M&T Bank Corp. management faced numerous questions during its third-quarter earnings call about the bank's weak loan growth figures in the third quarter.
On Oct. 18, the bank reported a decline in its commercial and industrial loan portfolio, partially driven by a drop in loans to auto dealers to finance inventories, also known as floor plan loans. Combined with planned runoff in the bank's residential mortgage portfolio but offset by some growth in consumer loans, the bank's total loans were down roughly 1% from the second quarter. The bank's lack of loan growth was referenced several times during the analyst question-and-answer portion of the call.
Excluding the impact of the auto dealer loans, the bank still reported a $388 million quarter-over-quarter decline in C&I loans. CFO Darren King said the bank saw a high level of paydowns of its C&I loan book across the board without any concentration by industry or by geography.
"Paydowns were probably the biggest driver of decreases in the quarter. When you look at originations, they were down a little bit, but not the biggest driver. The biggest driver was the rate of paydowns," King said.
King also cautioned analysts that they should expect an increase in the bank's criticized loans in the third quarter when the bank files its regulatory disclosure. He said the increase was not dramatic, with the absolute level higher than the second quarter but still below the level at year-end 2016.
He added that strong asset prices have allowed some borrowers to sell parts of their businesses, enabling the loan payoffs. And the bank has seen elevated payoffs in commercial real estate, too, where King said the bank has seen a significant number of borrowers pay off construction debt and then use a nonbank lender for the asset's permanent financing.
Looking forward, King said the bank is optimistic about its fourth-quarter numbers based on the company's existing loan pipeline. He said the bank's pipeline heading into the fourth quarter is 15% to 20% higher than previous quarters this year but cautioned that elevated paydown activity remains a "wildcard."
On the deposit side, King said average core customer deposits were $1.1 billion lower than the second quarter, attributing the drop to intended runoff of certain deposits from the Hudson City Bancorp Inc. deal. But an analyst noted that the bank's deposit growth outside the Hudson City runoff still appeared weak. King said the bank has seen increased activity and sensitivity to deposit pricing among its high-balance consumer customers. He also said small business borrowers continue to be skewed toward short-term deposit products.
The bank's rates on liabilities moved up slightly in the third quarter to 57 basis points on all interest-bearing liabilities, up from 52 basis points in the second quarter. Looking forward, bank management said it expects net interest income in the fourth quarter to be "flat to maybe slightly down." As for the benefit of a potential rate increase in December, management said the bank continues to expect a 25-basis-point increase to be worth 6 to 10 basis points on the net interest margin.