M&T Bank Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 17, 2023

There are 13 speakers on the call.

Operator

Welcome to the M&T Bank First 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Clock, Head of Markets and Investor Relations. Please go ahead.

Speaker 1

Thank you, Shelby, and good morning. I'd like to thank everyone for participating in M&T's Q1 2023 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website,

Speaker 2

www.mtv.com.

Speaker 1

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. 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 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 M and T undertakes no obligation to update them.

Speaker 1

Now, I'd like to turn the call over to our Chief Financial Officer, Darren Kang.

Speaker 3

Thank you, Brian, and good morning, everyone. Our first quarter results reflect the strength of our balance sheet and liquidity position as well as the impact of our merger with People's United Bank. Compared to last year's Q1, revenues have grown over $970,000,000 or 67% translating into 24% positive operating leverage year over year. Pre provision net revenues have more than doubled since last year to $1,100,000,000 Credit remains solid with net charge offs still below our long term average. Capital levels remain strong with the CET1 ratio estimated to end the 1st quarter at 10.15%.

Speaker 3

During the quarter, we repurchased $600,000,000 in common shares, which represented 2% of our outstanding common stock and the Board approved an 8% or $0.10 per share increase in the quarterly common dividend to $1.30 per share. Tangible common equity per share increased 3% to $88.81 per share. In addition, April 1 marked the 1 year anniversary of the closing of the People's United acquisition. We're pleased with the results of the largest acquisition in our company's history. The tangible book value dilution was only 4% and has been earned back already.

Speaker 3

Merger costs were less than anticipated at the time of announcement. Targeted expense synergies have largely been realized and are now in the run rate. As a result of these, the above, The return on investment and EPS accretion have exceeded those expected at the time the deal was announced. Let's take a look at the Q1 results. Diluted GAAP earnings per common share were $4.01 For the Q1 of 2023, down 7% compared with $4.29 in the Q4 of 2022.

Speaker 3

Net income for the quarter was $702,000,000 8 percent lower than the $765,000,000 in the linked quarter. On a GAAP basis, M and T's 1st quarter results produced an annualized rate of return on average assets of 1.4% and an annualized rate of return on average common equity of 11.74%. This compares with rates of 1.53% and 12.59% respectively in the previous quarter. Included in GAAP results were after tax expenses from the amortization of intangible assets amounting to $13,000,000 in the 1st quarter and $14,000,000 in the sequential quarter, representing $0.08 per common share in both quarters. Pre tax merger related expenses of $45,000,000 related to the Peoples United acquisition were included in the 4th quarter's GAAP results.

Speaker 3

These merger related charges translate to $33,000,000 after tax or $0.20 per common share. There were no merger related expenses in this year's Q1. In accordance with the SEC's guidelines, This morning's press release contains a reconciliation of GAAP and non GAAP results, including tangible assets and equity. Consistent with our long term practice, M and T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. We believe this information provides investors with a better picture of the long term earnings power of the institution.

Speaker 3

M and T's net operating income for the Q1, which excludes intangible amortization and the merger related expenses was $715,000,000 down 12% from the $812,000,000 in the linked quarter. Diluted net operating earnings per common share were $4.09 for the recent quarter compared with $4.57 in 20 22's Q4. Net operating income yielded annualized rates of return on average tangible assets An average tangible common shareholders' equity of 1.49% 19% in the recent quarter. The comparable returns were 1.7% 21.3% in the Q4 of 2022. As a reminder, GAAP and net operating earnings for the Q4 of 2022 were impacted by certain noteworthy events.

Speaker 3

This included a $136,000,000 gain related to the sale of the M and T Insurance Agency as well as a $135,000,000 contribution to Amity's Charitable Foundation. These items collectively netted and did not materially impact net income. Next, we'll take a deeper dive into the underlying trends that generated our Q1 results. Taxable net interest income was $1,830,000,000 for the Q1 of 2023, slightly below the linked quarter. The $9,000,000 decrease was driven largely by a $30,000,000 in lower net interest income, reflecting the 2 day shorter calendar quarter, partially offset by $13,000,000 positive impact from our hedging program and $8,000,000 from higher average earning asset volumes net of higher average interest bearing liability volumes.

Speaker 3

The net interest margin for the past quarter was 4.04%, down 2 basis points from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 basis points. This was partially offset by the impact from higher rates on earning assets, net of deposit funding, which we estimate added 18 basis points. All other factors had a negligible impact on the margin. Total average loans and leases were $132,000,000,000 during the quarter, up $2,600,000,000 or 2% compared to the linked quarter.

Speaker 3

Looking at the loans by category on an average basis compared to the 4th quarter, Commercial and industrial loans and leases increased $2,400,000,000 or 6 percent to 42,400,000,000 With $1,900,000,000 being broadly based and $453,000,000 of growth in average dealer floorplan balances. During the Q1, average commercial real estate loans decreased by $363,000,000 or 1% to $45,300,000,000 The decline was driven largely by lower permanent mortgages as average construction loan balances were essentially flat. Residential real estate loans increased by $435,000,000 or about 2% to 23,800,000,000 Due largely to the timing of the retention of originations throughout the prior quarter, end of period balances were essentially flat sequentially. Average consumer loans were up $144,000,000 or about 1% to $20,500,000,000 Recreational finance loan growth continues to be the main driver of increased balances And these average loans grew $178,000,000 or 2%. Average earning assets, Excluding interest bearing cash on deposit at the Federal Reserve increased $4,900,000,000 or 3 percent Due to the $2,600,000,000 growth in average loans and $2,300,000,000 increase in average investment securities.

Speaker 3

Although average interest bearing cash balances have decreased $777,000,000 to $24,300,000,000 during the Q1 of this year, they came in higher than our initial projections. The sequential quarterly decline in cash reflects loan growth and the drop in deposit balances, partially offset by the proceeds from long term borrowings issued during the quarter. Consistent with our expectations and normal seasonal outflows, Deposits declined sequentially. However, the $1,900,000,000 or 1% sequential average decline was slightly better than our expectations At the January earnings call, we remain focused on growing and retaining deposits. Our experience in prior rising rate environments reminds us to expect increased competition for deposits and changing customer behavior leading to a mix shift within the deposit base.

Speaker 3

During the Q1, average demand deposits declined $8,400,000,000 Savings and interest bearing checking deposits increased $1,000,000,000 and time deposits increased $5,400,000,000 Average commercial deposits declined a net $2,400,000,000 as business owners shifted $6,300,000,000 Almost 2 thirds of the decline in non interest bearing deposits was offset by movement into on balance sheet sweep accounts, where those average balances increased $3,800,000,000 during the Q1 of 2023. Turning to consumer deposits, they declined a net $758,000,000 In the Q1, as $2,500,000,000 in outflows were partially offset by $1,700,000,000 increase in average time deposits. Lower levels of activity in the capital markets and seasonal factors also impacted average balances for the following lines of business. Trust fund demand balances declined $1,200,000,000 municipal deposits declined $789,000,000 Net escrow deposits declined $684,000,000 Average brokered CDs increased $3,800,000,000 sequentially, due almost entirely from growth during the previous quarter. Turning to non interest income.

Speaker 3

Non interest income totaled 5 $87,000,000 in the Q1 compared with $682,000,000 in the linked quarter. M and T normally receives an annual distribution From the Bayview Lending Group during the Q1 of the year, this distribution was $20,000,000 in 2023 $30,000,000 in last year's Q1. As noted earlier, the Q4 of last year included a $136,000,000 gain from the sale of the M and T Insurance Agency. Excluding these two items, non interest income was up $21,000,000 or 4% sequentially. Cost income of $194,000,000 in the recent quarter was flat sequentially.

Speaker 3

Service charges on deposit accounts were $114,000,000 compared to $406,000,000 in the 4th quarter. The increase primarily reflects Full quarter of service charges on acquired customer deposit accounts after these fees were waived in October November of last year. Mortgage banking revenues were $85,000,000 in the recent quarter, up 4% from the linked quarter. Revenues from our residential mortgage business were $55,000,000 in the Q1 compared with $54,000,000 in the prior quarter. Commercial mortgage banking revenues were $30,000,000 in the Q1 compared to $28,000,000 in the final quarter of 2022.

Speaker 3

Other revenue from operations, Excluding the distribution from Bayview Lending Group in this year's Q1 and the gain from the sale of the M and T Insurance Agency in the sequential quarter were $140,000,000 up $9,000,000 sequentially. Turning to expenses. Operating expenses, which exclude the amortization of intangible assets and merger related expenses were $134,000,000,000 in the Q1 of this year, little changed from the Q4 of last year. As is typical for M and T's 1st quarter results, operating expenses for the recent quarter included approximately Aggretsky of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense For certain retirement eligible employees, the HSA contribution, the impact of annual incentive compensation payouts on the 401 match and FICA payments, as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $74,000,000 in last year's Q1.

Speaker 3

As usual, Net charge offs for the recent quarter amounted to $70,000,000 including amounts that reflect updated appraisals of non accrual office loans. Annualized net charge offs as a percentage of total loans were 22 basis points for the Q1 compared to 12 basis points in the 4th quarter. Loans 90 days past due on which we continue to accrue interest were $407,000,000 at the end of the recent quarter compared to $491,000,000 sequentially. In total, 75% of these 90 days past due loans were guaranteed by government related entities. Turning to capital.

Speaker 3

M and T's common equity Tier 1 ratio was an estimated 10.15% compared with 10.4% at the end of the 4th quarter. The decrease was due in part to growth in risk weighted assets and the impact of the repurchase of $600,000,000 in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $14,700,000,000 up slightly from the end of the prior quarter. Tangible common equity per share amounted to $88.81 per share, up 3% from the end of the year. Turning to the outlook.

Speaker 3

As we look forward to the rest of this year, we believe we are well positioned to navigate through the challenging economic conditions. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year of 2023. As a reminder, the acquisition of Peoples United closed on April 1, 2022 and thus the outlook for 2023 includes 4 quarters of operations and balances from the acquired company compared to only 3 quarters during 2022. Our 2023 outlook also reflects the sale of the M and T Insurance Agency that closed in October of last year. And even though the sale of the Collective Investment Trust business is expected to close in the first half of this year, our outlook includes The full year of operations from this business.

Speaker 3

First, let's talk about net interest income outlook. The outlook for interest rates in the economy continues to change frequently. Since March 8, the 10 year U. S. Government bond yield has dropped 46 basis points and the forward curve has changed meaningfully as well.

Speaker 3

We expect taxable net interest income to grow in the 20% to 23% range when compared to the $5,860,000,000 during 2022. This range reflects Different rates of deposit balance growth, deposit pricing and loan growth. Consistent with the current forward curve, Our forecast incorporates 2 25 basis point cuts in the final quarter of this year. As we noted on the Q1 call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning asset growth. We expect continued intense competition for deposits in the face of industry wide outflows.

Speaker 3

Full year average total deposit balances are expected to be down low single digits compared to the $158,500,000,000 average during 2022. During the Q1, we issued $3,500,000,000 in senior debt and we'll utilize the combination of FHLB funding and senior debt over the course of this year as needed to ensure that we can continue to meet the loan demands of our customers. We continue to expect the deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time and on balance sheet sweep. This is expected to translate to a through the cycle interest bearing deposit beta in the high 30% to low 40% range. Taking all of these factors into account, we anticipate the net interest margin to be slightly below 4% for the full year of 2023 and to continue to migrate towards the long term range we have been discussing for the past couple of quarters.

Speaker 3

Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $2,000,000,000 compared to the $28,000,000,000 balance at the end of March of this year with the addition of longer duration mortgage backed securities throughout the year. Looking at average loans, we expect average loan and lease balances during 2023 to grow in the 10% to 12% range when compared to the 2022 full year average of 119,300,000,000 We anticipate growth to continue in the 2nd quarter and then for average balances to be flat slightly down over the second half of the year. This implies total average loan and lease balances in the Q4 of 2023 to be up 1% to 3% from the $129,400,000,000 average during the Q4 of 2022. The mix of C and I, CRE and consumer loans inclusive of consumer real estate is almost 1 third each as of the end of March.

Speaker 3

We expect This trend to shift slightly as C and I growth outpaces CRE. As we have seen over the past three quarters, Higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. After these average loans grew 2% in the Q1, We expect the indirect portfolio to be relatively flat over the remainder of the year. Turning to fees. Excluding the $136,000,000 gain on the sale of the M and T Insurance Agency in the Q4 of 2022 As well as securities losses, net interest income sorry, non interest income was $2,230,000,000 in 2022.

Speaker 3

We expect 2023 non interest income growth to be in the 7% to 9% range compared to the $2,230,000,000 in 2022. This outlook for non interest income includes the impact of a bulk purchase of residential mortgage servicing rights that we completed at the end of this year's Q1. Turning to expenses. We anticipate expenses excluding merger related costs, The charitable contribution and intangible amortization to be up 11% to 13% when compared to the $4,520,000,000 during 2022. Recall that approximately half of this increase reflects the next quarter of Peoples United expenses.

Speaker 3

In addition, this outlook for net operating expenses includes the impact of the previously noted mortgage servicing rights purchase. We do not anticipate incurring any material merger related costs in 2023 and intangible amortization is expected to be in the We expect credit losses to migrate towards M and T's long term average of 33 basis points, although the quarterly cadence could be lumpy. Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as loan balances. For 2023, we expect taxable equivalent tax rate to be in the 25%

Speaker 1

Finally, turning to capital.

Speaker 3

M and T's common equity Tier 1 ratio of 10.15% at March 31, or SCB. We believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace over the long term. However, in the near term, we plan to maintain a CET1 ratio slightly above the current level until the current economic uncertainty abates. With that, let's open up the call to questions before which Shelby will briefly review the instructions.

Operator

We'll take our first question from Ebrahim Poonawala from Bank of America.

Speaker 3

Hey, good morning. Good morning.

Speaker 4

I guess, I just wanted to go back to the deposit beta and the NII guidance, so high 30s to low 40s deposit beta. If you can unpack that a little bit in terms of how has your view around deposit pricing behavior Change today relative to January and that could be because Fed Funds is at 5%, events of the last 1 month post SVB. Just give us a flavor of Commercial versus retail, are you seeing differences and has one changed a lot more than the other? Would appreciate any color there.

Speaker 3

Sure, Ebrahim. The deposit betas are largely moving consistent with how we thought they would. When we think about the cumulative through the cycle beta, we really haven't changed our thought process there. What happens is Kind of from quarter to quarter, you might see the pace at which we get from where we are today to that terminal cumulative beta shifts a little bit On the competition and obviously the Q1 there was a lot of disruption going on in the market. But generally the most elastic Deposits are the commercial and the wealth deposits.

Speaker 3

And when we look underneath the hood there, we see that the betas of the commercial Deposits are in kind of the mid-60s to low-70s. And That will be higher in commercial. If we add in small business, that comes down a little bit because those deposits tend to be a little bit less price sensitive. And And then when you get in the consumer space, you're in kind of the mid teens deposit beta so far. And with that number, that includes the impact of time deposits.

Speaker 3

If we didn't include the impact of time deposits on those consumer deposit betas, they'd be pretty low. But we tend to include the time When we think about the beta, because we see time for consumers as a substitute product in rising rates for money market savings and savings And so we try to think about the all in funding costs, which includes time deposits, which is why we include those. And so when we look at the quarter, and we look at the decline, for me, a couple of things kind of jump out. First is that the decline in deposits this Q1 versus last year's Q1 are almost identical. And so given that last year was kind of a more normal year and this year had a lot of activity going on, for those numbers to be about the same when you look at as That gave us a lot of we felt really good about that.

Speaker 3

And the other thing is just a little bit about there's a normal seasonal decline that happens In the Q1, as commercial customers tend to make their distributions to principals to pay taxes, But underneath the surface, it's important to keep in mind that there are a couple of things that affected deposit flows for us this quarter. One was trust demand balances were down about $1,200,000,000 right? So about 20% of those balances We're trust demand balances, which move with economic activity and another $700,000,000 odd was escrow. And with mortgage rates moving, there's less activity and so a little bit less action in the escrow accounts. And Outside of that, I see it as very typical seasonal decline in commercial balances offset by folks moving Commercial folks in particular moving some of their balances into on balance sheet sweep or interest bearing.

Speaker 3

And so we kind of look at those 2 Categories together as one. And when rates go down, we see deposits flow into non interest bearing. And when rates go up, there's a different Mix of interest bearing and non interest bearing, but nothing that we're seeing that's outside of our history or our expectations. So hopefully that I said a lot, it gives you a little color.

Speaker 4

No, it was a lot and thank you so much. And just on a separate question, I think you mentioned you provided some made some results against Office CRE. Obviously, a lot of focus there. Give us a Perspective of is there a pool within your office CRE book that you view within the CRE book as higher risk? And how do you frame the loss content If some of these buildings end up in foreclosure and you had to have a distressed sale around that, is it easy to handicap that right now and just your thought process In managing that portfolio?

Speaker 3

Sure. Office obviously is getting a lot of attention in the world and we've been focused on it for quite some time. When we go through it and we look at what we think the loss content is, it's a little bit tricky to estimate right now Only because there hasn't been a lot of asset sales. I think in talking to our team prior to the call, they suggested that there were 4 Properties that sold nationwide outside of Manhattan and 3 in Manhattan in the Q1. So that's not a lot of activity, to get a market price.

Speaker 3

So everything that's happening is everyone's looking at cash flows and NOIs. And so when you think about the cash flows, as we think about our clients, It's one of the things that's really important to keep in mind is about 2 thirds of our clients in real estate in general have put on fixed floating to fix swaps on their loans. And so the impact of the interest rate increases hasn't really affected their ability to carry the loan. And then we start looking at what's coming due. And so you worry about maturities and the ability to for folks to refi and the pace at which Those loans might come due.

Speaker 3

And so when I look forward, when we look forward into the next couple of quarters, in aggregate, We have about $200,000,000 of office maturing each quarter for the next 2, and then it actually drops down in the Q4. And when we look at the LTVs of what's maturing, we're in the neighborhood of 80% of those maturing loans have an LTV of 60% or less. Again, it's important to keep in mind that not all of those LTVs are calculated off of brand new appraisals. Some of them are will be a little bit dated. But when you look at some of the protections in place, there's a bunch of room there.

Speaker 3

So that's not to suggest that there will be no losses. As you could see in our results for the quarter, we did take some partial charge offs on a couple of office properties as we did get new appraisals on things that were troubled. But there is still room there. And I think for us, we keep looking at What's the pace at which the loans are maturing? And I think what you'll see certainly for M and T and I would expect, although I don't know other people's portfolios, That the office story is one that will play itself out over multiple quarters, if not multiple years, because of the maturities, because of the fact that most people will hedge if they got a floating rate note.

Speaker 3

And a lot of the leases are still not maturing because office leases When we look at our office leases, the numbers Something in the neighborhood of 75% don't come due until after 2024. So lots I guess the Long winded way of saying it's a concern. We're watching it. It's our portfolio is pretty broadly spread across our footprint, And it will play itself out over the next several quarters.

Speaker 4

That's great color. Thank you so much.

Operator

And we'll take our next question from Manav Gosalia with Morgan Stanley.

Speaker 2

Hey, good morning.

Speaker 3

Good morning.

Speaker 2

Just on the deposit side, it's not surprising that Deposits ended the quarter below the average. Can you talk a little bit about the trajectory of deposits in the second half of March? How much I guess how much the deposit balances changed through from Feb 28 through the impact from SVB through quarter end and even if you have what's been happening quarter to date this quarter?

Speaker 3

Sure. I guess I would just caution on drawing cause and effect that the numbers are the numbers, but whether the That happened in March was specifically attributable to the SCV or signature challenges is difficult to say, just because there's normal activity that happens in the Q1, right? As we mentioned, the trust demand balances move based on capital markets, And activity, not necessarily because of an exogenous event. But roughly, when you look at the decline In total deposits, over the quarter, it was about 60% happened before March and 40% happened in March.

Speaker 5

It was

Speaker 3

a little bit heavier in March, but as you get into that March timeframe, that's when we got our distribution from Bayview, which is when distributions often get paid right in front of taxes for commercial clients. And so when we look at the effect on the bank of the changes that happened, What we tended to see was we opened up more accounts in our business and middle market space than we would typically in a month. And we saw balances come onto our balance sheet as people sought to diversify. And there were some cases where that went the other way. But net net, we were flat to slightly up, from what our expectations were given all the activity that was happening in the marketplace.

Speaker 3

So from our perspective, we were in line with what we thought for the quarter And pleased with how, the client base and our teams reacted to everything that was going on in the world in the month of March.

Speaker 2

Got it. And I guess, how confident are you at this stage that deposit balances are stabilized? And to the extent, we noticed that the CDs essentially doubled on a Q on Q basis. So how confident are you that A, the deposit balances have stabilized and then B, given that you Kept your deposit beta assumptions. What would cause you to Increase your deposit rates as we went through the middle of the year.

Speaker 2

And Maybe if you have it, what were your spot deposit rates as of March 31? Thanks.

Speaker 3

I'll start with I don't have Deposit rates in front of me and we can follow-up with that. But in terms of the stability of deposits, Again, keep in mind that it's the action that we're seeing right now is really in non interest bearing and that's really being driven by commercial deposits. When we look at consumer balances outside of some outflow in January, and when I say that, I mean non interest bearing, They've been relatively stable through February March. And when you look in the consumer space, what you're seeing is Shift between interest bearing categories. And so we're seeing movement from savings and money market into time, which is pretty typical during rising rates.

Speaker 3

And the net is some small outflow in DDA, which again is pretty standard in the Q1 of the year. In the commercial space, outside of the normal seasonal activity, what will happen is deposits, Non interest bearing deposits will start to stabilize as customers get down to the level of deposits they need to keep in their operational accounts To make payroll, to pay accounts payable and the like and excess will not necessarily leave the balance sheet. It will just shift into some form of interest bearing. It could be interest checking or it could be an on balance sheet sweep. And so there will be some decline and there always is for M and T in these environments.

Speaker 3

When we look through the past, we see that when rates have gone down to 0, We tend to have an increase of about 4 or 5 percentage points in the percentage of our deposit base that sits in non interest bearing. As rates rise, that goes back the other direction. And that's just exactly what we're seeing now and what's happening. And so over time, If you get went all the way back into pre global financial crisis for banks, not just for M and T, but for the industry, Non interest bearing deposits were in the kind of 20% range of total deposits. When they peaked at 45% for us and about 30% for the industry.

Speaker 3

And so depending and that was the last time Fed funds was anywhere near the rates that they are today. On the flip side, Time deposits were a huge percentage of total deposits in the industry in that time period, upwards of 25% or 30%. They've come all the way down into the 5% to 10% range. I give you that as context to say that What's going to happen, what we think will happen is you'll continue to see some outflow of deposits, but it will stabilize as rates start to, stop increasing. And what you'll see is less movement out and more movement across categories.

Speaker 3

Again, for consumers, we think that will be, from interest products like money market and savings at a time. And for commercial customers, it will be from non interest bearing DDA into interest bearing things like sweep and commercial checking. And so for us, for the rest of the year, we think things start to stabilize as we get into the Q2 and second half and The build back in commercial checking balances will start, in anticipation of next year's Q1. It's a cycle that it follows itself very predictably every year.

Speaker 2

Great. Thanks so much. Very helpful.

Operator

And we'll take our next question from John Pancari with Evercore.

Speaker 6

Good morning.

Speaker 3

Good morning, John. How are you doing?

Speaker 6

All right. I want to see if you can give us a little more color on the updated loan growth guidance, 10% to 12%, where are you seeing some of the better trends coming from because it looks like it was Upwardly revised from where you had expected it coming out of last quarter. Thanks.

Speaker 3

Yes. So John, keep in mind that that 10% to 12% includes 4 quarters of Peoples this year in the averages versus 3 quarters last year, right? So some of that It's in there. I think we noted in the outlook that if you look based on the average balances in just the Q4 of last year, We're more in the 1% to 3% range. And if you look at that, a lot of that's happened already in the Q1.

Speaker 3

And based on where the first quarter Loan balances ended. Just the averaging effect of that should carry a little bit of growth through the 2nd quarter. And then we expect things to kind of flatten out a little bit as we go through the back half of the year. And that's how you that's just the math that gets the average into that range. And really, I think the challenge that you're seeing is pipelines have been robust, but they're starting to slow down a little bit, and we're managing them to focus our liquidity on our best customers and our relationship customers.

Speaker 3

And then in some instances, in some of the consumer space As it is indirect and rectify with rates going up, you're seeing a little less demand from the clients And therefore, a little bit of a slowdown that will keep balances flat to slightly down in that space just as the duration of that portfolio is pretty short. And so you need to continue to originate new to keep it flat or to grow it. Within the commercial world, There's not a lot of activity that's really happening in CRE. There's not a lot of new construction. And so what we would expect is you see for us and for the industry, As loans mature, a lot of capital and liquidity is devoted to those clients and keeping them around.

Speaker 3

And then in the C and I space, we've seen fairly broad based growth, whether it's by geography or by industry type. We did note that the dealer floorplan balances have grown. There's still maybe half of their long term average, which is better than they were, But there's some upside there and obviously as you get a slowdown in indirect, you'll likely see an uptick in the dealer floor plan balances. But Those are kind of the spaces where we're seeing activity and how we expect the rest of the year to play itself out.

Speaker 6

Got it. All right. Thanks, Darren. And then just Secondly, back to the office portfolio, just a few things around that. What percentage of the office book is Criticized, I believe last quarter you indicated about 20% of it was criticized.

Speaker 6

And in that 60% LTV that you mentioned For what is maturing coming up, do you have some granularity on what the refreshed LTVs look like as Part of that? And then lastly, did you add to the commercial real estate reserve this quarter?

Speaker 3

Okay. Lot in there. Me try and make sure I get it all. So the office criticized is still right around 20%. It's up slightly, but not up dramatically.

Speaker 3

And the hotel criticized continues to come down. So it's important to keep that in mind because as we talk about the CRE Increase that you're asking about, there's an offset within the whole CRE allowance, right? We've seen some improvement in hotel and retail, offset by some decline in office. But we did add to the CRE allowance in the quarter. If you think about Dollar amount, it's probably half to 2 thirds of the $50,000,000 provision was allocated towards the net towards the Erie portfolio, the rest was would be driven by growth in other portfolios.

Speaker 3

When you look at the LTVs, What we've seen in the ones that we have updated so far is we're seeing somewhere between a 15% 20% in some of the updated values of the properties that we've reappraised. And so that's why You didn't hear me talk much about 80% or 70% LTVs because those ones are getting closer perhaps to where these properties might reappraise. But 60% LTVs and sub-fifty percent LTVs would seem to still have a lot of cushion before you're into any material loss content. And so when we look at that, we feel good about where we are. It doesn't mean that We're taking our eye off the ball, but we feel good about where we are.

Speaker 3

And again, just to give a little more color on New York City office. Next quarter, this quarter we're in right now, there's 5 loans that are maturing With a principal balance of $30,000,000

Speaker 6

Got it. All right. Thank you, Darren.

Operator

And we'll take our next question from Dave Rochester with Compass Point.

Speaker 7

Hey, good morning, guys.

Speaker 3

Good morning.

Speaker 7

On capital The buyback going forward, it sounds like you're pretty much saying no buyback for 2Q or is that too strong a statement? Or is the thought just that you'll wait to get your CCAR results and then hope that the market is more stable at that point and go from there?

Speaker 3

Yes, I think that 0 is a strong statement. When we look through the quarter and what we see with the pace of risk weighted asset growth, We see the potential actually for kind of a trifecta and that we should see a little bit of risk weighted asset growth. As Rates are rising and liquidity is constrained. We think that we'll start to see some increased margin and profitability of new lending activity, which usually happens at this point in the cycle. So we'll deploy capital to those opportunities first.

Speaker 3

We will and we do anticipate closing the sale of the CIT business In this quarter, which will create a gain, which will help with our capital ratios, which should allow us to, be in the market and repurchase some shares and at the same time maintain this kind of capital level that gives us a really nice cushion, given the uncertainty in the market And while we wait for the SCB, from our perspective, if we run a little light for a quarter, it doesn't mean that the capital is gone. It just means it comes back a little bit later in the year. But we think we're in a position here, which is nice, where we can actually do all 3. We can grow risk weighted assets. We can Return capital and we can grow the capital ratios all at the same time.

Speaker 7

Got it. Very helpful. And then as a follow-up, you mentioned your outlook on hotel, retail and multifamily properties improved. I was just wondering if you could unpack that a little bit And just talk about what you're seeing that drives that improved outlook there. And then you had mentioned, I guess office properties As you kind of are redoing these LTVs are coming down, maybe 15% to 20%, if I heard that right.

Speaker 7

Is that how much you're actually marking these as well? So the NPAs that You have in the marks that you took this quarter, is that roughly the magnitude or is it less just given that 15% to 20% really doesn't Cut into a lot of those properties if those healthy views are that low. Thanks.

Speaker 3

Sure. Yes. I can't write fast enough to keep up with all the questions that you got. So if I miss one, Just let me know. So in hotel and retail, hotel in particular, we saw that portfolio Peak, it's kind of 80% criticized back in the pandemic.

Speaker 3

And what you're seeing is the return to travel, A lot of capacity that came out of the system during those times and occupancy rates and RevPAR is really strong. And so The NOIs on hotels are really strong when that's why you're seeing those come out of criticized and the asset values are holding up. Multifamily also continues to be strong. I did not make a comment about multifamily values, but multifamily has been very strong. When you look at Rent increases over the last 24 months, they've been very strong.

Speaker 3

And in fact, rents in multifamily Appreciated faster than interest rates did and so they should be well covered to handle moving interest rates. And retail kind of played itself out largely through the pandemic. And as the economy opened up, we've typically seen Retail sales of physical retail, pretty darn close to where it was pre pandemic when looking at volume between in person and online. And so those have performed very well. When you think about what was the last question?

Speaker 7

The marks on the office.

Speaker 3

The marks on the yes. So when you look at where some of these are reappraising, they are coming the appraisals are coming down and affecting the LTV. When we would only put it into the allowance if we have something that is Criticized or not performing and we're worried about it and we think that it would affect, the recoverable value and then we take that in and we'll That's through the allowance and ultimately through charge off.

Speaker 7

Great. Thank you.

Operator

And we'll take our next question from Bill Carcache with Wolfe Research.

Speaker 8

Thank you. Good morning, Darren. Could you Address how you're thinking about the risk of tougher regulations following the SIBB fallout and Barr's recent testimony, including In areas like TLAC and the elimination of the OCI opt out and how could we see this As we see this play out, how could we see it affect your appetite for buybacks and RWA growth?

Speaker 3

So I guess a couple of thoughts, Bill. On the OCI piece, We've had that in mind for the last 3 years and all the discussions we've had over the prior number of years about Putting the cash to work and the impact that, that might have in the securities portfolio on AOCI and our excuse me, our capital. We were looking at both the CET1 ratio as well as the tangible common equity ratio. It was really the latter one that got us gave us a little bit of agita in debating how fast and how much to put into securities. And so from an OCI perspective, if that comes to pass and that goes into our capital ratios, at the end of the quarter, We had about $1,300,000,000 in total marks across the AFS and HTM portfolios, About $350,000,000 was pretax, the AFS mark, and so $264,000,000 after tax.

Speaker 3

It's maybe 20 basis points of CET1. And then if you look at the total, you're maybe Slightly below that, call it, 80 ish basis points of CET1 if you had to put both through. And so when we talk a little bit about our thoughts on capital and where we're kind of managing the CET1 ratio for the next little while, It's giving ourselves some cushion as these things play themselves out. And so from that perspective, It won't surprise me if that's a change that happens, but I think we're well covered and well prepared should that play itself out. When it comes to TLAC, that's really a longer term change.

Speaker 3

I think when you look at what's happening in the industry right now, Most organizations have been increasing their use of wholesale funding and banknotes, which ultimately will help with TLAC as it plays itself out. And then there's always the question of how Basel IV and those regulations come to pass and what the final proposals look like. And We're trying to be mindful that those are changes that could come and not do something today that would put us in a place where We would have to raise equity or issue TLAC at a suboptimal time.

Speaker 8

That's helpful, Biren. Thank you. If I can follow-up on your deposit remixing commentary earlier. Yes. What's the non interest bearing mix that's implicit in your high 30% to low 40% beta expectation?

Speaker 8

And following up on the commentary about that non interest bearing mix, perhaps declining to Pre GFC levels that you mentioned, how are you thinking about that risk? What would that mean for betas?

Speaker 3

So I'll try and unpack that for you. I give the comment about where Rates were and where deposit or where balance sheets were pre GFC to give context, right, that most of the time when we talk About deposit betas in these industry forums, the point of reference tends to be the last rising rate environment, which was the 2016 to 2019 period where Fed funds only got to about 2.25%. And so given where Fed funds are today and we'll see how long they stay there, It's important to keep in mind what balance sheet looks what bank balance sheets looked like back in that time period. We might not get all the way back there. We probably won't get all the way back there depending on how long rates stay at this level.

Speaker 3

Although it does look like they'll stay there longer than the last Time rates rose. And so when we look at the deposit mix And where things stabilize, we tend to look at and think about demand deposits in conjunction with Interest checking and on balance sheet sweep. And what we've been seeing is some decline in those balances Over time, as deposit balances come out of the system with the Fed's quantitative tightening that they're doing. And what we think we'll see, which is included in that outlook is we'll see a continued shift from demand, particularly commercial clients, commercial and small business from non interest bearing into interest checking and sweep. And that over time, you see those balances look maybe closer to fifty-fifty from where they are today, in those particular categories.

Speaker 3

There'll still be interest, non interest Deposits on the consumer side and those you won't see as much movement into interest bearing products because they don't tend to Switch categories like that. And those are some of the factors that are implicit in those deposit betas. And really the question to me is twofold. Where do Fed funds ultimately end up and how long does it stay there?

Speaker 8

That's very helpful. Thanks, Darren.

Speaker 1

Hey, Shelby, this We're going to go for another 10 minutes and we've got a bunch of analysts in the queue. So maybe we can limit it to just one question for the analysts that are still there.

Operator

We'll take our next question from Matt O'Connor with Deutsche Bank.

Speaker 9

Hey guys, thanks for fitting me in here. Darren, I want to circle back on the comment about NIM being below 4% for the full year and then trending to kind of that longer term average. I guess, first, just confirm, is it still, I think, 3.6% to 3.9%, the long term average that you've talked about?

Speaker 3

That is correct.

Speaker 9

And then in terms of, I guess, like the timing of getting there and what are some of the Besides the obvious like if rates go to 0, it will be the low end. But what are some of the kind of puts and takes like the 3.6 versus 3.9? And then lastly, just to be, Ben, like any thoughts on the jumping off point for the end of this year? Thanks.

Speaker 3

Yes. So Matt, the biggest driver of the change in our posture and thoughts on NIM has really been the shift in funding sources, right? And so if you look at the work that we did in the Q1, the $3,500,000,000 that we issued, We had talked about issuing wholesale over the course of the year. The markets were very receptive when we went out in January. And so we pulled forward A bunch of that funding, which had a big impact.

Speaker 3

We talked about 19 basis points on the NIM. And so Where we stand today, when you look at our asset sensitivity, you can see we're kind of plus or minus 2%, which is where we try to run the bank. And so we'll see when we go through and we look at Those factors and expectations that Fed funds are starting to top out and likely based on the forward curve, we see a decline in the end of the year. That's where you start See that deposit or that margin start to come back down. But as I mentioned with our asset sensitivity where it is, It's not going to drop precipitously because of the things that we've done with some of the forward starting swaps with the securities portfolio build, with the mix of fixed rate assets on the balance sheet and what have you.

Speaker 3

And so it will start to grind down into that range. But given over the long run, the reason we've talked about that range is because we expect over the long run That things normalize. And what we mean by that is that the mix of deposits on the balance sheet looks more like what you would see In a normal rate environment, it's not extreme like where we had 45% of the deposits in non interest bearing. That's not normal. As that changes, We'll see a different or a mix of the time deposits and what the rates are on time deposits and that will affect the margin.

Speaker 3

We'll look at what percentage of the balance sheet sits in cash and securities. And as those start to normalize, You'll see an improvement in the margin. And so it's the shift in all of those categories that became very extreme through the pandemic That as they start to come back into what we would consider normal ranges, that's why we think that $3.60 to $3.90 is a normal long term For our bank and our balance sheet, just kind of based on history. And so we'll start to see that migration happen. We started to see it obviously this quarter and at the end of last year, and it will continue through 2023.

Speaker 3

How fast we get there? It seems like things are moving pretty quickly right now just given quantitative tightening and how balances are shifting around the industry. As we get to the end of the year and the jumping off point for the margin, you're probably Migrating towards the $3.60 range for the last quarter of the year, but there's a lot of factors that can get us there Between now and then, that would be kind of the low end of where I think we would end the year. For the whole year, we're in the ballpark of high Threes, just based on that trajectory. And then when as we go through the year and the balances the deposit balances reprice, you see Some migration down, but it starts to level off as we get towards the back half of the year and you operate in that range through Most of 2024 would be our expectation right now.

Speaker 3

But keep in mind, there's a lot of assumptions that go into that, not the least of which is what the forward curve looks like.

Speaker 9

Okay. That's a lot of detail. But just to summarize, so you think you get to the kind of lower end of the 3.6% to $3,900,000 range by the end of the year, but that's kind of relatively stable for next year with all the caveats that you have highlighted.

Speaker 3

Yes. I would just alter that slightly and say that the bottom end of the range, you probably don't see until The first half of next year, that $3.60 to $3.90 but you're slowly moving down as we go through the year. But as we get towards the end of the year, the rate of decline slows and you kind of stabilize and hold flattish as we go through 2024.

Speaker 9

Okay. That was helpful. Thanks so much.

Operator

And we'll take our next question from Ken Usdin with Jefferies.

Speaker 10

Hey, Darren, how's it going? Just a quick one on the fee guide going to 7.9% from 5% to 7% growth. Is the entirety of that just The MSR add that you mentioned you did at the end of the quarter?

Speaker 3

Pretty much, yes.

Speaker 10

Okay. And then if I can just sneak in the same one in on the cost side. Do you in terms of like the expected sale of the Corporate Trust business, You gave us the revenue number in the press release. Do you have an approximate idea of like when that's going to close so we can just kind of think about taking out The fees and the expenses relative to that over the as the course of the year goes on?

Speaker 3

Yes, sure. We expect it to close this quarter. For safety, for you guys, I would assume that it's out of the run rate for the second half of the year. And you've got the revenue, the expenses are not quite the same as revenue, but they're not far off, which is one of the reasons why we're contemplating this move.

Speaker 10

Okay, got it. Right. And you were pretty clear that the rest of the cost guide is inclusive of the MSR, any costs related to the MSR adds?

Speaker 3

That's correct, right. And so in the guide, we have both the full year of the CIT business right now, just to try and keep it apples to apples year over year, as well as to let you know that we made that MSR purchase. But other than that, there were a few things that were kind of pulled forward in this quarter, Some advertising expense, some of the items, costs related to that divestiture that won't repeat themselves to try and just give you guys A little bit of color as to why we still feel good about the full year guide.

Speaker 10

Got it. Thank you.

Operator

And we'll take our next question from Gerard Cassidy with RBC Capital Markets.

Speaker 10

Hi, Darren.

Speaker 3

Good morning, Gerard.

Speaker 11

We're going to miss you. Congratulations on your run as CFO. I guess, well, you started in 2016. So I know you've got a heavy hitter replacing you, but good luck in the new role.

Speaker 3

Thank you. I appreciate it. It's been a run. There's a lot that We've seen, we lost Bob and Mark. We went through a pandemic, bought the largest bank and went through a couple of bank failures.

Speaker 3

So It's been an eventful time.

Speaker 11

It sure has. And to help you in your new role, your spot rate on your My Choice money market account is Three basis points were under $10,000 in the account and over $10,000 it jumps to 2.96%.

Speaker 3

I'm just trying to help out the new CFO so that he has good numbers to report. They will be chastising me about why balances are leaving, but Don't forget that's the offer rate, not the portfolio rate, but

Speaker 11

I appreciate that. Oh, God, yes. No, no, I know, absolutely. But here's my question. Speaking of deposit rates, can you share with us and then you've alluded to this in some of your answers, If the Fed reaches its terminal rate on Fed funds in June, let's say, at 5%, 5.5% And does not cut even though I know you're looking at the forward curve that includes 2 cuts in the 4th quarter.

Speaker 11

Say they don't cut until maybe the first half of twenty twenty four, when does your deposit betas go flat After reaching the terminal rate and second, if they go flat 60 days afterwards or whatever that you think the number would be, Do you then benefit from reinvesting the cash flows off of the securities portfolio into a higher rate environment assuming the Fed doesn't cut The Fed Funds rate.

Speaker 3

So when you stop start seeing a slowdown in deposit repricing, History has been, it's typically 1 to 2 quarters after the Fed stops. And so I would expect even if the Fed Stopped in the summer and cut in the Q4, you might not you wouldn't see a change in deposit betas in all likelihood until sometime in next year. If you get into the space where they stop and then hold and it goes into 2024, the same Thing would be true in terms of you'd see deposit betas go up for a quarter or 2 after and then start to level off. In all of these things, in the pricing, in the ultimate beta, there's a couple of factors to keep in mind, Right. We've always talked about it in terms of where Fed Funds is.

Speaker 3

But as we look at the bank and the balance sheet, there's a bunch of trade offs that are being made, right? And so for interest bearing deposits, there's a cost that is borne that you need to offer to the customers. But then there's other alternatives that you can look at to meet those funding needs. It's brokered money market, it's brokered CD, it's wholesale funding, Right. And so our preference is if we're going to give rate, we'd rather give it to our customers than to the capital markets.

Speaker 3

But at the end of the day, you're always making those trade offs. And then it's the mix shift that happens. For our clients, as they are a reflection of the economy, just as any bank's clients are, Consumers are going to keep some amount of money in their checking account that they're comfortable with. And every person has their own number, but they won't go below it unless they're in dire circumstances. Businesses are the same way.

Speaker 3

And so there's a certain amount of deposits that are going to be on each bank's balance sheet. And then within each category, The market is pretty perfect, and we can't pay materially less for money market savings in Buffalo than our competitors can. And the same thing is true for time and the other categories. And so there's a natural governor in the market that gets all of these different deposit categories to their normal what I would call their normal pricing, right? And then what Kind of differentiates one bank from the next is their mix.

Speaker 3

And our advantage has always been that we tend to focus on operating accounts, Whether it's consumers or commercial customers, and we have a slightly higher mix of those in our funding, which ultimately helps our cost of funds. And so Those will be the things that will determine where we end up, and how big our beta is, perhaps compared to others. But we think the betas continue after Fed funds stops for a little bit, and the terminal amount is as much a function of your mix of deposits as, how high the absolute number goes.

Speaker 11

Very good. Again, congratulations and we'll talk to you in the future in your new role. Thanks. Thanks, Gerard.

Operator

And we'll take our next question from Steven Alexopoulos with JPMorgan.

Speaker 12

Hey, Darren. I'm curious, in the aftermath of SVB, which was obviously all over What are you hearing now from your large deposit customers? Right, are they looking to diversify? Did you guys lose balances to Larger banks, has the storm now passed? Just any color you could provide how this is impacting a bank like yours would be really helpful.

Speaker 12

Thanks.

Speaker 3

Yes. Well, happy to. The long story short was that the change was a positive for us For adding clients and adding accounts. And so we're helpful that we were able to serve as a source of strength and to help some of these folks out when these changes happen. And we were, I would say, a net Slightly positive as a result of all the disruption that happened in these various markets.

Speaker 3

For our clients, when we look at particular our commercial And the average tenure, 3rd 20, 25 year relationships. And so they know us well and they tend to worry a little bit less. That said, there were some people who chose to move some money into some of the money funds for diversification for rates as well as Some of their comfort level. We didn't lose a ton, to be honest with you, to the larger organizations. But what I would say is in some of those shifts, We were a recipient of balances as much as we saw an outflow.

Speaker 3

And so when you add in some of the accounts that we opened during the crisis, The net was a slight positive. And so for us, it wasn't the big shift In balances that many were anticipating, more I would say as much a continuation of the trend We've been talking about as quantitative tightening happens, as rates are moving up and the money the rates paid on the money funds Always moves faster than the deposit accounts on the balance sheet. That normal migration is happening and over time we expect it will come back As those other rates start to match what you can get in the funds.

Speaker 12

Great. Thanks for taking

Operator

And we'll take our last question from Brian Foran with Autonomous Research.

Speaker 5

Hi. I guess just quickly on lending, it sounds like Any underwriting changes on your end are only marginal, if I got that comment about focusing liquidity on our best customers, right? So I just wanted to confirm that. Then just more broadly, definitely appreciate the point that the rollover in commercial real estate in particular is fairly slow. But do you think some of your peers will change underwriting more significantly As people worry about a credit crunch in lending and CRE in particular, do you think that's a valid concern or do you think that's overblown right now?

Speaker 3

So I can't speak to what others will do. I think there's a big difference between the banks And the REITs and the CMBS and how they underwrite and how they've underwritten, and how they think about things. For us, in particular, We don't move our credit standards very much at all. And I think we've talked about this for a while that we've had 2 Chief Credit Officers since 1983. Our viewpoint on underwriting is pretty consistent, and we try to be the same through good times and bad, right?

Speaker 3

Because what our clients The value is consistency and knowing what they need to have in terms of a profile of the loan for us to be there. I think for us and the industry, as you look at what's maturing, There's a question of how many alternative sources of funds are available for those loans, particularly in the real estate space. And so as loans mature, one of the questions will be, is there another bank or a fund or someone out there, who is ready to take that loan on, which obviously will be a function of the debt service coverage and the loan to value. What likely happens though is as prices are challenged in the short term is As you'll see, some sponsors will have the ability to put in some extra equity, which will help with the underwriting. You might see some Of A and O B note structures, you might see some outside private equity money come in, in the form of preferreds or mez debt to help with some of those shortfalls.

Speaker 3

So I think what's typical within real estate is it's nuanced, right? It's hard to give a blanket statement about what will happen. It's more client by client and property by property that you work through these things. And so like I said, for us, We preserve our capital and our liquidity for our best customers and many of these ones, particularly in real estate, have been around for a long time, Like we're in the 2nd or 3rd generation of supporting them and we'll continue to do that. But there's always opportunity So when this kind of disruption occurs and we'll be paying close attention to that as well.

Speaker 5

I appreciate all that. Thank you very much.

Operator

And it appears that we have no further questions at this time. I will now turn the program back over to Brian Klock for closing remarks.

Speaker 1

And 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 great day.

Operator

That concludes today's teleconference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
M&T Bank Q1 2023
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