M&T Bank Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2023

There are 11 speakers on the call.

Operator

KeyBanc Third Quarter 2023 Earnings Conference Call. All lines have been placed on listen only mode and the floor will be open for your questions following the presentation. We ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star 0. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations, please go ahead.

Speaker 1

Thank you, Angela, and good morning. I'd like to thank everyone for participating in Q3 2023 earnings conference call, both by telephone and through webcast. If you have not read the earnings release we issued this morning, You may access it along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click 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.

Speaker 1

Cautionary statements about this information are included in earnings release materials and in the investor presentation as well as our SEC filings and other investor materials. Presentation also includes non GAAP financial measures as identified in the earnings release

Speaker 2

and in

Speaker 1

the investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I'd like to turn the call over to Daryl.

Speaker 3

Thank you, Brian, and good morning, everyone. Let's start with our purpose, mission and operating principles on Slide 3. I would like to thank our more than 22,000 M and T colleagues for all their hard work. Whether serving our customers or our communities, Our employees continue to deliver on our purpose, making a difference in people's lives. This purpose drives our operating principles.

Speaker 3

We believe in local scale that is combining local knowledge and hands on customer service of Community Bank with the resources of a large financial institution. Our 28 communities are led by on the ground regional presidents. Their knowledge allows us to better understand and meet the needs of our customers and communities. And importantly, This approach continues to produce strong results for our shareholders. Our local scale has led to superior credit performance, top deposit share and high operating and capital efficiency over the long term.

Speaker 3

Moving to Slide 4. Our seasoned talent and diverse Board are keys to gaining in-depth understanding of our customers' needs and expectations. We have sound technology solutions coupled with carrying employees who provide a differentiated client experience. Please turn to Slide 5. This slide showcases how we activate our purpose through our operating principles.

Speaker 3

When our customers Our investments in enhancing the customer experience and delivering impactful products have fueled organic growth. We also believe in supporting small business owners who play a vital role in our communities. Despite operating in only 12 states, we are ranked as number 6 SBA lender In the country, the 15th consecutive year M and T is ranked in the nation's top 10 SBA lenders. And for the first time, We have finished as the top SBA lender in Connecticut, an important milestone following our acquisitions of People's United. Our commitment to supporting the communities we serve extends to affordable housing projects with almost $2,300,000,000 in financing And over 2,600 home loans for low and moderate income residents.

Speaker 3

Additionally, M and T Bank And our charitable foundation granted over $47,000,000 in support of our communities in 2022 and approximately 30,000,000 So far in 2023. Please turn to Slide 6. Here we highlight our ongoing commitment to the environment. Last year, we invested over $230,000,000 in Renewable Energy Sector and have Significantly reduced our Scope 1 and Scope 2 emissions since 2019. Our ESG report was published in July, But I encourage you to review this slide for some of the highlights.

Speaker 3

M and T's ESG ratings have improved at Moody's, MSCI Turning to Slide 8. There are several successes to highlight this quarter. We continue to see growth in auto dealerships as well as specialty businesses. We continue to grow customer deposits Despite increasing competition and building on the strong liquidity position and comparative strength of our financial position in the industry Allows us to continue lending in support of communities and local businesses. We remain focused on diligently managing expenses.

Speaker 3

Our 3rd quarter results continue to reflect the strength of our core earnings power. 3rd quarter revenues have grown 4% compared to last year's Q3. Pre provision net revenues have increased 4% to 1,100,000,000 Credit remains stable, net charge offs decreased in the Q3 and year to date we still remain below the historical long term average. GAAP net income for the quarter was $690,000,000 up 7% versus light quarter in 2022. Diluted GAAP earnings per share was $3.98 for the 3rd quarter, up 13% from last year's similar quarter.

Speaker 3

Now let's review our net operating results for the quarter on Slide 9. MAT's net operating income For the Q3, which excludes intangible amortization, was $702,000,000 and diluted net operating earnings per share was $4.05 Net operating return on tangible common equity was 17.41 percent And tangible book value per share increased 3% compared to the end of June. On Slide 10, You will see that diluted GAAP earnings per share was down 21% from linked quarter. Recall the results from the Q2 of last year indicated an after tax one 157 gains from the sale of the CIT business in April. Excluding this gain, GAAP, Net income and diluted earnings per share were down 3% compared to the linked quarter.

Speaker 3

On a GAAP basis, M and T's 3rd quarter results produced And ROA and ROE of 1.33% and 10.99% respectively. Next, We will look a little deeper into the underlying trends that generated the 3rd quarter results. Please turn to Slide 11. Taxable equivalent net interest income was $1,790,000,000 in the 3rd quarter, down $23,000,000 from linked quarter. This decline was driven largely by higher interest rates on consumer deposit funding and unfavorable funding mix change, partially offset by higher interest rates on earning assets and one additional day.

Speaker 3

The net interest margin For the past quarter was 3.79%, down 12 basis points from linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift, which reduced margin by 7 basis points The net impact from higher interest rates on customer deposits, net benefit from higher rates on earning assets, which we estimate reduced the margin By 6 basis points, remaining one basis point was due to higher nonaccrual interest net of the impact of 1 additional day. Turning to Slide 12. Average earning assets increased $1,500,000,000 from the linked quarter due largely 2 low, strong deposit growth that drove the $3,000,000,000 growth at the Fed. Average loans declined $928,000,000 and average investment This has averaged $132,600,000 for the Q3 of 2023, down 1% compared to the linked quarter.

Speaker 3

Looking at loans by category. On average basis compared to the 2nd quarter, C and I loans increased slightly to $44,600,000,000 We continue to see growth in dealer and specialty businesses. During the Q3, average CRE loans decreased by 2% to $44,200,000,000 This decline was driven largely by our continued strategy to reduce on balance sheet exposure to this asset class. We have chosen to modernize our suite of products and services to offer more alternatives To better serve customers and to do so in a more capital efficient manner possible. Average residential real estate was $23,600,000,000 down 1% largely due to portfolio pay downs.

Speaker 3

Average customer loans were down slightly to $20,200,000,000 The decline was driven by lower auto loan and HELOC balances, partially offset by the growth in recreational finance and credit card loans. Turning to Slide 14. Average investment securities decreased to $28,000,000,000 during the Q3. The duration of the Investment securities book at the end of September was 3.9 years and the unrealized pretax of our available for sale portfolio was only $447,000,000 At the end of the 3rd quarter, cash held at the Fed and investment securities totaled 59,200,000,000 representing 28% of total assets. Turning to Slide 15.

Speaker 3

We continue to focus on growing deposits with our customers And we're pleased with the growth in both average and end of period customer deposits. Average total deposits grew 3,300,000,000 However, consistent with our experience and prior rising rate environments, increased competition for deposits and customer behavior continues The mix shift within the deposit base to higher cost deposits. Average customer deposits increased $1,000,000,000 The customer deposit mix to migrate to air reschedule demand deposits declined $2,300,000,000 in favor of commercial sweeps And customer money market savings and time deposits. Average broker deposits increased $3,200,000,000 while Federal Home Bank Home loan bank advances decreased $2,200,000,000 On average brokered money market and now increased 800,000,000 Broker time increased $1,500,000,000 Broker deposits represent just one of the several funding vehicles that we can employ and our management of the balance sheet. At September 30 this year, broker deposits represented 8% of our outstanding deposits and short term borrowings.

Speaker 3

The pace and reduction in demand deposits seem to have decreased during the quarter. Our determined focus on retaining and growing customer deposits You heard positive results during the quarter. Next, let's discuss non interest income. Please turn to Slide 16. Non interest income totaled $560,000,000 in the 3rd quarter compared to $803,000,000 in the linked quarter.

Speaker 3

As noted earlier, The Q2 included $225,000,000 from the sale of the CIT business. Excluding this gain, 3rd quarter non interest income decreased $18,000,000 compared to the 2nd quarter, driven predominantly by $15,000,000 related to 1 month of the CIT trust revenues included in the previous quarter. Other revenues categories were largely unchanged from the linked quarter. Turning to Slide 17 for expenses. Non interest expenses were $1,280,000,000 in the Q3 of this year, Down $15,000,000 from the linked quarter.

Speaker 3

That decrease in expense was due to $11,000,000 in lower compensation and benefit costs reflecting Lower average headcount, lower expenses for contracted resources and overtime. $6,000,000 lower in other cost of operations, largely reflecting lower sub advisory fees as a result of the sale of the CIT business, Lower legal related expenses partially offset by losses associated with certain retail banking activities. The efficiency ratio, which excludes intangible amortization and merger related expenses from the numerator and security gains or losses The denominator was 53.7% in the recent quarter compared to 53.4% In the linked quarter after excluding the gain from the sale of the CIT business. Next, let's turn to Slide 18 for credit. The allowance for credit losses amounted to $2,100,000,000 at the end of the 3rd quarter, up $54,000,000 from the end of the linked quarter.

Speaker 3

In the Q3, we recorded $150,000,000 provision in credit losses, which was equal to the 2nd quarter. Net charge offs were $96,000,000 in the 3rd quarter compared to $127,000,000 in the linked quarter. The reserve build was primarily reflective softening CRE values and the variability in the timing and the amount of CRE charge offs. At the end of the Q3, non accrual loans were $2,300,000,000 a decrease of $94,000,000 compared to the prior quarter And represent 1.77 percent of loans, down 6 basis points sequentially. As noted, Net charge offs for the recent quarter amounted to $96,000,000 Significant charge offs were tied in 4 large credits: Three large office buildings in Washington, D.

Speaker 3

C, Boston and Connecticut and 1 large healthcare provider operating in multiple properties in in Western New York and Pennsylvania. Annualized net charge offs as a percentage of total loans were 29 basis points for the 3rd quarter compared to 38 basis points in the Q2. This brings our year to date net charge off rate to 30 basis points, which is below our long term average of 33 basis points. We continue to assess the impact on future maturities And our investor real estate portfolio due to the level of interest rates, the impact of value declines and emerging tenancy issues. Continued targeted deep portfolio dives in office, healthcare and multifamily portfolios are being done To identify any new emerging issues, when we file our upcoming Form 10 Q in the few weeks, We will estimate the level of criticized loans will be up to mid to high single digit percent as compared to the end of June, largely due to increases in investor real estate.

Speaker 3

Reflective of the financial strength and portfolio diversification of the CRE borrowers, Almost 90% of the criticized loans are paying as agreed. Loans 90 days past due On which we continue to accrue interest were $354,000,000 at the end of this quarter compared to $308,000,000 $380,000,000 sequentially. In total, 76% of these 90 days past due loans were guaranteed by government related entities. Turning to Slide 19 for capital. Amity's CIT ratio at the end of September was an estimated 10.94% compared to 10.59% at the end of the second quarter.

Speaker 3

The increase was due In part to the continuation of the pause of repurchasing shares. At the end of September, based Upon the proposed capital rules, the negative AOCI impact on the CET1 ratio from available for sale securities And pension related components will be approximately 36 basis points. Now turning to Slide 20 for outlook. With 3 quarters in the books, we will focus on the outlook for the Q4. First, let's talk about the economic outlook.

Speaker 3

The economic environment was supportive in the Q3 and we were cautiously optimistic heading into the last quarter of this year. In the Q3, the overall economy continued to expand, thanks to the strong consumer spending and steady capital expenditures by businesses. Though the housing market continues to struggle in the high rate environment, encouragingly inflation continued to slow And label markets, while still tight, improved substantially with steady hiring, while age pressures dissipated. Looking ahead To the Q4, we are cautiously optimistic that the economy will continue to grow, but at a slower rate. We expect that that slower growth will The Federal Reserve has probably reached the end of its hike cycle given Lower inflation and recent run up in long term rates.

Speaker 3

With that economic backdrop, let's review our net interest income outlook. We expect taxable equivalent net interest income to be in the $1,701,000,000 to $1,740,000,000 range. As we noted on the previous calls, the key driver to net interest income continues to be the ability to efficiently fund earning asset growth. We expect the continued intense competition for deposits in the face of industry wide outflows. We remain focused on growing customer deposits.

Speaker 3

For the Q4, we expect average deposits to be about the same level with growth of interest bearing customer deposits, We'll continue to decline in demand deposit balances. This is expected to translate into a through the cycle interest bearing Customer deposit beta through the Q4 this year to be in the mid-forty percent range. This deposit beta excludes broker deposits. Including broker deposits would add 6% to the beta. While the percent of the cumulative beta is We anticipate it will continue rising into the first half of next year.

Speaker 3

Next, let's discuss the outlook for the average loan growth, which should be the main driver of earning asset growth. We expect average loans and leases balances To be slightly higher than the Q3 of $1,330,000,000 level. We expect the growth in C and I, But anticipate declines in CRE and residential mortgages, while consumer loan balances should be relatively flat. Turning to fees. We expect non interest income to be essentially flat compared to the Q3.

Speaker 3

Turning to expenses. We anticipate expenses excluding intangible amortization and the FDIC special assessment To be in the $1,245,000,000 to the $1,265,000,000 range in the 4th quarter. Intangible amortization is expected to be in the $15,000,000 range and the FDIC's special assessment is anticipated to be $183,000,000 Given the prospects of slowing revenue growth, we remain focused on diligently managing expenses. Turning to credit. We continue to expect loan losses for the full year to be near M and T's long term average of 33 basis points, which implies Q4 charge offs could be higher than the Q3.

Speaker 3

For the Q4, we expect taxable equivalent tax rate to be in the 25% range. Finally, as it relates to capital, our capital coupled with limited investment security marks Have been a clear differentiator for M and T. M and T has proven to be a safe haven for clients and communities. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders' capital very seriously And we'll return capital wound, it is appropriate to do that.

Speaker 3

Our businesses are performing very well and we are growing new relationships each and every day. We are still evaluating the proposed capital rules so that we believe that now is not the time to be repurchasing shares. That said, We are positioned to use our capital for organic growth. Buybacks have always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us from our clients, Communities, regulators, investors and rating agencies.

Speaker 3

To conclude on Slide 21, Our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M and T has historically outperformed Fears, M and T has always been a purpose driven organization with successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through an all economic cycles With growth about 2 times that of peers. Our strong shareholder returns include 15% to 20% return on tangible common equity And robust dividend growth. Finally, our disciplined acquirer and prudent steward of capital shareholder capital and Our integration of Peoples merger is completed.

Speaker 3

We are confident in our ability to realize our potential post merger. Now with that, I'll turn it back to our caller and we'll briefly review the instructions.

Operator

Our first question comes from Manan Gisalia with Morgan Stanley. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 3

Good morning, Manav.

Speaker 4

You spoke about Mid to high single digit increase in criticized loans this quarter. I was wondering how is The mix changing between hotel, healthcare and office. And it also looks like non accrual loans ticked lower this quarter. So can you talk about what the drivers are there, whether there is loan sales or any other underlying drivers? And If that had any benefit to net interest income this quarter?

Speaker 3

Yes, happy to do that. So on the criticized increase, it's really just more of the same that we're seeing. It's more increases just in our IRE portfolio, Primarily on the office side for the most part. So nothing really different from trends that we're seeing. As far as non accruals, There was one large property that was sold in New York that was a primary driver for the non accruals.

Speaker 3

We actually had a Gain in that, that helped margin probably by about $5,000,000 in the quarter.

Speaker 4

Got it. Thank you. And then maybe just on the buybacks, What is the criteria to resume the buybacks from here? Because it seems like we have more clarity on regulation at this point. Is it a function of M and T issuing more in the debt markets and then starting buybacks?

Speaker 4

Is it to do with the credit rating agencies? Any color you can throw there would be helpful, Especially given how much excess capital M and T seems to have at this point?

Speaker 3

Yes. So I definitely agree with you, Manan, in that We do have excess capital, but right now the economy is still kind of unpredictable. Rates higher for longer will probably continue to have stress on clients over the next couple of quarters if that actually comes to fruition. I think we're just trying to be conservative and cautious At the same time, and it's also for us to actually have an opportunity to continue to grow organic growth in our commercial and consumer books And our trust books as well. So I think we're just trying to be cautious, and we'll know when the economy gets a little bit more Comfortable, we'll consider about repurchases there.

Speaker 3

It is true to our long term strategies of capital distribution back to the shareholders. It's not going anywhere, But we just want to continue to make sure that we're strong and can grow and serve our customers right now.

Speaker 4

Great. Thank you.

Speaker 3

Thank you.

Operator

The next question comes from Ebrahim Boonawala with Bank of America. Please go ahead.

Speaker 5

Good morning. I guess just as a follow-up, Daniel, in terms of so your NII guide for Q4 is fairly clear, but We are hearing from some of your peers around potential for the margin NII bottoming in the 4th quarter, especially if the Fed is done. Give us your thought process around, is there something about your balance sheet, why that might get pushed out because of this deposits have been later to reprice What are the dynamics on your balance sheet or your markets? Any color there would be appreciated.

Speaker 3

Yes. Manan, it's really the biggest Driver for the net interest margin for us right now is really what happens to our non interest bearing deposits. We were down 2,300,000,000 That was better than what we thought it would be. And we think that it's slowing down. We'll see how that plays out in the Q4, But that is probably the biggest determining factor.

Speaker 3

When you look at our balance sheet though, I'm actually pretty pleased with how the assets are repricing. If you look at the reactivity rate on some of our fixed portfolios, if you look at this quarter, like our consumer loan portfolio was up 22 basis points. We have home equity in there that is prime related, but that's a smaller percentage. We have really good repricing in other Consumer portfolios like auto was up approximately 300 basis points in what was rolling off versus what was rolling on. If you look at our RV and boat portfolio, that was up approximately 250 basis points of what we've rolling off, rolling on.

Speaker 3

So I think once we get more stability in the disintermediation of deposits, I'm more favorable into margin stabilizing. I think the asset side is actually performing pretty well.

Speaker 5

Noted. And I guess just moving maybe Give us a mark to market in terms of commercial real estate, what you're seeing around there's some concern whether If we go into next year, given what the yield curve has done, we might see some more pressure flow beyond CRE office into multifamily. So one, given a sense of like on CRE office, has the visibility improved around the level of marks that you might have to take As some of this works through the system and whether or not you're seeing more pain beyond the office complex?

Speaker 3

Yes. So on the office side, I would tell you our credit team, we feel really on top of what's going on there. I think we are actively looking at any credit That could be and have any issues whatsoever. We're looking at it. I'm trying to put the right valuation in there.

Speaker 3

We traditionally run with a higher level of They have other sources of cash flow to help carry the loans and are willing to put in equity to help support the loans. When we do find loans That there is not support around, we'll probably move to exit those. As far as the valuations go, there's still not a whole lot of specifics out there. We did have that one sale for us that actually was a little bit better than what we had at mark there, but that was One big loan, so I wouldn't say that's a trend by any stretch right now. But I think we feel pretty good on where we are.

Speaker 3

As far as the other asset classes, I think we just with rates higher for longer just puts more Just tougher for some of our customers and multifamily is an area that we are looking at as well. Nothing really is popping out of Anything very severe there yet, but we're just trying to stay ahead of what potentially could happen and kind of be preemptive If we see anything. So we're just preparing. Our credit team is very experienced. We've been very good with commercial real estate for a long time and We are on top of where we are.

Speaker 5

Got it. Thank you.

Operator

The next question comes from Erika Najarian with UBS. Please go ahead.

Speaker 2

Hi, good morning. I just wanted to clarify sort of the responses to Ebrahim's question, Daryl. I'm just wondering as we think about The forward curve, as we see it, at what point do you expect net interest income to

Speaker 3

From a framework perspective, it's really when the disintermediation slows down. I think when the disintermediation slows down, I think the asset side Is that performing well and will continue to reprice higher? Because I think we're going to have a steeper curve for a longer period of time. Hopefully, that will happen in the next couple of quarters, but it's really hard to know right now. We think it's slowing, but I think we'll just see how that plays out.

Speaker 3

I'll give you guidance next earnings call on the Q4 on that. But conditions Could be slowing down with what we're seeing right now, but 1 quarter is not a trend. I just want to get a couple of quarters under our belt before we really say that And interest margin is going to stabilize.

Speaker 2

Got it. And as a follow-up to that, your period end cash balance rose $30,000,000,000 Daryl, which is awesome dry powder. And as we think about The quarters ahead, on one hand, potentially the Fed is peaking, right? And you seem to be rather asset sensitive. On the other, you have all these new rules on liquidity that we don't have yet, as well as treatment of AFS for regional banks.

Speaker 2

So how should we think about an absence of stronger net loan growth, The puts and takes of what you're are you just going to continue to build cash and be a little bit more asset sensitive even though we're peaking in rates as we figure out what the final rules

Speaker 3

I think we have the strong position at the Fed. That's Intentional for us right now. We want to be really conservative with our cash and liquidity position. Like I said earlier, the economy is Doing okay, but slowing down and maybe hopefully not get into a recession, but we just want to be really careful and cautious from that perspective. So I think it's intentional where we're staying there.

Speaker 3

Will we invest some of that obviously into loans? We would love to do that to support our Customers, but we are not widening our credit box whatsoever we're going to grow what the market will give us. But We do think there's opportunities to grow relationships and to potentially grow balances in some of our loan categories. So we'll see how that plays out. As far as deploying some of it, the cash into the securities portfolio, I would just say that over the next year, you might see us move a little bit To the investment portfolio, but it will be on a gradual basis.

Speaker 2

Thank you. Thank you.

Operator

The next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.

Speaker 6

Good morning. First, sorry if I missed it, but did you comment on what your reserves are against your office book?

Speaker 3

So we haven't made that public, Matt, but it continues to increase where we are right now. So We had an increase in our allowance. We had a little over $50,000,000 I'd say about half of it went to the CRE portfolio and Half of it went to the C and I portfolio. So I think we're adding it where we think it's appropriate based upon our models and performance.

Speaker 6

Okay. Yes, that would be helpful to get over time. I know everybody's book is a little bit different, but Many of your peers are disclosing, so that would be helpful as you think about disclosures, obviously, an area of focus. Maybe switching gears, like as you think about all the capital that you have and liquidity and the balance sheet flexibility, what areas in lending Are you leaning into, not just kind of looking out 1 quarter, but the next few quarters? And is it kind of doing More business with existing customers or also trying to grow the customer footprint?

Speaker 3

I mean, this past quarter, we had growth in our Dealership businesses, as the strike was starting to happen, I think a lot of dealers actually stocked up on used cars and that actually drove An increase in utilization in that one sector are a little bit earlier than normal there. That will probably continue to play out, I think into the Q4, Well would be 1. Our large corporate banking, I think, has some growth opportunities where we're positioned there. Specifically on fund banking, I think we're growing there nicely. It's a very conservative portfolio, very short term oriented, Lower risk areas.

Speaker 3

So I would say most of the growth that we're seeing is in the C and I space. Those are the highlights right now. It is very competitive in middle market C and I. We are trying to be competitive there. But right now, the higher interest rates are just Putting a lot of our commercial clients to be a little bit more cautious, but when they're willing to borrow, we're trying to help them, when that's when we're able to do that,

Speaker 6

Okay. Thank you very much.

Operator

The next question comes from Bill Carcache with Wolfe Research. Please go ahead.

Speaker 7

Thank you. Good morning. Hey, Daryl. I wanted to Follow-up on your comments around the higher for longer rate environment being tougher for your customers. As you look across your portfolio, Do you have a good handle on the degree to which some of your customers had put on swaps, maybe when we were still underserved 2 to 3 years ago, so they haven't yet Felt the pressure of higher rates.

Speaker 7

Curious about whether the rolling off of those swaps is something you worry about, not really not just in CRE, but really across all loan categories.

Speaker 3

Yes. I think obviously, Bill, I mean people that did swaps 3 years ago are really fortunate that they did, but it depends on the maturities when they roll off and when they do roll off, it does put when they roll off and when they do roll off, it does put pressure on some clients that basically, I'll just have higher interest payments there. So it is impacting much broader than just office, broader than just CRE. It's impacting, I think, all of America right now, to be honest with you. I mean, it's just higher rates for longer.

Speaker 3

I think the Fed wants to slow the economy down and we're definitely having that impact To do that and they're accomplishing what they're achieving there. But we like I said earlier, we are on top of the portfolios Where we see maturities coming up, we're looking at what we have to do, if anything. Do they have other support on it? So we're trying to stay ahead of what's coming down the pike. Most of the maturities And swap our line together so that they're pretty much in balance.

Speaker 3

So when things come close to mature on loans is when we see if there's anything that needs to happen from a lending perspective. But I think the Fed is accomplishing what they're trying to do is slow the economy down, Bring inflation down and it's definitely having that impact.

Speaker 7

That's really helpful, Daryl. Thank you. If I can follow-up, As you continue to take actions to shift more of your focus to fee income as you reduce the credit risk associated with on balance sheet CRE, How are you thinking about your sort of longer term CET1 target before I guess all the developments of the last several quarters, we were sort of thinking of M and T being able to get to sort of that 9% CET1 target, but I guess the inclusion of OCI volatility and regulatory capital Has led to some debate over whether category 4 banks will now have to run with a little bit larger buffer versus history. Would appreciate any thoughts there?

Speaker 3

Yes. I think as the new roles play out and as we get comfortable working within the roles, you obviously start with a higher cushion at first. And then as you get used to managing the book and everything, I think we will tighten it up over time. But my guess is that we probably have a higher buffer out of coming out of the blocks. You have to really adjust your investment portfolio since the AFS is going to now go through The regulatory capital ratios to probably run with shorter durations either outright or invest longer with hedges that bring in One way or the other, just so you have less volatility there.

Speaker 3

So it's really just getting used to how we manage all that process, but Our teams are working on that now and we will start operating that way probably well before we get the roles actually implemented From that perspective.

Speaker 7

Understood. Thank you for taking my questions.

Speaker 3

Thanks, Bill.

Operator

The next question comes from Brent Urgenthal with Portales Partners. Please go ahead.

Speaker 8

I was going to follow-up on that stock buyback question. Thank you and good morning. Good morning. To impress you, If you were to like incrementally invest the capital that you're generating at 7%. You would generate half the returns that you could by buying back stock.

Speaker 8

So you need double digit returns To equate that, if that question makes sense. So the question I guess is when at what point Will the corporate finance math drive you to resume buyback?

Speaker 3

So the corporate finance math is screaming that it's a buy Right now, it's really more of our cautious position, conservative nature that we have To make sure that we have really strong capital, strong liquidity to really weather what comes our way. I mean, if the Fed stays higher rates, let's say, for 3 years or whatever, that could really have a big impact on the economy. We just want to be really cautious and all that. So I think we're just trying to be prudent with it. Like I said earlier, the capital is not going anywhere.

Speaker 3

We will I promise you, we will deploy it in a really shareholder friendly manner For Matt, right now, we have strong capital, strong liquidity, which has been really helpful for us since March, April timeframe and we will continue to operate and be a strong supporter of our customers and communities that we serve.

Speaker 8

Just is there a bell that's going to go off when you guys are going to change your mind or how should we do we just wait and see?

Speaker 3

I will tell you once we make that decision to go, my guess is you will find out very quickly when that decision is made.

Speaker 1

Thank you.

Operator

The next question comes from Gerard Cassidy with RBC. Please go ahead.

Speaker 9

Hi, Daryl.

Speaker 3

Hi, Troy.

Speaker 9

Daryl, over the years, M and T has been Very effective in making acquisitions. Obviously, the Peoples deal is the more recent acquisition that is now And we understand in talking to your peers and others that the interest rate marks make it very difficult For M and A today. So I got a 2 part question for you. First, just what is your view on M and A for M and T over the next 12 months to 24 months of traditional depositories. And then second, some of the P and C in particular was Recently bought some assets from the FDIC some loans.

Speaker 9

Are you guys looking at any assets that might be for sale from the FDIC From the failed banks that we had earlier in this year?

Speaker 3

Yes. So we didn't do a press release on it, but we did buy 2 loans from that same purchase P and C did. I think it was a total of about $300,000,000 in commitments. It was at fund banking. So we did participate in there and We're able to get a couple of those loans as well.

Speaker 3

But we are constantly looking where we can grow our customer base that are good long term Customers that fit, we just don't want to do asset purchases. We want relationships is really what we're looking for to drive organic growth from that. As it relates to acquisitions, it's just you and I have been in doing this for a long time. When I started, we had 18,000 banks In the early 80s, now we're up to about 4,000 banks and it's going to continue to shrink. I think M and T has a great track record of acquiring bank Over time, and that strategy hasn't changed.

Speaker 3

Our strategy is really to control and have lots of density in the markets that we serve. So I think if and when we do purchase acquisitions, it probably won't be a surprise in where we're going and what we're trying to do From that perspective. So the strategy is there and it will happen at some point down the road. The interest rates definitely make it a little bit more challenging now Just because the impact on capital, but like anything, things change over time and we will be there when we need to and do What we've been really good at before and we'll continue to do that.

Speaker 9

Very good. And then the second part, a different question as a follow-up. When M and T of course has developed a reputation as being a very strong underwriter, you got the numbers to prove it. And so we're not necessarily concerned about what you guys are doing specifically, but we just worry about The competitors doing foolish and stupid things that then end up having a second derivative effect on your sound underwriting decisions. Can you frame out for us, granted, I know it's not 2,005 and 2006 craziness out there, but Are there any concerns that you see non bank lenders or other bank lenders doing or have done things in the last 18 months to 24 months on the lending side That make you a little nervous or are we just in a new playing field, everybody is very rational and we're not going to see anything really Implode because of what some foolish lenders are doing?

Speaker 3

Yes. We have a long history of Working with our clients, client selection is really huge for us and how we look and underwrite. So like In the CRE portfolio, we deal with people that have been in the business for a very long time that aren't just looking at that real estate investment that they have As an investment, but more as a long term strategy to their company and their family from that perspective. So really don't look at Trying to get out of the criticized loans, if somebody is not going to support it, we will probably exit over time. But, I don't really view how we are approaching it.

Speaker 3

I think it's a great way to develop and keep relationships over the long term. It's the right way and fair way to do it, as long as they're willing to support their properties and loans with us from that perspective. Yes, I think overall though, I think the industry is much safer than what it has been over the last couple of decades. I think everybody's Trying to do the right thing. We have the benefit that we have some really long term customers that have been with M and T for a long period of time and we try to Thank the people that are really top in market and all the markets that we serve.

Speaker 9

Very good. I appreciate the color. Thank you.

Operator

The next question comes from John Pancari with Evercore ISI. Please go ahead.

Speaker 10

Good morning, Daryl.

Speaker 3

Good morning, John.

Speaker 10

Just a follow-up around the loan loss reserve. I know you had talked about the that the reserve addition was 50% for CRE and about half going to C and I. And I'm just trying to frame out like what about the developments in the quarter Drove the need for additional reserve additions beyond what would have already been baked into there under CECL? And then separately, can you maybe talk about the likelihood of further reserve build here Just as you continue to dig through the CRE portfolio, I know you said a couple of times that there's ongoing efforts To sift through the exposures in that book.

Speaker 3

Yes. So if you look at the macro factors, Our macro factors when we run our allowance models, basically, we're pretty steady. Actually, that CREPI and NICS actually improved a little bit, But the other economic statistics are pretty stable versus the prior period. And really what drove the increase was really Softness in some of the asset values in the CRE portfolio is what we were seeing and thought it made sense to add some more reserves in those. As we get more examples of what valuations are that could help drive more or may actually, I think we feel really reserved where We are today, but we just want to continue to have a really robust allowance for the needs of our Borrowers and make sure we comply with all the rules that we have there.

Speaker 3

But it was really just a little bit of softness in some valuations.

Speaker 10

And is that softness surprising you negatively and is that why it's not already in the CECL reserve?

Speaker 3

There's just not a lot of activity going on in some of these markets right now. So you're basically There is a big market dislocation. A lot of the marks we're doing as conservative as they are with a net present value cash flow perspective and We think I went through it last time, but if something is not leased today, we assume it's not leased for 3 years. If something is coming off lease within the next year, we assume that there is a 1 year gap period before it gets released. Those type of cash flow adjustments Kind of what we're marking to, but we don't have anything to look at.

Speaker 3

But when you get a certain example, I would say then we can make an adjustment. Our bet though right now is that there's a lot of money waiting on the sidelines potentially that when The Fed does decide to keep rates more stable and maybe signal rates going down at some point. I think there'll be a lot of money that will jump back into the system. Right now, there's just not a lot of going on and there's a very wide bid ask spread.

Speaker 10

Okay. That's helpful. Thanks for that. One last follow-up, if I could, also on credit. Your I know your charge off guidance for the 4th quarter Expect it to be a low above the 29 basis point level for the Q3 and then full year 2023 near the long term 33 bps.

Speaker 10

Can you maybe help us think about what that would imply in terms of as you look into 2024, Maybe help us, I know you're not giving formal guidance yet on 2024, but how should we think about Where the loss trajectory could be versus that longer term 33, how much above that could it be?

Speaker 3

Yes. No, that's a good question. For the Q4, it's just our gut feel that it might be higher. It could actually be Same or lower, to be honest with you right now, but just knowing what's going on right there, it might be higher, but we really are Sure about that yet. Next year, we aren't really giving guidance.

Speaker 3

But from a framework perspective, our allowance will build When either market economic conditions allow for it or you see some deterioration in customer behavior from that perspective. But Right now, I think we're really on top of what it is, any areas that we potentially could have risk Our credit teams are all over it looking at the reviews and the analysis that we have. And right now, what we feel that our reserve is adequate and We're in good touch with where the risks are. Got it.

Speaker 10

All right. Thanks, Daryl. Appreciate it.

Operator

It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional remarks.

Speaker 1

Again, thank you all for participating today. And as always, if 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 and have a good day.

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Earnings Conference Call
M&T Bank Q3 2023
00:00 / 00:00