M&T Bank Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 14 speakers on the call.

Operator

Good day, and welcome to the M&T Bank Second 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 Klock, Head of Market and Investor Relations. Please go ahead.

Speaker 1

Thank you, Todd, and good morning, everyone. I'd like to thank everyone for participating in M&T's 2nd Quarter 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, at 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 The presentation also includes non GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning are M and T's Senior Executive Vice President and CFO, Daryl Bible and Senior Executive Vice President and former CFO, Darren King. Now I'd like to turn the call over to Daryl Bible.

Speaker 2

Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. I'm also grateful for everyone across the bank that has welcomed me and Help me get up to speed quickly, including my incredibly talented finance team. Like me, I'm sure all of you are extremely happy that we now have an earnings presentation.

Speaker 2

So thank you to Investor Relations, Corporate communication and corporate reporting teams for making this a reality. I'm very excited about the work we are doing and the transition has gone even smoother than I could have anticipated. I am proud to be part of M and T's strong financial history, Consistent operating philosophy and conservative community focused banking principles. I'm even prouder to be part of a company that is tied to its purpose, to make a difference in people's lives. I would like to thank our over 22,000 M and T colleagues for all their hard work each and every day.

Speaker 2

You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M and T continues to make a difference in our customers' lives and continues to produce strong results for our shareholders. Please turn to Slide 3. Let's start with our purpose, mission and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve.

Speaker 2

Our purpose drives our operating principles. We believe in local scale with 28 community led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, comp deposit share and higher operating and capital efficiency. Our performance is fueled by relentless focus on customers, talent and communities. Moving to Slide 4.

Speaker 2

We deliver for customers. We have seasoned, talent, diverse sport and new capabilities that provide solutions that make a meaningful difference to our customers. Please let's turn to Slide 5. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed.

Speaker 2

Our investments in enhancing customer experience and delivering impactful products have fueled organic growth. A significant milestone this Here was a designation of over 119 Multicultural Banking branches across our footprint, with more to come in our expanded These branches are community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities. Despite operating only in 12 states, We rank as the number 6 SBA lender in the country and rank highly in 10 of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects with over $2,300,000,000 in financing and over 2,600 home loans for low and moderate income residents.

Speaker 2

Additionally, M and T Bank and our charitable foundation granted over $47,000,000 to support our communities and 22 loans. Please turn to Slide 6. Here we highlight our commitment to the environment. We have invested over $230,000,000 in renewable energy sector and significantly reduced our electricity consumption since 2019. Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights.

Speaker 2

Turning to Slide 8. Our 2nd quarter results Reflect the strength of our core earnings power, balance sheet and liquidity position. Adjusted to exclude the $225,000,000 pre tax gain from the sale of Collective Investment Trust or CIT business in April. 2nd quarter revenues have grown 395,000,000 or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year over year.

Speaker 2

On the same basis, pre provision net revenues have increased 35% since last year's Q2 to 1,100,000,000 Credit remains stable. Net charge offs increased in the 2nd quarter, but year to date still remain below our historical long term average. Net income for the quarter was $867,000,000 up 24% from linked quarter. Diluted GAAP earnings per share was $5.05 for the 2nd quarter, up 26% sequentially. Now let's review our net operating results for the quarter on Slide 9.

Speaker 2

M and T's net operating income For the Q2, which excludes intangible amortization, was $879,000,000 up 23% from linked quarter. Diluted net operating earnings per share common share were $5.12 for the recent quarter compared to $4.09 in this year's Q1. Tangible book value per share increased 3% to 91.58 On Slide 10, you will see that on a GAAP basis, M and T's 2nd quarter results produce an annualized return on average assets and return on average common equity of 1.7% 14.27%, respectively. Results for the Q2 of this year included an after tax $170,000,000 gain on the sale of the CIT business in April. Excluding this gain, adjusted GAAP earnings per share was $4.11 and adjusted return on average assets and average common shareholder equity was 1.39% and 11.6%.

Speaker 2

Next, let's look a little bit deeper into the underlying trends that generated our 2nd quarter results. Please turn to Slide 11. Taxable equivalent Net interest income was $1,810,000,000 in the 2nd quarter, slightly below linked quarter. This decline was driven by higher volumes of non core funding and unfavorable mix change caused by disintermediation, partially offset by higher interest rates and one additional day. Net interest margin for the past quarter was 3.91%, down 13 basis points from linked quarter.

Speaker 2

The primary driver was the decrease to the margin Was partially impacted from the mix change to the higher cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets net of rates on deposit funding benefited the margin by 4 basis Turning to Slide 12. Capital levels remain strong with a CET1 ratio to the end of the Q2 at 10.58%. Average earning assets increased $1,900,000,000 or 1% from the 1st quarter to the Q2 due largely to the $1,500,000,000 growth in average loans and $1,000,000,000 increase in average investment securities. Turning to Slide 13.

Speaker 2

We talk about the drivers on the loan growth. The total average loans and leases for $133,500,000 during the 2nd quarter, up $1,500,000,000 compared to the linked quarter. Looking at the loans by category on an average basis compared to the Q1, commercial and industrial loans increased 5% to $44,500,000,000 We continue to see in our dealer and specialty businesses. Plus, we are adding new customers as we grow market share in legacy and new markets. During the Q2, average commercial real estate loans decreased 1% to 44,900,000,000 The decline was driven largely by lower construction loan balances.

Speaker 2

Average residential real estate loans were 23,800,000,000 essentially flat compared to the Q1 of this year. Average consumer loans were down 1% to $20,300,000,000 driven by lower activity due to rising interest rates. Turning to Slide 14. Average investment securities increased to $28,600,000,000 during the 2nd quarter due to large part to purchases late at the end of the Q1. The duration of the investment securities book at the end of June Is 3.9 years and the unrealized pretax loss on the available for sale was only 441,000,000 At the end of June, cash and interest bearing deposits at banks and the investment securities totaled 56,900,000,000 Turning to Slide 15.

Speaker 2

Deposit outflows during the Q2 on an average basis accounted at $2,100,000,000 or 1.3 percent in line with industry trends. Consistent with our experience, prior to rising rates, The increased competition for deposits and customer behavior is leading to a mix shift with the deposit base to higher cost deposits. Comparing the second to first quarter's, average demand deposits declined 5,700,000,000 Savings and interest bearing checking deposits decreased $843,000,000 while time deposits increased $4,400,000,000 Decline in average demand deposits resulted predominantly from a $1,100,000,000 decline in the corporate trust balances due in part to a large to lower capital markets activities, the movement to sweep products as customers seeking higher yields with $1,800,000,000 on balance sheet and $2,400,000,000 shifted off balance sheet sweep accounts during the Q2. Average time deposit growth was driven by $2,300,000,000 in broker CDs and $2,100,000,000 growth consumer time deposits. We remain focused on growing the REIT and retaining deposits.

Speaker 2

End of period deposits grew $3,000,000,000 or 1.9 percent from the end of the Q1. The gross was largely driven by broker CD balances, which Increased $4,100,000,000 compared to the end of the linked quarter. However, since the end of May, our customer base Our wholesale deposit balances have stabilized and started to grow with an increase of $523,000,000 driven largely by growth in commercial and consumer deposits. Now let's discuss non interest income. Please turn to Slide 16.

Speaker 2

Non interest income totaled $803,000,000 in the 2nd quarter compared to $587,000,000 linked quarter. As noted earlier, the Q2 included $225,000,000 gain from the sale of our CIT business. Recall that M and T normally receives an annual Distribution from Bayview Lending Group during the Q1 of the year. This distribution was $20,000,000 in this year's Q1. Excluding these two items, 2nd quarter non interest income increased $11,000,000 compared to the Q1.

Speaker 2

Mortgage Banking revenues were $107,000,000 in the recent quarter, up 26% from linked quarter, driven by $18,000,000 in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March. Service charges on deposits for $119,000,000 or up 5% compared to the Q1. Trust income of $172,000,000 in the recent quarter declined of $194,000,000 in the Q1 due largely to $31,000,000 in lower fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees. Our revenue from operations adjusting from the gain From the CIT sale and the distribution at Bayview Lending Group in this year's Q1 were $137,000,000 down $2,000,000 sequentially. Turning to Slide 17 for expenses.

Speaker 2

Operating expenses, which exclude the amortization of intangible assets, for $1,280,000,000 in the Q2 of this year, down $64,000,000 from the linked quarter. As is typical for M and T's 1st quarter results, Operating expenses in the Q1 included approximately $99,000,000 of seasonally higher compensation costs. Excluding the seasonally higher compensation in the Q1, operating expenses increased $35,000,000 sequentially. That increase was due to $31,000,000 in higher compensation and benefit costs reflecting higher average headcount, The full impact of the annual merit increases and severance costs, dollars 20,000,000 in higher other operating expenses related to the bulk of the MSR purchase. These increases were partially offset by lower CIT related expenses, including $22,000,000 of lower sub advisor expenses and lower advertising and marketing and deposit insurance expenses.

Speaker 2

Given the prospect of slowing revenue growth, We remain focused on diligently managing expenses. The efficiency ratio, which Excluding intangible amortization and merger related expenses from the numerator and the security gains and losses from the denominator was 48.9% in the recent quarter compared to 55.5% in 2023's Q1. Excluding the gain from the sale of the CIT business in the 2nd quarter, the efficiency ratio was 53.4%. Next, let's turn to Slide 18 for credit. The allowance for credit losses amounted to $2,000,000,000 at the end of the second quarter, up $23,000,000 from the end of linked quarter.

Speaker 2

In the 2nd quarter, we recorded $150,000,000 provision in credit losses compared to $120,000,000 in the Q1. Net charge offs were $127,000,000 in the second quarter compared to $70,000,000 in this year's Q1. The reserve build was largely due to anticipation of declining commercial real estate values and loan growth. At the end of the second quarter, non accrual loans were $2,400,000 a decrease of $122,000,000 compared to the prior quarter and represent a 1.83 percent of loans, down 9 basis points sequentially. As noted, net charge offs for the recent Quarter amounted to $127,000,000 The increase in net charge offs was driven by 4 large credits, 3 office buildings in New York City and Washington D.

Speaker 2

C. And 1 large healthcare company operating in New York State. Annualized net charge offs as a percentage of total loans were 38 basis points for the 2nd quarter compared to 22 basis points in the 1st quarter. This brings our year to date net charge offs to 30 basis points, which is below our long term average of 33 basis points. As we have noted previously, we expect net charge offs to be lumpy on a quarter to quarter basis.

Speaker 2

This is the result of unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, Tenant sensitivities on commercial real estate portfolios on a quarterly basis. This work is reflected in our criticized loan portfolio. Loans 90 days past due on which we continue to accrue interest were $380,000,000 at the end of the first quarter compared to $407,000,000 sequentially. In total, 43% of these loans 90 days past due Loans were guaranteed by the government or government related entities.

Speaker 2

Turning to Slide 19 for capital. M and T CET1 ratio at the end of June was estimated 10.58% compared to 10.16% at the end of the Q1. The increase was due in part to higher net income and in repurchasing shares in the Q2. In June, tangible common shareholder equity totaled $15,200,000,000 up 3% from the end of the prior quarter. Tangible book value per share accounted at 91.58 dollars up 3% from the end of the Q1.

Speaker 2

In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category 4 banks, given the timing of the People's United acquisition, M and T participated in the stress test this year. Our preliminary stress test capital buffer or SCB is estimated to be 4%. Using the STB, which is in effect from October 1, 2023 to September 30, 2024, where we subject to 8.5 percent CET1 ratio. Now turning to Slide 20 for the outlook.

Speaker 2

As we look forward to the Q2 of this year, we believe we are well positioned to navigate through a challenging economic condition. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year 2023. The 2023 outlook reflects the impact of the sale of the M M and T Insurance Agency that closed in October of last year and the sale of the CIT business that closed in April of this year. First, let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7,000,000,000 to 7 point $2,000,000,000 range, which reflects a flat to modestly higher flow and deposit growth and incorporates 125 basis point hike in August of this year.

Speaker 2

We noted on the Q1 call a key driver of net interest income in 2023 over the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry wide outflows. Full year average deposit balances are expected to be up low single digits compared to 2022. We continue to expect the deposit mix The shift towards higher cost of deposits with declines expected in demand deposits and growth in time deposits and on balance sheet sweeps. This is expected to translate to a through the cycle interest bearing deposit beta through the Q4 of this year to the low to mid 40% range.

Speaker 2

This deposit beta excludes broker deposits. Next, let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full year average loans and leases balances during 2023 to be relatively stable. The mix Of C and I, CRE and consumer loans inclusive of consumer real estate loans is almost 1 third each As of the end of June, we expect this trend to shift slightly to C and I growth outpacing CRE. As we have seen over the past 4 quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan books over the remainder of 2023.

Speaker 2

Turning to fees. We expect non interest income to be in the range of 2.25 to $2,300,000,000 range. This outlook for non interest bearing reflects lower trust revenues, free floating from the sale of the CIT business in April, as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's Q1. Remember, the outlook does not include the $225,000,000 gains from the sale of the CIT business. Turning to expenses.

Speaker 2

We anticipate expenses excluding intangible amortization to trend near at the higher end of $5,000,000,000 to $5,100,000,000 In addition, this outlook for net operating expenses Includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the $60,000,000 to $65,000,000 range. Turning to credit, we expect loan losses to be near 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 be affected by changes in the macro outlook and loan balances. For 2023, we expect taxable equivalent rate to be in the 25% range.

Speaker 2

Finally, as it relates to capital. This is a very clear differentiator for M and T. Our capital, Coupled with our investment with our limited investment security marks has been a clear strength during these turbulent times. M and T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary.

Speaker 2

We take our responsibilities to manage our shareholders' capital very seriously and will return more when it's appropriate to do that. Our businesses are performing very well and we are growing new relationships each and every day. Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth along with buybacks in the future, which will always be part of our core capital distribution strategy. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies.

Speaker 2

To conclude on Slide 21, our results underscore an optimistic investment thesis. Our economic uncertainty remains high and that is when M and T has historically outperformed its peers. M and T has always been A purpose driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than 2 times growth relative to peers. Our strong shareholder returns include 15% to 20% return on average tangible common equity and robust dividend growth.

Speaker 2

Finally, we are a disciplined inquirer and prudent steward of shareholder capital. Our integration of People's United is complete and we are confident in our ability to realize our potential post merger. Now let's open up the call to questions before which Todd will briefly review the instructions.

Speaker 1

Thank

Operator

You may remove yourself at any time by pressing star 2. We'll take our first question from Manan Ghasalia with Morgan Stanley.

Speaker 3

Hey, good morning.

Speaker 2

Good morning.

Speaker 3

I had a question on NII. I noticed you took your deposit balance guide up along with the deposit beta guide, but kept the NII guide the same. So can you talk about the puts and takes there? I guess the question is why hold more liquidity And hold more in interest bearing deposits in an environment where you're not growing loans that much. Is it more a function of Any upcoming LCR rules or anything the regulators are asking you to do?

Speaker 2

Yes, Manav, thank you for the question. What I would tell you is that We start right now each and every day making sure we have a really strong liquidity on our balance sheet and we want to make sure that is a Really good strength as we continue to move through these times. Our deposits, we believe we are in great position to Continue to grow and gain share in our markets that we're serving. So we are aggressively going out and trying to get deposits from our clients for customers out in these marketplaces. The beta guide did go up, but it's really a mix of how much of funding we get from core versus broker deposits.

Speaker 2

When the crisis first started in March, we Took down Federal Home Loan Bank advances. This quarter, this past quarter and Q2, we accessed broker CD market, we thought that was a good use. And when we access the broker CD market that automatically increased our deposit beta. So if you look at our deposit beta this quarter, it was 40%, but if you back out the broker CDs, it's worth 6 points, so it was down to 34%. So the guide is that we gave going up to low to mid-40s is really excluding the broker deposits Because you don't know if we're going to issue more broker deposits, it's going to be a mix between, Federal Home and Bank advances broker deposits and actually issuing debt in the marketplace.

Speaker 2

So It's a really mix and it's really up to our treasury team to figure out what's best to do for our company. But right now, having liquidity It is really important and really gaining share and serving our clients we think is really important as well.

Speaker 3

So you took cash off this quarter and it sounds like you're going to keep it at a high level for some time?

Speaker 2

Yes. Yes. We're going to continue to keep really strong liquidity and continue to stay where it is. And it's one of the strengths that we have in the marketplace right now.

Speaker 3

Got it. Okay. And then just as a follow-up, the debt market seem to be opening up. Can you talk about how you're thinking about issuance for the remainder of the year. Just keeping in mind the possibility that TLAC rules could apply to banks of your asset size?

Speaker 2

Yes. When you look at the 3 sources I just talked about, whether it's broker deposits, federal home loan bank advances or debt, Early on when you're going into a crisis, it makes sense to access the Home Loan Bank for us because it's there available and you get it really fast in size. Broker markets, I think, were a good use this past quarter. And over time, you will see us issue Unsecured debt and basically pay off some of the Home Loan Bank advances and probably some of the broker deposits over time. And that's just normally how we would fund the bank overall.

Speaker 2

But we start with really having really good core funding and making sure our core funding Is growing and doing what it needs to from that perspective.

Speaker 3

Great. Thanks so much.

Speaker 2

All right.

Operator

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

Speaker 4

Good morning. Just, I guess first a follow-up on the capital, obviously strong, built quite a bit and you talked about letting it continue to build as you wait for new capital rules. But I guess how high are you willing to let it get? I think under kind of any rules, It seems like you have excess and obviously good outcome from CCAR GFAF. So, I guess, first question is how high are you willing to let it go?

Speaker 4

And then maybe just kind of review the priorities in terms of capital deployment as you think about the next couple of years.

Speaker 2

Yes. So let me start with the capital deployment question. 1st and foremost, we want to make sure we serve our clients and our communities. So organic growth is number 1 on how we deploy capital. And during turbulent times like this, we want to make sure that all of our customers and potential new customers that we want and want to join M and T that we have the capital there to serve them.

Speaker 2

That's 1st and foremost where we start. Dividends obviously is a second. 2nd is dividend growth, and we have a long history of our Dividend policy and keeping really strong dividend at M and T really, really value a strong dividend from that perspective. And share buyback has always been part of our history of repurchasing shares. And from time to time, we might do Any acquisitions, if they make sense, and it's a good shareholder value from that perspective.

Speaker 2

But long term, there's really not a change. Just right now in these turbulent times, we're keeping extra capital. We think it's prudent to do that. And as we get more information from the roles that come out from the regulators, but right now, we are Doing really well. Our business is performing well.

Speaker 2

We're getting new clients in the commercial area, business banking, wealth, Corporate Trust, I mean our businesses are growing because we are strong. So I think it's an advantage right now to have a lot of capital.

Speaker 4

And then just separately, last fall, Darren threw out this kind of long term NIM range. I think it was 3.6% to 3.9% that kind of spoofed folks a little bit, but obviously you guys were kind of ahead of the curve and messaging the over earning on deposits. And you did get to the high end of that NIM range this quarter. Wondering if you still think that's kind of a good long term range and Do you get below that range at some point this cycle if you have to guess? Thanks.

Speaker 2

Yes. So I want to give Darren a lot of credit. He was definitely ahead of the industry And talking about margin and the impact of margin, and he saw it coming. And I think he was a leader in Telling people where everything was going. So it was really, really good guidance from that perspective.

Speaker 2

I would say that we will continue to Have margin pressure just because of the cost of what we're seeing on the funding side. We're having disintermediation. And if you look at it, our EDA was down $5,700,000,000 We retained all the clients. Some of the balances went to on balance sheet sweeps, some of them went into off balance sheet sweeps. If you look at our consumer book, we are moving balances from non maturity buckets to CDs.

Speaker 2

But if you go back 20 plus years and you look at the deposit that we had back then, CDs were 20 plus percent of our funding base. Right now, we're at 10% and we're probably going to be in the mid teens before it's all said and done. It really depends on how long rates stay higher. And that's just the normal mix of how We run our retail bank. I mean, it's the right thing to do.

Speaker 2

It's the right thing for our clients. It's the right thing for our bank. We can adjust our rate sensitivities With CDs on the books and manage that really well. So it's just basically learning things that When you ran banks 20 years ago, we're doing the same thing right now and doing it the same way. But we feel really good about our businesses.

Speaker 2

Yes, our margin pressure is going to continue to come down and I think we've given you some guidance for this year. Don't really want to get into 24 right now Until we get working on our plan, which will be later this quarter.

Speaker 4

Okay. Thank you very much.

Speaker 2

Thanks, Matt.

Operator

Thank you. We'll take our next question from Steven Alexopoulos with JPMorgan.

Speaker 5

Hey, good morning, Everybody.

Speaker 2

Good morning, Steve.

Speaker 5

And thank you for the earnings slide deck.

Speaker 2

Yes. Thank you. I appreciate it. Yes. The team did a great job.

Speaker 5

I want to start on the non interest bearing deposits. So when I look at the decline this quarter, it's still perplexing To me that this mix shift is not basically done by now, right? If you're a commercial customer, you have a treasury function, I'd imagine you've done the analysis And you've already moved those balances, but you guys are now guiding you expect more decline in DDA. When you look at your client base, can you walk us through Why is this taking so long? I mean, it's been quite a few quarters, right?

Speaker 5

The 2 years been above 3% or 4%. What's still Happened to cause this mix shift?

Speaker 2

Yes. Thank you for the question, Stephen. 1st and foremost, if you look at M and T When you look at pre COVID and going into COVID, M and T had one of the largest increases of Surplus balances of all the banks out there proportionately. So we're starting at a really high strength. I think our DDA percentage of total deposits was 48%, yes.

Speaker 2

So it was really high to start with. And if you look at how we run this company, as I learn about this company, I am just Amazed at how well we are at getting primacy, getting the operating counts. We are really good in the consumer business, In our business banking business and commercial businesses, we lead with getting operating accounts. So we have a disproportionate amount of operating accounts there. So that said, to answer your question, it just means that we're going to continue to have mix shift changes.

Speaker 2

It does seem to be slowing down a bit, But we're still seeing some mix change happen and it's going to continue to put a little bit pressure on funding, But we're still serving our clients at the end of the day and we're gaining new clients too. So I think all in all, I think we're doing good. We Still have a pretty high margin overall if you look at others in the industry, even with this coming down. So I think we feel really good at what we're doing and how we're executing.

Speaker 5

Okay. That's helpful. And then, just a question on the reserve. What's the unemployment rate you're assuming in the total And then I know you increased the reserve a bit, you called out commercial real estate. What's the reserve on the commercial real estate portfolio?

Speaker 5

Thanks.

Speaker 2

We're right around 4%. If you really look at the reserve, Steve, there's 4 drivers there that we have. The one that really impacted our increase in our allowance was really the The change in the commercial real estate this quarter, that went from a negative 5% to 11%. The other three variables, unemployment was around mid-4s, GDP was basically right around 1%, didn't change a whole lot. And HPI was right, mid-6s didn't change a lot.

Speaker 2

So what really drove the change was the CREPI on the allowance side.

Speaker 5

Got it. I'm sorry, I missed it. What was the specific reserve, Dale, on commercial real estate loans?

Speaker 2

Commercial real estate went The macro variable value that we used in the model went from 6 to 11. And if you look at the allowance, the allowance we increased more to office overall and we had decreases And hotel and multifamily.

Speaker 5

Got it. I'm still not following with Specific reserve is on CRE, but I could follow-up with Brian after. Thanks.

Speaker 2

Yes. I didn't hear that, that well. Okay. All right.

Operator

We'll take our next question from Gerard Cassidy with RBC.

Speaker 6

Hi, Daryl.

Speaker 2

Hey, Gerard.

Speaker 7

Good luck with the new position for you. And ditto on the slide deck to you, Brian and your colleagues. It's a very strong slide deck, so thank you. Daryl, can you share with us these proposals that we're hearing about for Basel III Endgame May include banks as low as $100,000,000,000 in assets. And so when you guys talk about what could happen and then I believe earlier this week Bloomberg had a story that there may be higher risk weighted asset assumptions for residential mortgages, Which seemed to be a new twist to these capital requirements.

Speaker 7

How are you guys approaching what could happen in terms of greater RWA increases for your organization and the capital needed to support them.

Speaker 2

Yes. Thanks for the question, Gerard. Obviously, we are very eager To get these new roles and see what's out there and make comments, it's going to go through those normal process there. So it's going to take time, probably get most of these things implemented. On your specific question of RWA and mortgages, we'll wait and see how that comes out.

Speaker 2

We are in the residential mortgage space. We exited the correspondent space last quarter. So we're really just focusing on meeting the needs of our clients of the company and We're basically selling all the conforming into the marketplace and we're balance sheeting all of our wealth clients and Clients that are low and moderate income are the ones that really are going on the balance sheet. So we're going to stay in our core businesses because we're serving our clients. If it's a little bit higher capital, the market will probably adjust and just raise pricing to accommodate for that would be my best guess from that.

Speaker 2

As far as the other changes out there, there's a lot of proposals there. If it's like long term debt or TLAC, we're waiting to see what that happens. M and T really, we don't have a whole lot of debt outstanding. So it's Something that we will have to just manage. It's probably going to be holding company.

Speaker 2

If it's not an holding company and a lot of bank will probably end up With a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there, but we're just optimizing. With us using now Federal Home Loan Bank advances broker deposits, I think we have right now a Where we can pay those off, issue unsecured debt and really not pull up the balance sheet from that and still have a really strong liquidity position from that. So we'll wait and see. I think our AOCI comes in, looks like that's coming We're 55 basis points. That 55 basis points negative adjustment at the end of this quarter includes all three pieces.

Speaker 2

It's the AFS securities, Cash flow hedges as well as pension, that's probably one of the lowest that we have in the industry. So it's not a real big impact for us. So that's a strength as well.

Speaker 7

Very good. And then as a follow-up question, you touched on and I may have missed some of this, the charge offs in the quarter About some lower values for commercial real estate in a slide deck you guys put out earlier in the second quarter, You gave some very detailed information about your commercial real estate portfolio by location and loan to values. Can you share with us Where is is it the higher loan to values that were required to be written down? Or are you actually seeing it in some of The lower loan to values, seeing some weakness as well. And then second, on top of that, when you go through the portfolio, Where are you in terms of are you 50% through reviewing the portfolio or 75% or 20%?

Speaker 2

Yes. Thank you for the question. So on your first question, CRE is really just You have to look at it on a case by case basis just because of the unique quality and pieces of how it is. Each borrower has different Implications, you have tenant things, you have to market conditions, interest rates. So that is a case by case basis.

Speaker 2

So you really go through that the deep dives there. On your question on Portfolio review, yes. So we are 50%, 60% plus through it. Yes. All the loans that we have in the criticized bucket is reviewed every quarter.

Speaker 2

We stress test those really well. And if I look at what we're doing versus my prior places, I would say we're doing as much if not more So what I've seen done in our credit process. So we're staying on top of this. Our teams are doing really well. Valuations are coming in and we're doing the best we can with the information we have.

Speaker 2

But I would say we feel Good at where we are and we're just continuing to monitor where everything ends.

Speaker 7

Very good and good luck again in your new role.

Speaker 3

Thank you.

Speaker 2

Thanks, Gerard.

Operator

Thank you. We'll take our next question from Brent Arenzel with Portales Partners.

Speaker 8

Good morning and Daryl, welcome to Western New York.

Speaker 2

Thank you, Brett.

Speaker 8

So specifically on the CRE drilling down to the Manhattan Real Estate or New York City Real Estate. I was wondering, could you walk us through what you do? You said you were taking charge offs there. So Do you take possession? Do you restructure?

Speaker 8

What happens when you have a CRE Manhattan? I guess it's an office building. What do you do here in that situation?

Speaker 2

Yes. So in New York City, New York City It's a big marketplace and every place is a little bit different. Right now, it seems like the downtown area might be a little weaker than the Middle part of Manhattan. So the charge offs that we took in Manhattan was in the downtown district there. But I would say we do all the above.

Speaker 2

I mean, we really work with our clients. It really for us starts from a client perspective. Client is really, really important, client selection. And in the CRE business, we make loans in the larger studies like New York, DC, Boston and in those markets, I would say 75% of those are very long term oriented clients I mean really good clients. Once you get outside of these major market cities, it's almost all of our clients are really long term oriented.

Speaker 2

But as far as which notes we would sell or whatever, it's probably more the financially oriented clients that we have, where they've had their returns and they are putting any more equity into the deals is really how we would handle that.

Speaker 8

To follow-up on that, you've seen strong handed borrowers, some of these big names just mailing in the keys. Are you experiencing that as well? Your long term strong handed CRE borrower is actually not so strong handed after all.

Speaker 2

I would say what we're seeing right now is our long term clients, it really comes down to client selection, but they're really holding in there. You have to look at their portfolios that they have and they might have one troubled property, but they have a lot of others that are really performing well and they Move cash over to support and put equity into those transactions. So we feel good about that. And We've been in this business for a long time. I get a lot of comfort when I look at Bob and his team.

Speaker 2

There's a lot of gray hair there. They've been through this many, many times and give me a lot of confidence. And like I said earlier, the processes we're using are as good or better than what I've seen in the past.

Speaker 9

Thank

Speaker 2

you.

Operator

Thank you. We'll take our next question from Ken Usdin with Jefferies.

Speaker 6

Thanks. Good morning, everyone. Daryl, a couple of clarifications, if you don't mind. So on the guide slide, you talk about Mid-40s, interest cumulative interest bearing betas. I assume that's what's built into the low end of NII guide for the year and because in your comments you said low to mid, so I would assume that if you ended up being in the low 40s that would be Kind of better.

Speaker 6

Just so just clarifying what's in the guide. I would assume it's the mid-40s that's on the slide.

Speaker 2

Yes. I think that's right. And it does exclude broker We may pay off some of the broker deposits. It really depends if we access the unsecured market or not. So I would say if you look core, I think that's the right assumption

Speaker 6

And that was going to be my follow-up, Daryl. So can you explain that just so broker deposit beta is completely outside of that mid-40s beta comment?

Speaker 2

Yes. So if you look this quarter, our beta on total interest bearing deposits was 40. And we issued $4,000,000,000 of broker deposits during the quarter. If we back out those broker deposits, We were at 34% deposit beta. Our decision to issue broker deposits was 1 versus looking at it from issuing, doing Federal Home Loan Bank advances or doing unsecured debt.

Speaker 2

We chose that. As we move forward, the treasury team will basically do what's best for the company and what we need to do. And we'll probably use all three pieces. And When it actually goes into deposits, it impacts the deposit beta. So we tried to give you excluding the broker piece what deposit beta is.

Speaker 2

What Darren said in the last several quarters on deposit betas, if you back up the broker, he's spot on still where we're performing. So I mean the guide is there. We just kind of mix it up by issuing these broker deposits.

Speaker 6

Understood. And then could you just tell us then, so of I don't know, a great way to think about $103,000,000,000 of total interest bearing deposits, just how much of that in aggregate is brokered?

Speaker 2

I think our broker deposits are about $10,000,000,000 in total. And I would say $8,000,000,000 of it is CDs and $2,000,000,000 of it money market. Okay. I get it. That helps.

Speaker 2

Thanks a lot, Darrick. Yes. You're welcome.

Operator

Thank you. Our next question comes from Ebrahim Poonawada with Bank of America. Good

Speaker 2

morning.

Speaker 10

Just to follow-up on Ken's question around brokers, 10,000,000,000 at the end of the quarter. Is there a target that the max that we should think about how much brokered Deposits can get either on a dollar basis or as a percentage of total deposits that we should keep in mind when we're thinking about Betas and the outlook there?

Speaker 2

Yes, probably just a few more 1,000,000,000 from 10,000,000 is probably As high as we want to go there. So we don't want to be outsized in the use of that. Like anything else, we want to be diversified and kind of use all of our funding tools. Just kind of you wanted to just make sure you have use them all and you have access to all of them. So but I'd say a couple more billion is all we're going to use in the But you might actually see that come down if we issue more unsecured debt.

Speaker 10

Got it. And just one follow-up on the CRE appraisals. I think if I heard you correctly, you said you are 250% to 60% of the portfolio. How hard is it to get A true appraisal on a CRE property right now. And what I'm trying to get to is what's the risk of being blindsided on reserve levels 2 or 3 quarters from now where you need to take a lot more because of fair values.

Speaker 10

And I'm just wondering with the visibility on appraisals, how conservative are you being as a bank in Kind of trying to put this getting ahead of this issue.

Speaker 2

Yes, that's a great question. So what I would tell you is there aren't a whole lot of sales in the marketplace right now. So We don't have a lot of specs. When we do have them, we use them. But a lot of the valuations we're using, we use The discounted cash flow method and when you look at just a couple of pieces of discounted cash flow method, When we're looking at properties and the property is vacant, we assume a 3 year vacancy for it to get filled up.

Speaker 2

When something Coming due and it's turning over, we assume a 12 year vacancy or 12 months vacancy. So from a cash flow perspective, we're factoring in Free amenities to get people in leases. So all that cash flow adjusted in the Discounted cash flow model, so it's really impacting the valuation that you have. Cap rates really haven't changed a whole lot. It's really the assumptions you're using on the cash that you're generating in these properties is really what's driving down the values.

Speaker 10

Got it. And welcome to the new role. Good to hear you on this call again. Thanks.

Operator

Thank you. We'll take our next question from Frank Schiraldi with Piper Sandler.

Speaker 8

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 11

Just Daryl, I missed the I know you talked about the back to sort of the non interest bearing mix shift. You talked about maybe a more normalized, I guess, sort of balance sheet, getting CD balances ultimately back into the mid teens. Is that kind of is the best way to think about non interest bearing shift from here is basically that all comes at the cost of non interest bearing so that we could continue to see pretty significant ship add in non interest bearing, because it seems like you could have Some offsetting tailwinds from the trust business as well, right, as sort of that transactional volume maybe picks up or normalize. Just wondering the best way to think about where non interest bearing balances could kind of migrate to?

Speaker 2

Yes. No, I think those are all great questions. If you look at our non interest bearing to total deposits, this quarter we were at 35%. But if you actually back out the broker deposits that you put in there, we were at 38%. So that Here Again Broker is kind of playing some Something with the numbers from that perspective.

Speaker 2

We probably have that going down though by the end of the year, maybe 2% or 3% with a mix change that we have. So I think from that Corporate Trust is definitely a great business for us. It's a business that's growing for us. As market activity increases in that sector, it will be a big contributor to our balances that we have on the non interest bearing side. So that is Really important piece, right now the activity just is down some, so there is a lot of market activity.

Speaker 2

But Right now, we're just giving an outlook for a couple of quarters, but as market activity picks up, Corporate Trust will definitely be a big benefit for us in having that mix change.

Speaker 11

Okay, great. And then just on the other side of the balance sheet, back to the loan growth outlook and I guess consumers continuing to slow and 4Q balances maybe being down overall. Just on the C and I side, should that growth decelerate here as the floor Deal planning stabilizes and ultimately where do you think CRE kind of flushes out at or stabilizes in terms of the total loans?

Speaker 2

Right now, if you look at our projections for total loans, it's relatively flat to maybe up slightly. If you look specifically at the commercial side, C and I is growing. This past quarter, it was really driven by Dealers, floor planning as cars were getting on the lots. Some of our specialty businesses and fund or Sponsor were kind of the growth areas there. As you move forward, I think CRE, we're going to serve our clients in CRE, But with businesses that we have, some of it, we will basically lend to them and sell it back out.

Speaker 2

So that's more fee business. So that overall business is going to become a smaller percentage of the balance sheet and C and I will continue to be a larger percentage. On the consumer side, it's I think performing well. We might do some asset sales or securitizations just to test the plumbing later this year. So that's really impacting some of those balances if that actually happens.

Speaker 2

Okay. All right, great. Thank you.

Speaker 1

Thank you. We'll take

Operator

our next question from Mike Mayo with Wells Fargo

Speaker 9

Purity's. Hey, Daryl.

Speaker 5

How are

Speaker 2

you doing, Mike?

Speaker 9

Welcome to the North. Just Big picture question. I mean, you've been in the Midwest, U. S. Bancorp, and you've been in the South, BB and T and Truist and now you're at M and T.

Speaker 9

Just how do you view M and When you pull the lens back, having been on the inside at so many different firms and so much perspective over a few decades, why did You choose to go to M and T, what do you see as the potential that's not unrealized? And what do you think that you can bring extra to the table, which you probably brought up when you spoke to management.

Speaker 2

Yes, Mike. Thank you for the question. I would tell you, 1st and foremost, I am ecstatic to be here and to be part of the leadership team at M&T. Hi. It was actually my neighbor, Tracy, one of my peers, I walked into her office one evening and I told her, I think it's better than I expected it to be, just the reception of the people and the work ethic.

Speaker 2

And we run a really good company here and it is Really performing well. Just blessed to be on the team to try to continue to that performance. To me, it reminds me a lot of a bank that's getting larger. And as we get larger, you have to adjust and to meet certain requirements and from regulations and basically actually running a larger company. For me, the big balance that we have to keep is the magic that happens out in the communities each and every day.

Speaker 2

We empower our regional presidents and people to make decisions out in the field and really do a great job with client touch and How we serve clients and we want to make sure that that stays intact. But running a larger company, we also have They have controls and processes in place, so we know what's going on and we can manage the risk as we continue to get larger. And So I think it's just a balancing act from that perspective, Mike. And I see a lot of opportunity where I think I can help us Perform and get things in working better potentially as we kind of move forward just because we're a bigger company. I can't say I can't tell you how much the work ethic here, just how well we run the company And everything, we do a great job and it's really starts with the community and are serving our clients.

Speaker 2

And from that, it kind of all falls down. Working for Renee, somebody that I've really respected, have known over the industry, I would tell you is Just a dream come true for me and my career. So I'm very blessed to be here, Mike.

Speaker 9

And just one follow-up. Qualitatively, I think that makes sense helping a bank manage through Becoming bigger and all the regulatory and complexity that involves. But if there was one quantitative metric where you say, You know what, 3 years from now or maybe 5 years from now, this financial measure should be better And I'm going to take ownership of that. What would that one financial metric be or maybe a couple?

Speaker 2

I would say, We have a good strong performance. If you look at our investor deck and you look at our investor thesis, our return on average, strong, Tangible common equity 15% to 20% is pretty darn good to do that consistently. I think that's good. If you get Well over 2020, you're either growing too fast or taking more risks. So you have to be careful for some of that.

Speaker 2

So I think that that would be a really good target. We are really focused by how we run the company to really at the end of the day give a great return to our shareholders. We are really prudent with how we Manage our capital, whether it's through buybacks, dividends are definitely key. And acquisitions, the acquisitions we do and You just look at the Peoples acquisition, I mean, we have great returns off that acquisition. I went through some of the metrics earlier in my prepared remarks.

Speaker 2

So that's going well. And I would continue to see probably more acquisitions in our future over time. It's kind of in the pace of how we absorb it. When you do these acquisitions, it really takes us a good 2, 3, 4 years to get the performance up to the M and T standard. So Just buying Peoples last year, we probably don't expect Peoples performance to really be at the M and T performance until we get Couple of years under our belt there, but as we grow into that, we could have potentially other opportunities to do more of that over time.

Speaker 2

So it's good and it will continue to change and evolve as the industry changes. But people here are fully dedicated To the mission, everybody is 110% all in, and I'm just excited to be on the team.

Speaker 9

All right. Thank

Operator

you. Thank you. We'll take our next question from Erika Najarian with UBS.

Speaker 12

Hey, just one last question. I'm sure everybody's hopping on to their 9 o'clock call. But Could you give us a sense of how you think if you are going to do $7,000,000,000 in NII, how is the cadence unfurls for the second half of the year. More importantly, what 4th quarter looks like? And is the $183,000,000 impact on a down 100 basis point scenario From your last Q, still sort of in the ballpark of your rate sensitivity to the downside.

Speaker 2

Yes. Let me start with the sensitivity question, Erica. As we continue to look at our hedging strategies that we have in place and that we're continuing to operate on, we are becoming less and less Asset sensitive. And right now, when we if the Fed increases 1 or 2 more times, we'll get a little benefit out of it. Well, what I use, if you go up 25 basis points and over a 12 month period with that increase, Our net interest margin is probably only going to increase 1 or 2 basis points because of that.

Speaker 2

On the downside, we're getting less negatively impacted as we move forward such that if you go down 25 basis points, our deposit betas are not deposit betas, Our net interest margin is only going to go down 3 to 5 basis points. So it's getting tighter and over time we just want to try to keep it as close to 0. I mean, it's a big balance sheet, so you can't be exact, but you want to be as close as you can and you don't really want to take a whole lot of rate risk. And our treasury team is doing an awesome job in managing this through that. As far as the guide goes, right now with the funding pressures, If you look at what we have rolling off or what's rolling in, we'll probably have a little bit more pressure 3rd quarter versus 4th quarter just because of the repricing That's occurring on the liability side.

Speaker 2

That said, as things kind of normalize, we're starting to pick up spreads, Higher spreads on the asset side and if things stabilize on the liability side, you could actually start to stabilize margin Probably in the mid-3s as you kind of embark, but we'll see how that goes maybe next quarter when we look at 2024 and beyond. But hopefully that helps.

Speaker 12

That really helps. Thanks, Daryl, and look forward to working with you again.

Speaker 2

Yes. Thanks, Erica. Appreciate it.

Operator

Thank you. We'll take our last question from John Pancari with Evercore.

Speaker 13

Good morning and congrats Daryl on the new role. Just a couple of very quick things from me. And just on the on that NIB non interest bearing mix of 34%. Did you indicate where you believe it could bottom? Could it be below that 30, you're around currently the level that you were pre pandemic, could it how much further below that could the non interest bearing mix migrate?

Speaker 2

Yes. I said earlier in another question, John, you may have missed it, but we because of the broker deposits that we put Just putting those broker deposits on dilutes our percentages, so you're comparing apples to apples from that perspective. But I would say we're going to go down probably 2% or 3% the rest of this year and it would be our best guess. It's really We are serving clients to have higher rates. But what I said earlier, we started from a really high place because we got a lot of surplus deposits And we really have huge focus to getting primacy on the operating accounts.

Speaker 2

And that basically gives us A lot to deal with. And I think at the end of the day, M and T will still have one of the highest percentages of non interest bearing to total deposits of Our peer group. So I think it's just playing out with just a higher rate environment and that will change if rates start to go down at some point. Got it. All right.

Speaker 13

Thank you. Then lastly for me, on the deposit side, your outlook does imply modest growth in the second half of this year. What is that primarily going to reflect? Is that a little bit of the incremental broker that you expect or maybe a little bit of color there?

Speaker 2

Yes. It's not broker. We really saw this quarter in the middle of the quarter start to stabilize and start to grow. So we're hopeful that we'll be able to get some growth out of our core businesses, whether it's retail, business banking and commercial. And maybe towards the end of the year, maybe we'll get higher activity out of the Capital Markets area in our Corporate Trust space as well and wealth areas.

Speaker 2

So I'm hoping that all those business lines will continue to modestly grow throughout the year as we compete for deposits.

Speaker 13

Okay, great. Thanks for taking my questions.

Speaker 2

Yes. Thanks, John.

Operator

Thank At this time, I'll turn the floor back over to Brian Klock for any additional or closing remarks.

Speaker 1

Again, thank you all for And as always, clarification of any items on the call or news release, if necessary, please contact our Investor Relations department at area code 716-842-5138. Thank you and have a great day.

Operator

This does conclude today's M and T Bank Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful

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Earnings Conference Call
M&T Bank Q2 2023
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