarter. The decrease reflects the lower level of loans originated for sale, partially offset by gains from the sale of loans previously purchased from Ginnie Mae servicing pools that, based on borrower re-performance, recently became salable. Residential servicing revenues improved slightly.

Commercial mortgage banking revenues totaled $48 million, encompassing both originations and servicing, compared with $50 million in the third quarter. Recall that in the third quarter's commercial servicing results they included an $11 million fee for yield maintenance as a result of prepayment of previously securitized commercial mortgage loans. Trust income was $169 million in the recent quarter, improved from $157 million in the previous quarter. Business remains solid, with very strong capital markets activity, continued growth in retirement plan assets, and higher asset values. Service charges on deposits were $105 million in the recent quarter, unchanged from the third quarter.

Turning to expenses, operating expenses for the fourth quarter, which exclude the amortization of intangible assets and the merger related expenses, were $904 million compared with $888 million in the third quarter. Salaries and benefits increased by $5 million from the prior quarter. This reflects, in part higher levels of branch staffing as customer traffic returns to normal and our ongoing program of adding on payroll IT professionals. Data processing of software increased by 6 million from the third quarter, tied in part to higher business volumes as well as the cost from software licensing and maintenance. The $6 million linked quarter increase in advertising and marketing reflects the beginning of the winter marketing campaign, combined with incentives paid on new customer accounts. The efficiency ratio, which excludes intangible amortization and merger related expenses from the numerator and securities gains or losses from the denominator, was 59.7% in the linked quarter, compared with 57.7% in the third quarter.

Its clich?? in sports, that defense wins championships, in banking credit is the defense. Let's take a look at credit. While some sectors of the economy remain challenged by supply chain and labor constraints, credit trends overall continue to improve even in the most severely impacted sectors. The allowance for credit losses declined by $46 million to $1.47 billion at the end of the fourth quarter. That reflects a $15 million recapture of previous provisions for credit losses combined with $31 million of net charge offs in the quarter. At December 31st, the allowance for credit losses as a percentage of loans outstanding was 1.58%, compared with 1.62% at September 30th. Annualized net charge offs as a percentage of total loans were 13 basis points for the fourth quarter, down slightly from 17 basis points in the third quarter.

With the advantage of hindsight, it would appear that criticized loans did indeed peak in the third quarter of 2021, and when we file our 10-K we expect to report a noticeable decline in criticized loans reflecting both payoffs and upgrades. Non-accrual loans as of December 31st declined to $2.1 billion, a decrease of $182 million from the end of September. Non-accrual loans as a percentage of loans outstanding were 2.22%, compared with 2.4% at the end of the prior quarter. Loans 90 days past due, on which we continue to accrue interest, were $963 million at the end of the recent quarter. Of those loans, 928 million or 96% were guaranteed by government related entities. In a difficult environment, one might argue our credit is the top ranked defense in the league.

Turning to capital. M&T's common equity Tier One ratio was an estimated 11.4% as of December 31st, compared with 11.1% at the end of the third quarter. This reflects the impact of earnings in excess of dividends paid and a slightly higher risk weighted assets. As previously noted, we increased the quarterly common stock dividend by 9% this quarter to $1.20 per share per quarter, raising the annual dividend rate to $4.80 per share.

Now turning to the outlook. As we look forward into 2022, we are pleased to see that the economy is improving, evidenced by the fact that GDP is growing and unemployment is falling. However, these conditions are driving inflation which is impacting our cost structure as well as that of our customers. It has also changed the outlook for interest rates as the forward curve now has embedded a number of increases in both 2022 and 2023. Our outlook considers these macro factors. Also, as we are still awaiting regulatory approval for our merger with Peoples United, we will focus our comments on M&T standalone. That said, there are no material changes to our expectations for the financial impact and benefits of the merger. Of course, the timing of those benefits will depend on the date we close the merger and complete the conversion.

Starting with the balance sheet, there are a number of moving parts that will impact where we're headed. We don't expect the $42 billion of cash on the balance sheet at the end of 2021 to endure through 2022. We are managing deposit balances both brokered and customer relationships that don't make economic sense in this rate and liquidity environment. We'd expect interest checking and MMDA accounts -- balances, excuse me, to decline over the course of the year. Our current plan is to continue securities purchases to increase the proportion of our liquid assets that are held in longer duration assets and have higher yields. We expect to do this by replacing maturities and principal amortization and to increase investment securities by an incremental billion dollars by the end of the year.

On the commercial side PPP loans on our balance sheet amounted to $1.2 billion at year-end. We expect that a significant majority of those loans will be largely repaid or forgiven in the first half of 2022. We've seen a meaningful turnaround in vehicle inventory financing and we believe we're past the low point and expect growth in 2022 although not fully back to pre-pandemic levels. The remainder of our C&I portfolio experienced growth this past quarter and we believe we've also reached the inflection point in these balances. We expect this growth to continue.

The pandemic resulted in a slow pace of new commercial real estate transactions over the past two years, putting pressure on balance growth. This leads us to expect low single digit declines in CRE balances in 2022. Our efforts to make this portfolio more capital efficient, should result in a transition to more fee income, less interest income, less use of the balance sheet, and higher returns over time. In connection with those efforts, we may seek to participate CRE loan exposures to third parties while retaining the customer relationships and loan servicing. These factors are reflected in our outlook for interest and fee income.

As noted earlier, we're retaining a large majority of the mortgage loans we originate, which we expect will grow balances by approximately $2.5 billion in 2022 depending on the level of refinance activity. Offsetting that growth, our $2.8 billion of mortgage loans purchased from Ginnie Mae servicing pools on our balance sheet at the end of 2021 more than half of which we believe will qualify for repooling over the course of 2022. On average, we expect the residential real estate loan portfolio will contract during 2022. We expect more of the same in the consumer portfolios, with growth in indirect vehicle financing being partially offset by continued pressures on home equity balance. Taking all of this into account, our balance headwinds from PPP and Ginnie Mae buyouts will lead to average balance declines in 2022. However, excluding those impacts we expect aggregate loan growth to be in the low to mid-single digits.

We expect net interest income to be down in the low to mid-single digits on a year-over-year basis. Growth in securities, retention of mortgage loan originations, and a return to growth in C&I loans will help but not fully offset the lower benefits from the PPP loans and our interest rate hedging program. We continue to expect net interest income to trough in the first quarter of the year and grow from there. That should result in a net interest margin, little change from full year 2021 in the area of 2.75%. Our forecast incorporates three increases in short term interest rates, although the third increase occurs late enough in the year to not have a meaningful impact on either net interest income or margin.

Turning to fees. As we noted residential mortgage gain on sale revenues will be diminished in 2022 by our programs to retain for investment a large portion of originations although repooling of Ginnie Mae buyouts should be a partial asset. Commercial originations and servicing as well as residential mortgage servicing should still be solid. We see continued momentum in trust income based on the capital markets activity, continued growth in retirement plan assets, and possibly higher asset values. We would need to see short-term interest rates rise by 50 to 75 basis points before we can fully recover the money fund fees we are currently waiving. Those amounts to an annual run rate of approximately $50 million. We expect service charges on deposit accounts to be down with modest growth in commercial offset by declines in consumer largely related to changes in our overdraft practices. All in we're looking for low single digit growth in non-interest revenues in 2022.

Turning to expenses. Non-interest operating expenses in 2021 grew at an uncharacteristically high rate rising 5.6% over prior years. Lower profitability and growth led to decreased compensation costs in 2020. The recovery and profitability in 2021 carried with it a return to more normal compensation cost which accounted for over half of the increase. Our current estimate contemplates low to mid-single digit operating expense growth in 2022. And like 2021 salaries and benefits, data processing and software, and advertising are the categories that will drive the majority of the increase. We would expect to see our typical seasonal surge in compensation expense during the year???s first quarter. That amount last year was approximately $69 million. And we're encouraged by the improvement in credit conditions over the past several quarters. Overall, we expect net charge offs to be consistent with the average of the past two years although it could be somewhat lumpy from quarter-to-quarter. We expect loss provisioning to normalize as loan growth offsets potential declines in trouble credits.

Lastly, turning to capital. We've paused our buyback program while we wait to close the merger with Peoples United. Since that pause, our CET1 ratio has increased by 140 basis points to 11.4% leaving us positioned well in excess of what we believe we need to run the combined company. Our focus, as always will be on deploying excess -- the excess capital we have beyond that needed to support growth in the business. 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 Brittany will briefly review the instructions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question from John Pancari with Evercore. Your line is now open.

John Pancari

Good morning.

Darren J. King

Hi, John.

John Pancari

Don, I wish you all the best in retirement. And Darren nice division championship comments you made in your prepared remarks. All the best of luck to your builds or to the builds and although I'm Andy Reid fan, so.

Darren J. King

Good luck to you this weekend and we appreciate the comments.

John Pancari

Well I am only the Reid fan but not the cheese, per se. But on the deposit topic, I know you mentioned that checking balances and money market are likely to decline. What is your overall deposit growth assumption as you look at 2022? And then related to that, what are your deposit beta assumptions baked in and maybe if you could talk about the sensitivity to 25 basis point rate hike? Thanks.

Darren J. King

Yeah. So I guess I'll start with the latter. You know, when we look at where we are with rates and the first set of increases, our expectation is that the reactivity early on is really low. And that for the first probably 100 basis points of increase, the net interest margin would increase9 to 12 basis points for each 25 of the first 100. And then, we'll go from there. When we look at the balance growth that we expect over the course of the year, we're really anticipating that much of the cash that we have on hand will start to deploy or move on. There's some Escrow balances that are tied to the index that we expect will run off in the first part of the year. And when you look at the brokered money market balances, those have a term on them and we expect those to decrease. When you look at kind of the core balances on the balance sheet, we are really expecting fairly modest decreases over the course of the year. There's the usual uptick in commercial balances that you see at the end of the year, that's part of what we saw in the fourth quarter where our middle market and business customers hold on to or build up their balances for distributions that usually happen in January and February. We also saw an uptick again in the fourth quarter in trust demand balances, which really reflect activity in the M&A markets in the agency business. And so those should start to come down a little bit. But at the moment, we're really not anticipating a meaningful rundown in our core operating account balances for 2022.

John Pancari

Okay, great. That's helpful. Thank you. And then separately on the Peoples deal, I know you mentioned that your forecasts related to the deal remain unchanged, anything else you can comment on in terms of the expected timing around the closure of the deal, we've seen the bottleneck of delayed deals begin to clear here and so I would????

Darren J. King

Yeah, we're kind of in the same boat we were in the fourth quarter, John where we were pleased to see as you've noted the bottleneck clear and that things are happening. And we're hopeful that we'll receive positive news here in the first quarter.

Operator

And we will take our next question from Ken Usdin with Jefferies. Your line is now open.

Ken Usdin

Hey, thanks. Good morning, guys. Hey, I wanted to just follow up on your comments about that excess liquidity position and the securities, I think there's a perception that you might have gotten more aggressive. I heard you just say that you're only expecting to build the book by about a billion overrun off and I guess, can you just give us updated thoughts on how you're looking at the mix of earning assets presuming that those deposits do shrink? And, with kind of an in and out as you mentioned in your loan growth guide, how you just expect for the overall composition of the book to look from like a loan signing assets perspective? Thanks, Darren.

Darren J. King

Sure. There's a lot to unpack in the question, Ken. So just starting with the cash and the securities. If you think about uses of the cash, there's two that we've been looking at. One is retaining our mortgage production and that's a way to get some duration and some yield. And so we're taking that on the balance sheet instead of in the securities portfolio in MBS. And when you look in the securities portfolio, over the last quarter, we've kind of shifted a little bit to shorter duration treasuries, kind of two to three years as the curve reshaped. And so we'll continue to build that portfolio but we're being patient, because we see where rates are headed. And so we're trying to trade off the incremental spread that you can get by putting more securities on the books with the downside of the mark-to-market risk that goes through your OCI and affects your tangible book value. And so that's what's on our mind, as we look through those balances.

The other thing, to keep in mind, as we talk about the brokered money markets and CDs coming off, that will be a use of some of that cash. And we also expect to see some use with Peoples when the two banks come together. And so, the cash we were watching it closely, we don't love having such excess balances that the donor much, but at the same token we want to make sure we're careful with how we start to deploy it. When you look at the balance sheet and the earning assets in total, so given that decrease in cash that would be the largest driver of a decrease in earning assets in our forecast of 2022 over 2021 but doesn't have as meaningful an impact on NII, obviously, because they're very low margin. When I look underneath and when I get excited about looking into 2022, is that across all of our portfolios, holding the specials, which I'll get to in a second aside, whether it's C&I, whether it's residential mortgage, or whether it's consumer, we are expecting growth in those portfolios. And, we do expect a decrease -- slight decrease in the CRE portfolio over the course of the year, for the reasons that we've talked about as we both reshape our go to market strategy there so that we can actually provide better service to our clients. As well as just the normal course of construction loans paying down and reaching their end.

And so, when you take that which is the core of the bank, it is actually low to mid-single digit growth in those portfolios. The -- what I would refer to or I refer to as the specials, one is the PPP loans and so when you look at those on an average basis in 2021, they averaged about $4 billion and that average in 2022 is down to about $0.5 billion. And so that's got a meaningful impact on the printed loan growth. And then the same thing with the Ginnie Mae buyouts where on average basis in 2021, they are around $3.5 billion and we think as those three pool and we put them back into the servicing portfolio and do the gain on sale, but those drop to about 1.6 billion. And so when you look at on average, so when you look at the what I would refer to as the specials, you kind of see a decrease in those balances. But that's the things that have happened over the course of 2021 and 2020. And so as we exit 2022, we start to have a more contemporary balance sheet that starts to skew a little bit more towards C&I and a little less cash on the balance sheet, which overall should start to see the margin increase and allow us to benefit from the rising rate environment.

Ken Usdin

Got it. That was a complicated question and great answer. So I'll leave it at that. Thank you.

Darren J. King

Thanks, Ken.

Operator

And we will take our next question from Gerard Cassidy with RBC. Your line is now open.

Gerard Cassidy

Hi Darren.

Darren J. King

Hi Gerard.

Gerard Cassidy

I am with you, a strong defense does win the big games. But when you're behind, you have to have a hurry up offense. So with that in mind in your capital levels being so high, how aggressive can you be after the Peoples deal in buying back your stock or using that excess capital to bring that CET1 ratio down to a more normal level?

Darren J. King

Well Gerard, that's a good question. We could debate whether capital is offense or defense but certainly to your point, holding 11.4% CET1 which I think will post quite high relative to the peers, when we're finished with the year is a higher level of capital than, obviously, we believe we need to run the combined organization, given the credit emphasis of both of those organizations. When you look at Peoples history of strong underwriting and you look at how our results have held up over the course of the last couple years, and the improvements we're seeing in the portfolio, we definitely see an opportunity to bring that down. And we will look to bring those ratios down over the course of 2022. You know where are the actual target and how fast we'll get down there will be -- will kind of be dependent on when we close and convert the merger. But as you think about targets of where we'd like to be and think about where we were kind of pre pandemic, that's a good place to think about where we might end up over the course of the next six quarters or something like that, once you get through the deal.

Gerard Cassidy

Very good. And then as a follow-up, you touched on credit quality, obviously your net charge offs are remarkably low, similar to some others in the industry. But that's a hallmark for you folks. Then, can you share with us what you said about being taken out on some of the classified loans by competitors, what were the flows in and out of the non-performers, especially with hotel loans and the hospitality and leisure industry?

Darren J. King

Yeah, happy to. Well you see the full print when we put the 10-K out. But if you look at where the decrease was over the quarter, it was predominantly in the hotel and retail space. And when you look at the hotel portfolio, what we're seeing is we're seeing a couple things, we're seeing upgrades because when we look at our -- the activity that's happening in the hotel space, when you get to resort oriented hotels are ones that are more suburban and drive up. We've seen occupancy rates come back and being very strong. There's still some challenges in the larger city hotels as business travel isn't quite back to where it was, but thereafter pandemic lows. And then some of the -- when we look at some of the properties that have been refinanced by others, no matter what class it is, what we're finding is there are other institutions that are coming in and offering terms that might be interest only for one or two years and not fully amortizing, which for many of these properties is a very attractive alternative. What's kind of interesting about it is, if we were to restructure those loans, to a similar thing, similar setup, it would be a troubled debt restructure for us but for someone else it???s a new loan. And so, it is one of those things where I guess I'd rather have a payoff than a charge off. And so that's part of what's helping bring down both criticized and non-accruals.

Gerard Cassidy

Great and Don good luck in retirement. And if you're ever in Boston in November for the BAB Conference, you're always welcome Don. So, thank you.

Donald MacLeod

Thank you.

Operator

And we will take our next question from Christopher Spahr with Wells Fargo. Your line is now open.

Christopher Spahr

Thank you. Good afternoon. So my question is just, now that you are kind of getting under the hood with Peoples, I mean you took a merger charge this quarter, is there anything that's kind of surprise you on the upside and also on a related note, Peoples has a larger share of securities as - earning assets much larger than what you have on your balance sheet, is that kind of why you're a little bit more cautious and adding more securities on your own portfolio?

Darren J. King

Excellent question and observation, Chris. That's definitely one of the things that is on our mind, as we think about the securities portfolio, not just the size of it, but the composition of it. Now, if you look within the people's portfolio, there's a large municipal bond portfolio there, which gives you a little bit different duration and composition. And so as we think about the cash that we have and how we want to build up our securities portfolio, we're taking that into account. As I mentioned before, we're also taking into account some of the other funding sources that people has on their balance sheet, that we would be able to reduce that funding and lower our overall cost of funding with the cash balances that we have. You know, obviously we're all in the same banking industry. So they're still also seeing some cash balances grow as well, and are looking to deploy them. But that's absolutely part of our thought process and patience on putting that cash to work.

And I guess as we've gone through the merger preparation process, we just continue to be excited by the combination of the two organizations. The cultures between the two couldn't be more similar. The focus on clients and the focus on geographies, the opportunity to have complementary product sets is encouraging and we're just between both organizations anxious to be able to go to market as one unified team because everyone can see the potential. Is there anything really new from what we saw going in, the answer is probably no. We continue to be excited about the opportunity to grow the small business segment within the Peoples portfolio and bring some of our treasury management into the C&I space. We're both pretty solid at commercial real estate. When you look at what we have from Peoples, there's some unique segments that they serve that we can bring to our client base. They are leasing equipment finance, small ticket leasing, some of the fun lending as well as some of the niche businesses they have, like the mortgage warehouse lending. And so we think the combination, we're still excited about it. They're very complimentary. We love the funding deposit franchise that they have and so -- no, no real big upsides in terms of new things, but certainly can continue the enthusiasm for what we saw back almost a year ago.

Christopher Spahr

And if I could just one quick follow up, how quickly can you close the deal say, if the merger is approved tomorrow, how quickly can you close it and start the integration process? Thank you.

Darren J. King

Sure. So, by law there's a 15 day cool-off period once the approval is granted. And so technically, 15 days is your fastest. Usually, you're within that time period, plus or minus a week, depending on trying to manage things like month ends and quarter ends and the like. But, that's kind of generally the timeframe. And then once that's done, then you try to lock down a time to do your system conversion. And so, the complicating factor there is when you are merging with an organization that has a number of outside contracts and outsourcing where some of their technology is provided by third party, you got to coordinate with that third party to make that happen. And so we think it's probably in the order of 120 to 150 days post legal close that you can do the system conversion, and then you probably try and time it around a long weekend, to the extent that you can just because it helps derisk that system integration. But, obviously our mutual desire is for a quick close and as quickly as possible, a conversion so that we can get on to the things that I mentioned before, talking to customers and driving business.

Operator

And we will take our next question from Dave Rochester with Compass Point. Your line is now open.

Dave Rochester

Hey, good morning guys.

Darren J. King

Good morning.

Dave Rochester

A quick one on the loan side, it sounded like the floor plan segment was really strong this quarter. Can you just give an update on the dynamics you're seeing in that market and what your outlook is there, it sounds like maybe you have some more momentum there, so just curious what you're hearing from customers and how much you expect that to contribute to loan growth this year?

Darren J. King

Sure, and on an end of period basis, we saw the floor plan loan is up just over $500 million, which typically you would see an uptick in the fourth quarter. There is a pattern to that business that you see balances built in the fourth quarter and a little bit into the first and then as those inventories get sold and ultimately, the dealers clear out there lots of one model a year to prepare for the next you see a decrease in the third quarter. And so, that pattern had shifted a little bit for the last 18 months, I would say and it has mainly been a decrease. So we were pleased to see some balances come back. And it's really about the level of production. And so if you looked from a dealer???s perspective, they love the current situation where the inventory is low and both time on loss is low, that's very helpful for their profitability. But you're seeing the manufacturers ramp up. And that's what was reflected in our auto floor plan growth. We expect that ramp up to continue, the SAR last year in 2021 was the lowest it's been in a while, a $14 million to $15 million or 14 million to 15 million vehicle level. I think we got as high as 17-17.5 pre pandemic. And so we'll see that start to come back.

One of the things that you're seeing in the dealers is the shift to electric and so I think there's some changeover that you're seeing that's compromising that volume in the short term. And so our expectation for floor plan over the course of the year is that we'll see balances and utilization rates tick up, not all the way back to what they were pre pandemic but maybe two thirds of the way back in 2022. And then the rest of the way back in, excuse me, about half of the way back in 2022, 75% of the way back in 2023, and then by the time you get to the start of 2024 you're probably back to where you were pre pandemic. And it's just going through that change within the manufacturing world that will drive the pace of inventory buildup at the dealers. But, long story short, it's a positive thing to see those volumes going. It's good for the clients and good for the economy.

Dave Rochester

Yeah, sounds good. So you've definitely hit the inflection point there and that's great. Maybe just a real quick one on the deal timing. I know you are really limited as to what you can say and per se the color you've given so far, I was just curious if you're still kind of getting requests for information or in an info exchange or whatever with the regulators, or if that process is completed and you are just waiting on an answer at this point?

Darren J. King

Yeah, you know, it's what I would describe as by and large the normal process with back and forth with questions. And, what's abnormal, obviously, is the time and some of the things that are happening around Washington and we're just got our fingers crossed and we're waiting. So fingers crossed some more or more dire than it is. It's I think it's just being patient that well, Washington gets through the backlog. And the optimist is that it's happening, right, we saw some deals get approved and we expect to continue.

Dave Rochester

Sounds good. One last one on the securities purchases. I appreciate all the color you gave there, was just wondering if there is any kind of sensitivity around as it relates to the steepness of the curve, so if we were to see a more material steepening than you guys were looking for, if maybe that could make you more comfortable with picking up some more volume there and sorry if I missed it, but can you talk about what your expectation is at this point for the long end of the curve that you got baked into your end margin estimates would be great?

Darren J. King

Sure. We've got obviously a lot of liquidity to put to work. And when we think about the securities portfolio, the steepness helps. What we'll probably pay a little bit more attention to is not just the steepness, but where the short end is. When we look at some of the cash we've been deploying, we've been deploying it in mortgages as I mentioned through the balance sheet as opposed to through the securities portfolio. And so instead of having NBS, we're actually putting mortgages on the balance sheet and getting some duration and yield that way. And so on in the securities portfolio, we've tended to skew a little bit recently towards the shorter end of the curve. So kind of in the two to three years space. And so that's really where we've been watching and looking. And one of the things that we'll pay attention to is from a shape of the curve perspective is where the forward rates are. And if we start to see the forward rates move, one of the other ways that we'll start to try and take some of that asset sensitivity off the table, maybe it will be through the hedging program and restarting the hedging program, depending on what we see there. So there's a lot of different avenues that we're thinking about, both to protect and grow net interest income as well as to put the cash to work. And it's just thinking through all the alternatives, not just M&T but the combined M&T with people and managing the asset sensitivity across the balance sheet, the securities portfolio, and hedging and making sure that we're getting maximizing yield without over hedging at the same time.

Dave Rochester

Yeah. Alright. Great, appreciate the color. And Don, congrats on a great career at M&T, great working with you.

Donald MacLeod

Thanks.

Operator

And we will take our next question from Ebrahim Poonawala with Bank of America. Your line is now open.

Ebrahim Poonawala

Good morning. I just wanted to circle back on loan growth, I think you mentioned CRE balances low single digit since 2022. Just if you don't mind talking to us in terms of if you look beyond 2022 is it possible that this portfolio remains a drag on overall loan growth as you move towards the fee driven strategy and give us an update in terms of the growth market on the fee side, how quickly will that start hitting the ground running by then we should see the revenue impacts from that?

Darren J. King

Yes. I think, as it relates to the CRE portfolio, the way to think about it is the decrease in balances will be consistent but slow. And what we're looking to do is more on a prospective basis as we work with our existing clients as well as new ones and we're helping them finance their properties that will look to use a mix of both our balance sheet as well as the balance sheet of others. And so what'll happen is the rate of growth, of new originations will slow and that will be what drives the decline because there's normal amortization and there's normal pay offs that happen. But obviously, as we make that shift, then we'll start to grow the fees and the fee income will come. It will probably lag by slightly the net interest income but the flip side of that is that it reduces the capital required to support that. And so that allows us to both improve the economics of the individual deals, but then to manage our balance sheet and manage our equity levels and either deploy it into other high yielding customer segments and asset types or to deploy back to shareholders. And so, when we think about it from an EPS perspective and a return perspective, while the balances might decline, it is in our opinion additive to returns and additive to EPS.

Ebrahim Poonawala

And that is with EPS today or is it a year out by the time we get there?

Darren J. King

It'll be a year before that stuff starts to happen and it will grow as we go through 2023 and 2024.

Ebrahim Poonawala

Alright and just separate question on loan growth and the retention of mortgages, is there a certain level that you're targeting in terms of how baked that book relative to the overall portfolio, just give us the thought process around when you may do it again retention versus selling some of that production?

Darren J. King

Yeah, I guess, as we look forward, I think it's safe to say that for 2022 we'll be retaining most of those mortgages and perhaps in 2023 we'll look at where gain on sale margins are and what constraints, if any, the mortgages are putting on the balance sheet. We'll think about whether or not we want to hold NBS in the future instead of having the mortgages on the balance sheet as rates move up, then you start to reduce some of that convexity risk that sits in the NBS portfolio, and we might think about shifting some of the balances there as well. If you went back and looked at our balance sheet through time you would see that the mortgage balances peaked when we acquired Hudson City, and we came down from there so that would probably be the upper bound. I don't think we'd get to that level. But overall our objective is to maintain a diversified balance sheet across geographies and customer segments and asset classes. And so, the mortgage portfolio got a little bit smaller through the course of the last few years, and we'll look to build it back up where the ending point is. Again, we'll come back with a little bit more detail there. The reason I'm not giving a specific target is, Hudson City has mortgages on their balance sheet as well. And when we put the two organizations together, sorry Peoples -- I am sorry, having PTSD, when we combine with Peoples they also have mortgages on their balance sheet. So again, like we talked about with the securities portfolio, we're thinking about not just what we look like by ourselves, but what the combined organization and balance sheet might look like. So we're taking that into account as well.

Ebrahim Poonawala

Thanks and Don congratulations and good luck.

Donald MacLeod

Thanks.

Operator

And we will take our next question from Erika Najarian with UBS. Your line is now open.

Erika Najarian

Good afternoon. Just wanted to ask a few follow up questions. Darren on the 9 to 12 basis point of NIM sensitivity to each 25, I just wanted to make sure I heard it right, if that includes the ramp in terms of deposit repricing that you experienced in the first 100 and is that 9 to 12 basis points on a static balance sheet or a dynamic balance sheet?

Darren J. King

Good questions. It is on a dynamic balance sheet, and it's 9 to 12 per 25 for the first 100.

Erika Najarian

Right, sorry, yes, yes. And so what's the deposit beta underneath the 9 to 12 per 25?

Darren J. King

Well, it depends and that's why we got the range. There's some part of the deposits that are pegged to the index. And so if it's just those that moved, then you're down enough kind of a 5% to 10% range of deposit reactivity. If it happens to get all the way up to 25% to 30%, then you would get to the lower end of that range. But, I think we believe too much like others that with all the excess deposits in the system, and excess liquidity that the reactivity, at least for the first few hikes, with the exception of those that are tied to an index will be pretty low.

Erika Najarian

Got it. And Darren, the stock did turn on when you gave your guidance for expenses being up low to mid-single digit on a standalone basis. And, if you want to take the football analogy further, in a 3% to 5%, I guess how much is offense versus defense right, in terms of how much are you pulling forward some investment spend versus the cost inflationary catch up, you said 5.2% was not a normal rate of growth for expenses for M&T, is 3% to 5% the new normal or low to the low to mid-single digits the new normal?

Darren J. King

Well, it's I guess, I will start with it's hard to say what the new normal is given the inflationary environment we're in. If we step back and we will give context, if you look at our expense growth, compound annual growth rate over the last two years it's actually under 2%. I think it's about 1.6% or 1.7%. And so what happened was when we took the actions we did in 2020 to adjust some of our expenses given the environment we were operating in, most notably compensation that we actually had a decrease in 2020 compared to most others who had an increase. And so it came back in 2022 -- 2021, excuse me. And so when you look over the course of the average over those two years, we're talking 2% expense growth, which in this inflation environment is pretty good and pretty consistent with M&T's long term average. And so when we think about 2022 and the 3 to 5, there's a couple of things going on there. One is just when you look at the changes that happened over the course of 2021 and where we ended the year, it's annualizing the run rate of the fourth quarter, bakes in some of growth just by itself. And then on top of that, as we mentioned, we start to come back to a more normal environment, and we see advertising and promotion expenses come back closer to what they were pre-pandemic, although not all the way back.

And then as we talk about investments, the software and outside data processing and outside data processing is largely tied to volume. And so as we see fee income growth, we're going to see expense growth. And a lot of the software licensing and maintenance is as we continue to make our investments in the franchise and we shift more to buying software rather than developing it ourselves and using the cloud that you see some of those expenses move up. And obviously, as we make those investments they will have countervailing impacts on other parts of the organization, notably in professional services and salary and benefits costs. But there'll be a timing mismatch, and so those should help us moderate expense growth in the forward years. But some of it is just the timing of when these changes occurred in 2021 and then their full year impact in 2022.

Operator

And we will take our next question from Matt O'Connor with Deutsche Bank. Your line is now open.

Matt O???Connor

Hi. I wanted to come back to the balance sheet, and I know you've touched on a lot of these pieces, but I'm sitting here and I'm hearing deposits down. The only bank I cover where they're talking about deposits down, loans down, security is not really growing after you've shrunk kind of 75%. And I get it, right, like you're the best bank at PPP relative to your size, it's going to be a drag. You probably have the most buyouts, which is very profitable relative to your size, but it just doesn't feel right kind of where we are in the economy. And I guess I come back and wonder, are you missing some things on the loan origination side, like a lot of your peers have gotten in the capital markets, which creates some large corporate opportunities in the lending side, they've acquired point of sale. I'm not sure how economically attractive all these things are, but they're doing things to improve their asset generation. And I know you've been very conservative in the past. You've talked about playing defense, and you tend to do extremely well, kind of in a credit cycle. But I'm just wondering if there is something more that's needed on the asset generation side if we get this multiyear recovery that many people seeing working out?

Darren J. King

I appreciate the clarification. We'll go back through some of the categories. When we look at the C&I portfolio and our expected growth rate there, which would include what we talked about in the floor plan business as well as other C&I. We're actually expecting growth in 2022 on an average and an end to period basis, that's low double digits. When we look at residential mortgage growth as we retain the balances on an average basis, we think that's mid-single digit growth and the consumer business is up upper single digits. The only one portfolio where there's some decreases is the CRE portfolio and that's for all the reasons we've talked about. When you put all those together, you've got kind of mid-single digit growth in the core portfolio, which I think is consistent with what we're seeing and how we're thinking about the world and taking advantage of the growth that's out there. It???s the size of the PPP and how well we did in 2020 and 2021 that is affecting the average and the total. And then the other piece is the Ginnie Mae, but outside of those things, we're seeing the growth that you're talking about.

When you talk about deposits, the core deposits and the core operating accounts of our customers, were not expecting material decreases. It's some of the deposits where they're tied to an index and they would not be what we can consider core operating accounts that we're anticipating some decline and whether that's the brokered money market and brokered CDs, as well as escrow balances. And so it's just continuing to look to optimize those balances and deploy that excess cash in a way that is additive to clients without and being shareholder friendly. And so I guess when I look forward at 2022, you make it sound dire. Actually, I feel as optimistic as I've been in the last 18 months about the prospects for all the reasons that you talked about. It's a little bit difficult with some of the moving parts on the balance sheet. But when I look forward at what we've got in front of us, whether it's deploying the excess cash, it's growing the assets as we talked about deploying the excess capital, there's a number of opportunities and options that we have in front of us to continue to grow the bank and make 2022 and beyond the same M&T that you're used to seeing. And so it's just getting through some of these transitions that are happening on the balance sheet. But underneath I think things look really good.

Operator

And we currently have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Brian Klock

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

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time. And have a wonderful day.