M&T Bank Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2024

There are 11 speakers on the call.

Operator

Welcome to the M&T Bank Third Quarter 20 24 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 Market and Investor Relations. Please go ahead.

Speaker 1

Thank you, Todd, and good morning. I'd like to thank everyone for participating in M&T's Q3 2024 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, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Closed captioning has also been provided for those following along on the webcast.

Speaker 1

Also before we start, I'd like to mention that today's presentation may contain forward looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation as well as our SEC filings and other investor materials. Presentation also includes non GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M and T's Senior Executive Vice President and CFO, Daryl Bible.

Speaker 1

Now I'd like to turn the call over to Daryl.

Speaker 2

Thank you, Brian, and good morning, everyone. As you will hear on today's call, the Q3 results represent M and T's continued strength through a dynamic economic environment. We continue to support our communities that we serve. For the 16th consecutive year, M and T Bank is among the nation's top 10 SBA lenders, ranking number 1 in Baltimore, Buffalo, Connecticut, Delaware, Syracuse and Washington D. C.

Speaker 2

We recently launched the 3rd phase of our which will provide $25,000,000 to nonprofits focused on financial inclusion and economic growth across New England, Long Island and New York's Westchester County. We also recently updated several environmental goals, including offsetting 100% of our electricity use with renewable energy by 2,030 and establishing interim reduction targets for Scope 1 and 2 emissions. Turning to Slide 5. Our employees and products continue to receive awards from consumer, business and trade organizations. Turn to Slide 7, which shows the results of the Q3.

Speaker 2

As noted in this morning's press release, we released our Q3 results as we continue to make progress on the plans we laid out in January. There are several successes to highlight. Net interest margin and net interest income grew sequentially as we continue to grow loans while reducing our CRE concentration. In fact, since the Q4 of 2023, we have grown average loans by nearly $2,000,000,000 while reducing CRE by over $4,000,000,000 and growing C and I and consumer loans. Funding cost was well managed in this quarter with a 4 basis point decline in the cost of interest bearing liabilities.

Speaker 2

We restated we restarted our share repurchase program in the Q3 and executed $200,000,000 in share repurchases and grew our CET1 ratio to over 11.5%. Non interest income reached a high point in the 3rd quarter, if you exclude the prior gains on our 2 divestitures. This was achieved by even considering the foregone fee income from those 2 sold businesses, demonstrating the resiliency and strength of our diversified business model. Asset quality continued to improve this quarter with reduction in both non accrual balances and commercial criticized loans and net charge offs below the full year outlook. Now let's look at the specifics for the Q3.

Speaker 2

Diluted GAAP earnings per share were $4.02 for the 3rd quarter, improved from $3.73 in the 2nd quarter. Net income for the quarter was $721,000,000 compared to $655,000,000 in the linked quarter, an increase of 10%. M and T's 3rd quarter results produced an ROA and ROCE of 1.37% and 10.26%, respectively. The CET1 ratio remains strong, growing at 11.54% at the end of the 3rd quarter and tangible book value per share grew 5%. Of note, the Q3 included a discrete tax benefit of $14,000,000 or an $0.08 EPS benefit.

Speaker 2

Slide 8 includes supplemental reporting of M and T's results on a net operating and tangible basis. M and T's net operating income for the Q3 was $731,000,000 compared with $665,000,000 in the linked quarter. Diluted net operating earnings per share were $4.08 for the recent quarter, up from $3.79 in the 2nd quarter. Net operating income yielded an ROTA and ROTCE of 1.45% and 15.47% for the recent quarter. Next, let's look a little deeper into the underlying trends that generated our 3rd quarter results.

Speaker 2

Please turn to Slide 9. Taxable equivalent net interest income was $1,740,000,000 an increase of $8,000,000 or 1 percent from the linked quarter. The net interest margin was 3.62%, an increase of 3 basis points from the 2nd quarter. The primary drivers of the increase to the margin were a positive 3 basis points from fixed asset repricing, mostly in the investment portfolio and consumer loans, positive 3 basis points from earning asset mix, positive 2 basis points from deposit and wholesale funding mix and costs, partially offset by a negative 4 basis points from lower non accrual interest and a negative one basis point for all other items. Non accrual interest amounted to $12,000,000 compared to $30,000,000 in the Q2.

Speaker 2

Turn to Slide 11 to talk about average loans. Average loans and leases increased slightly to 134,800,000,000 dollars Similar to the trend that we saw last several quarters, C and I growth outpaced the decline in CRE. C and I loans grew 3% to 59,800,000,000 driven by increases in fund banking, dealer commercial services, mortgage warehouse and franchise lending. Middle market utilization declined modestly, while dealer floor plan utilization increased from the Q2 as a result of slower auto sales and new model arrivals. CRE loans declined 8% to $29,100,000,000 reflecting continued low originations and paydowns as we continue to manage our CRE concentration.

Speaker 2

CRE as a percent of Tier 1 capital and allowance is estimated to be 148% at the end of the 3rd quarter. Residential mortgage loans were relatively unchanged at $23,000,000,000 Consumer loans grew 4% to $22,900,000,000 reflecting growth in recreational finance and indirect auto loans. Loan yields were unchanged at 6.38 percent as lower non accrual interest was largely offset by the benefit of fixed rate loan repricing and mix shift. Turning to Slide 12. Our liquidity remains strong.

Speaker 2

At the end of the Q3, investment securities and cash, including cash held at the Fed, totaled $59,000,000,000 representing 28% of total assets. The average investment securities increased $1,300,000,000 The yield on securities increased 9 basis points to 3.7% as the yield on new purchases exceeded the yield on maturing securities. In the Q4, we have $1,000,000,000 in securities maturing and an average yield of 1.8%, which we intend to reinvest. The duration of the investment portfolio at the end of the quarter was 3.6 years and the unrealized pretax gain on the available for sale portfolio was $68,000,000 or 3 basis points CET1 benefit if included in regulatory capital. Turning to Slide 13.

Speaker 2

We remain focused on growing customer deposits and are pleased with the overall deposit performance. Average total loans declined $2,000,000,000 or 1 percent to $161,500,000,000 reflecting a $1,100,000,000 decline in broker deposits and a $900,000,000 decline in non broker deposits. Commercial and Business Banking grew total average deposits from the Q2, while consumer deposits declined sequentially as we continue to manage more rate sensitive deposits. Average non interest bearing deposits declined $1,600,000,000 to $46,200,000,000 from an expected deal related decline in trust demand deposits and modest continued disintermediation within commercial and consumer. Excluding broker deposits, average non interest bearing deposit mix in the Q3 was 30.7%.

Speaker 2

Interest bearing deposit costs decreased 2 basis points to 2.88%. Continuing on Slide 14, non interest income was 60 $6,000,000 compared to $584,000,000 in the linked quarter. Interest income was $170,000,000 unchanged from the prior quarter with 2nd quarter seasonal tax prep fees of $4,000,000 offset by strong equity market performance and sales performance at ICS. Mortgage fees were $109,000,000 compared to $106,000,000 in the 2nd quarter. Commercial mortgage fees increased $4,000,000 from the linked quarter to $34,000,000 reflecting an uptick in the origination activity.

Speaker 2

Service charges increased $5,000,000 to $132,000,000 from both consumer and commercial, mostly related to the number of processing days in the quarter. Other revenues from operations were unchanged at $152,000,000 Turning to Slide 15. Non interest expenses were $1,300,000,000 an increase of $6,000,000 from the 2nd quarter. Salary and benefits increased $11,000,000 to $775,000,000 reflecting one additional working day. Deposit insurance decreased $12,000,000 reflecting the prior quarter $5,000,000 incremental special assessment.

Speaker 2

Other costs from operations increased $12,000,000 to $128,000,000 driven mostly by M and T's obligation under various agreements to share in losses stemming from certain litigation of Visa. The efficiency ratio of 55% was largely unchanged from the Q2. Let's turn to Slide 16 for credit. Net charge offs for the quarter were $120,000,000 or 35 basis points, down from 41 basis points in the linked quarter. The 3 largest charge offs in the quarter totaled $37,000,000 combined with and represented 2 C and I loans and 1 office CRE loan.

Speaker 2

Non accrual loans decreased $98,000,000 or 5 percent to $1,900,000,000 The non accrual ratio decreased 8 basis points to 1.42 percent driven largely by a decrease in CRE non accruals from upgrades out of non accrual as well as several large payoffs and paydowns. In the Q3, we recorded a provision of $120,000,000 compared to a net charge off of $120,000,000 The allowance to loan ratio decreased 1 basis point to 1.62% as a result of continued improvements in asset quality and improvements in the macroeconomic outlook, partially offset by growth in certain portfolios. Please turn to Slide 17. When we file our Form 10 Q in a few weeks, we estimate that the level of criticized loans will be at $10,900,000,000 compared to $12,100,000,000 at the end of June. The improvement from the linked quarter was driven by a $315,000,000 decline in C and I and $830,000,000 decline in CRE criticized balances.

Speaker 2

Slide 18 provides additional detail on the C and I criticized balances. The largest C and I criticized balance decreases were within the motor vehicle and recreational finance dealers and manufacturing segments, with smaller changes across most other industries. The decline within the motor vehicle and recreational finance dealers mostly reflects improvements in debt service coverage ratios and normalizing profit margins within the RV segment. Slide 19 includes the detail on CRE criticized balances. The largest CRE criticized declines were within Healthcare and Construction with continued but more modest declines in most other property types except for office.

Speaker 2

Within healthcare, we saw an uptick in repayment activity as improvements in occupancy and rent growth combined with declining long term rates allowed for more viable takeouts. The decline in construction criticized was aided by improved project performance and loan modifications and curtailments as borrowers continue to support these projects. The largest factor that drove versus prior quarters was the amount of upgrades that occurred in the quarter. Turning to Slide 20 for capital. M and T's CET1 ratio at the end of the 3rd quarter was an estimated 11.54% compared to 11.45% at the end of the 2nd quarter.

Speaker 2

The increase was due to continued strong earnings and strong and a $200,000,000 share repurchase in the Q3. At the end of the Q3, the negative AOCI impact on the CET1 ratio from available for sale securities and pension related components combined would be approximately 4 basis points. Now turning to Slide 21 for the outlook. Let's begin with the economic backdrop. Economy remains resilient in the Q3 with GDP growth expected to come in stronger than we had projected.

Speaker 2

The labor market has slowed, but remains healthy. Though we see a soft landing scenario as having the highest probability, the possibility remains for a mild recession brought on by lagged impact and rate hikes. The consumer spending has slowed, alleviating inflation pressure for many goods and services. Recently, inflation has nearly returned to the Fed's target of 2%. Now turning to the outlook.

Speaker 2

Our outlook for the full year NII is unchanged from our last update. While the outlook from the full year fees, expenses and net charge offs is unchanged from the ranges we initially discussed in January and maintained through the year. That said, with 3 quarters complete, we will focus on the outlook for the Q4. We expect taxable equivalent NII to be at least $1,730,000,000 implying a full year NII near the top end of the range we provided previously. Net interest margin is expected to be in the low 360s.

Speaker 2

Our outlook incorporates the latest forward curve that has an additional 50 basis points in rate cuts by the end of the year. We expect continued loan growth and average total loans of approximately $136,000,000,000 with growth in C and I and consumer and lower CRE balances. Total deposits are expected to be at least 100 and $60,000,000,000 as we continue to focus on growing core customer deposits. We expect interest bearing deposit beta of approximately 40% for the first couple of interest rate cuts. Security balances are expected to continue to grow in the Q4.

Speaker 2

Our outlook for the 4th quarter non interest income is about $600,000,000 reflecting continued strength in mortgage and trust, partially offset by other fee categories. 4th quarter expenses, including intangible amortization, are expected to be about $1,320,000,000 due to the timing of projects coming online. This reflects continued investment in our key priorities and initiatives while closely managing our expenses. We continue to expect net charge offs for the full year to be near 40 basis points. Our outlook for the tax rate for the 4th quarter is about 24.25 percent and the preferred dividends are expected to be approximately $36,000,000 We plan to continue the $200,000,000 share repurchase in the 4th quarter.

Speaker 2

To conclude on Slide 22, our results underscore an optimistic investment thesis. M and T has always been a purpose driven organization with successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are disciplined acquirer and prudent steward of shareholder capital.

Speaker 2

Now let's open the call to questions, before which our operator will briefly review instructions.

Operator

Thank you. The floor is now open for your questions. Our first question will come from Gerard Cassidy with RBC Capital Markets. Please go ahead.

Speaker 3

Hi, Daryl. How are you?

Speaker 2

Good. How are you doing, Joris?

Speaker 3

Good. Thank you. Daryl, over the years, M and T has done a great job in managing their capital and returning excess capital to shareholders. You pointed out today that your CET1 ratio is a very strong 11.5 percent and you have the buyback going on again in the Q4. Can you share with us where do you think the CET1 ratio is at an optimal level?

Speaker 3

And to get there, could you increase the share repurchases as you go forward into 2025? And once we also get the final Basel III endgame, so you guys know what to expect?

Speaker 2

Yes. Thanks, Gerrard. First, I just want to start with that. We have a lot of flexibility when it comes to capital with a CET1 ratio of 11.5%. And we have really no negative impact on the AOCI.

Speaker 2

And we have strong capital generation. That said, as we continue to move forward into the end of Q4 and into 2025, we will continue to look at the economy. Economy continues to grow now, but if we're signs of slowdown that could impact potential increases to share repurchase. We've made great progress on our criticized loans. They've come down now 2 consecutive quarters.

Speaker 2

We expect Q4 to be also a really strong decrease in criticized. And we believe we're at the point now that our CRE exposure is where we want it to be and we are now the pipeline is starting to build from that perspective. So I believe in 2025, we're going to return more capital to shareholders as long as it plays out as mentioned what I just talked about. We will probably switch to dollar amounts and target more of a CET1 ratio. So for example, we might say we'll buy back in 2025 if we want to stay above 11% CET1 ratio and do repurchases and that depends on how much loan growth and RWA growth that we have on the balance sheet.

Speaker 2

I know 11% is higher than what you would need long term, but we're working on our long term targets and probably we'll have something to say about that in the next quarter or so.

Speaker 3

Very good, very helpful. And then as a follow-up, and I'm not asking for 25 guidance because I know that won't come until, possibly January. But it looks like your net interest income has troughed. It looks like the Q1 based upon Slide 9 that net interest income bottomed and you're gradually growing out net interest income and the margins obviously expanding. If the forward curve is correct and if the Fed and I know these are big ifs, but if the forward curve is correct and the Fed is correct and that it's going to lower the Fed funds rate possibly to 3% to 3.5% by the end of next year and we get a positive slope in the curve, can you kind of frame out, should this growth that you're seeing continue and possibly accelerate in 2025 just based aside from growing your balance sheet, but just based on interest rates?

Speaker 2

You start off with a really rosy scenario. Let me just say that our team has worked really hard this past year in 2024 and we are really neutral to net interest income and really happy that happened just as the Fed started lowering rates. So we're very fortunate for that. If you look at what's going on, we have really good roll on and roll off rates in a lot of our fixed asset portfolios. I know it's hard for you as analysts to really understand and get that those numbers into your models.

Speaker 2

But if you look at auto and RV, resi mortgage and our investment portfolio, all those continue to reprice positively this quarter. We expect that to continue next quarter and into 2025. So that's a positive for us. Upward sloping curve would enhance that potentially. On the deposit side, I just see it's the strength of our company, Gerard.

Speaker 2

It is our strong foundation that we have. We have really strong stable core operating deposits. We're seeing now an initial downward beta of 40%. That's at the higher end of the range that we talked about previously. So that's strong.

Speaker 2

And when you look at hedging, we know we already have locked in hedges improvements in our swap book that we're going to basically reprice our hedges. If you look at the cash flow hedges point to point, they should go up about 55 basis points and the fair value hedges should cope about 37 basis points point to point in 25. That's if rates don't even change. So that's probably very positive from there. So we have a lot of good things going on, plus we're growing loans.

Speaker 2

Even when we were shrinking CRE, we were able to eke out loan growth. So our businesses are performing really well, both on the CRE and C and I side as well as our consumer businesses. So I would say we have positive mix benefit as we move forward as we continue to grow that. So that gives me a lot of confidence that NII, the Energous Margin should continue to improve.

Speaker 3

Very good. Very helpful. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Speaker 4

Hey, good morning, Daryl.

Speaker 2

Good morning. Good morning.

Speaker 4

This question on the you mentioned the criticized loans declined. Just wondering, do we need rates to go much lower for CRE criticized loans to come down over the coming quarters? And could we see a big like stair step decline at some point early next year when you, I don't know, get updated appraisals, financials from these borrowers? And what are the implications? Does it really change your thought process as a result on the 11% CET1 or where the reserve ratio is today at 1.60?

Speaker 2

Yes. Thanks for the question Ebrahim. What I would tell you is this quarter, I pointed out in the prepared remarks, the biggest difference in the 3rd quarter versus the past several quarters is that we actually had a lot of upgrades in our roles. When rates fall, we can have more takeouts and pay downs from that and that's occurring obviously with rates coming down, but we're getting actually good upgrades now. If you look specifically in our healthcare sector that we had, the operations really started to improve their occupancy and rents were more positive and they were cash flowing better and that's really positive.

Speaker 2

You have to remember that in our criticized book that we have in total, 91% is paying current. So that's really, really good. If you look at our CRE construction book, that also dropped a fair amount and that was really driven by interest rates and also just stay stabilization that you're seeing in the marketplace, the projects that we have. One of the strengths M and T has with our all of our lending is really that the clients that we lend to. We really have really strong client selection and people are committed to supporting their credits and believe that they were the right things they want to hold on to them.

Speaker 2

And you're seeing that really come through and you're seeing this now come through as we're starting to get upgrades. The other thing that we saw this quarter is our RV dealers, 3 at 3 significant RV dealers. They were able to get rid of their excess inventory in 2022 and that really helped from an upgrade perspective. So we have a lot of momentum and criticized. I'm very optimistic.

Speaker 2

Q4 will continue to be a very strong and continue into 2025. So I think we have momentum there and probably won't be a direct line down, Ebrahim, but I think the trajectory is definitely down. I feel very positive about that.

Speaker 4

Understood. And just maybe, Daryl, so you mentioned drivers of loan growth. You had pretty good C and I growth the last few quarters. Is this still coming through partly driven by the Peoples acquisition and kind of the footprint you acquired there? And are we done with the runoff in CRE?

Speaker 4

Could that kind of flat line from here? Or is that still going to be declining somewhat from 3rd quarter levels?

Speaker 2

Yes. So let me start with the CRE first. So our pipelines are building in CRE. We haven't had large pipelines for a while there. So it's going to take us probably a couple of quarters for those pipelines to fill up and start seeing it hit on the balance sheet.

Speaker 2

But we are making really good progress in our CRE portfolio and that gives me confidence as we get into 2025. We won't be shrinking CRE, but we'll be growing CRE. So it's another ore in the water that will give us more momentum from a revenue growth perspective from that. So I think that's very positive. As far as growth this quarter, it was continued growth.

Speaker 2

I mean our specialty businesses that we have, corporate and institutional fund banking, mortgage warehouse franchise, all were really strong growers this quarter. When you saw the quarter play out, we were a little soft in the 1st part of the quarter, but we finished the quarter really strong. You can see it in end of period loan balances and we have a lot of momentum going into the Q4. So that's good. When you look at our regions that we have, our middle market, the areas that really are the highlight there are Austin and Baltimore, New Jersey, York, PA, Richmond, Virginia, all those continue to progress and go really be positive.

Speaker 2

So I would say we have good momentum in the lending side and feel good about the revenue projections that we have.

Speaker 4

Got it. And just one follow-up on the previous response you gave to Gerard. If we don't get a rate cut in the Q4 in November, December or at least one of those, does that change your outlook on the NII NIM from here?

Speaker 2

Everything I said going through that list Ebrahim was structural that's going on in our balance sheet that has no impact on interest rates. So I feel comfortable that we're going up if rates stay flat or if they actually go up or down. We're relatively neutral from an interest rate risk percentage and it's hard to be exact, but we're as neutral as you can be with the balance sheet and the complexity that you have. So I feel good that we have an upper trajectory of margin and net interest income.

Speaker 4

That's helpful. Thank you.

Operator

Thank you. Our next question will come from Manan Gossalia with Morgan Stanley. Please go ahead.

Speaker 5

Hey, good morning, Daryl.

Speaker 2

Good morning.

Speaker 5

So I wanted to ask on deposit beta, as I think you noted that you're assuming a 40% deposit beta in 4Q. Now deposit betas in the way upward closer to the mid-50s, if I recall correctly. So do you expect that betas will accelerate from 4Q as you go into next year and as we see more rate cuts and get closer to the betas that you saw on the way up?

Speaker 2

Yes. I think of it maybe it's my simple mind or whatever, but I think that if our betas went up, I think we peaked at about 55%. On the way down, we'll probably end up at 55% at some point. It's really the pace and how quickly you get there. But I felt really good about what we've been able to do at the end of September and feel good that we'll have a good at least a 40% beta repricing down in the 4th quarter.

Speaker 2

And that hopefully will continue to move forward as we get into 2025. But all things being equal, I don't think we're going back to where we were, but I feel very positive that our businesses are lowering rates. There's a lot of good planning that we had in the company. Our treasury team with all the businesses worked really hard to come up with good strategies and really good implementation and we've tested that and feel really good at where we're headed.

Speaker 5

Got it. And then just on in terms of the loan growth you were just speaking about, as we get into next year, I mean, it sounds like loan growth will accelerate as you start to build that those CRE loans. In terms of funding that loan growth, do you expect to grow deposits in line with loan growth next year? Or is there room to bring down the cash balances? I noticed they didn't go down that much this quarter.

Speaker 5

Is there some room to utilize cash balances and maybe grow deposits a little bit slower next year?

Speaker 2

So, Manan, I'm a big believer that we want to operate the company basically being always on.

Speaker 6

When I say always on,

Speaker 2

what that means is we are always out there trying to get deposits from all of our customers. We won't pay the highest rates, we won't pay the lowest rates, but we'll always be out there asking for deposits. We've had 4 consecutive quarters of customer growth in deposits. We will continue to focus on growing customer deposits. I think it's important.

Speaker 2

If you think of a boat, if you're growing loans, you need to grow deposits, so you don't go in a circle and all that. So you need to continue to move going forward. I would actually like to grow deposits faster than loans, to be honest with you, and continue to shrink some of our non core funding if that's able if we're able to do that.

Speaker 5

Got it. So it sounds like that core deposits continue to grow, you'll pay down some of the non core funding and would the securities balances grow as well as you move away from cash or would you expect to stay at this level of cash?

Speaker 2

If you look at where we are right now, we have about $59,000,000,000 between the 2. We are putting more money into the investment portfolio. Again, we've been very methodical all year and increasing our investment portfolio increases and that's played out really well for us. You saw we had nice increases. We'll probably be in the 3.90s towards the end of the year, early first quarter and 4% sometime in 2025 from a yield perspective.

Speaker 2

So we will continue to grow our investment portfolio. We have $1,000,000,000 in maturing in the 4th quarter. We'll probably invest $3,000,000,000 in the 4th quarter, and then we'll reevaluate and see how $25,000,000 plays out. From a cash at the fed perspective, we probably will operate with cash at fed, no at $20,000,000,000 we won't probably go much lower than that. But I think we just have a lot flexibility where we are right now.

Speaker 2

Right now, we're sitting on about $25,000,000,000 plus at the Fed. So we got a lot of flexibility.

Speaker 5

Got it. Thank you.

Operator

Thank you. Our next question will come from Christopher Spahr with Wells Fargo. Please go ahead.

Speaker 7

Thank you. Good morning. So just a question on the loans

Speaker 2

Hey, Chris, you're breaking out.

Speaker 7

Oh, apologies. Can you hear me better now or is this still bad?

Speaker 2

I can now, yes.

Speaker 7

Okay. Sorry about that. Just for the loans in the 4th quarter relative to period end of $136,000,000,000 just is there upside to that if CRE stabilizes or do you see some more out of some little bit more runoff and pay downs in that portfolio and then stabilizing into 2025?

Speaker 2

Yes. I think you're going to see runoff in CRE for at least a couple more quarters. Q1 for sure, Q4, Q1, Q1, maybe Q2, it depends on how quickly our pipelines build and what type of loans that we're making, whether it's permanent or construction loans from that perspective. But we're kind of going to operate with about 20% of our loan book being in CRE is kind of the mix that we're going to have moving forward from that projection. So it's pipelines are building and Peter and his team will do a great job and try to meet the needs of our clients and communities as we move forward.

Speaker 2

So but we'll do it the right way, but I wouldn't expect CRE balances to grow until mid next year conservatively.

Speaker 7

Okay. And then during the quarter, you said that 200 basis point lower in rates could actually effectively wipe out the criticized loans in the CRE. Do I have that correct? And if so, then just kind of getting back to the earlier questions like the timing, is it that last Yes, I didn't get the last part, Chris.

Speaker 2

Yes, I got the first part. I didn't get the last part, Chris.

Speaker 7

Sure. Apologies about the connection. Just what's the timing of that if you do get 200 basis points lower in the curve, what's the timing for the benefits on the criticized CRE?

Speaker 2

Yes. So we have a good downward trajectory in criticized. I don't like to use the word wipe out. I don't think that's appropriate. We have a long term history, Chris, of working with our clients and staying with them when things are stressful and we will continue to do that as long as they support their loans that I will.

Speaker 2

So we're always going to have some criticized loans. That's just who we are. It's in our DNA. It also makes our clients very loyal to us. So that's going to continue from that perspective.

Speaker 2

But I do feel really good 4th quarter trajectory down. Do believe that we will continue with a good trajectory down in 2025 and all that, but we aren't going to wipe out the criticized balances.

Speaker 7

Okay. Thank you.

Operator

Thank you. Our next question will come from Dave Rochester with Compass Point. Please go ahead.

Speaker 8

Hey, good morning guys. Nice quarter.

Speaker 2

Thank you.

Speaker 8

On the deposit front, I appreciate the outlook on the beta that 40% you mentioned. I was curious on what your thoughts were on the non interest bearing deposit piece as a part of that deposit outlook. I know you're still running off broker deposits, so that's a part of that decline that you've been talking about for 4Q. Are you factoring in a little bit more runoff on the non interest bearing side within that? And can you talk about how close we are to a trough in those deposits?

Speaker 2

So when you look at our non interest bearing, I would say that the commercial and consumer side has really slowed down significantly. There might be a little bit of disintermediation that occurs, but I wouldn't say very much as we move forward. I think what you have though in our non interest bearing is just a function of who we are is that we have balances from our ICS business and those balances tend to be volatile. And sometimes you see swings of that going back and forth. We will try to point those out and all that, but you're going to have some volatility with that.

Speaker 2

But I think for the most part, what we said several quarters ago that we thought we'd average around 30% non interest bearing. I think that's playing out when you exclude our broker deposits from that perspective. So I feel really good from a non interest bearing perspective. I think the thing as you look forward, the value of free deposits as rates come down is less. So we have to work harder to keep our interest rate spreads and margins higher just because you aren't getting as much benefit from the non interest bearing.

Speaker 2

And we're aware of that market. We're definitely keyed into how that plays

Speaker 8

out. Okay, great. Thanks. Just switching to loan growth, appreciated all the color you gave on the drivers for 3Q. I think you mentioned those were specialty lines and the middle market utilization was actually down a little bit.

Speaker 8

When do you expect that utilization to start to move up more meaningfully? And then if you could just talk about the competitive landscape within C and I overall, that'd be great.

Speaker 2

Yes. Well, within commercial, we did have the increase, like I said, in our dealer services. It seems like there's a lot more cars on the lots now, which is driving that utilization up, but net net is still down. Some of it could be post election. That's what people seems to be defaulting to when you talk to clients in the marketplaces.

Speaker 2

And in the markets that we serve, we have a lot of good things going on in the marketplaces and I think there will be a lot of growth needs over time. It's just a matter of when that will happen. It's hard to actually pin that down to be honest with you today, but we are working as hard as we can and we're there for our clients when they need us. If you look at lines, our lines can actually continue to grow. So we're actually making more lines available for our clients.

Speaker 2

So we are growing our customers and accounts from that perspective and eventually they will start to draw on them.

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question will come from Frank Schiraldi with Piper Sandler. Please go ahead.

Speaker 6

Good morning, Daryl. Good morning, Frank. I know there's I guess just one last one on loan growth. I mean, I know there's a lot of moving parts here. You mentioned the $136,000,000,000 in average for next quarter, which would be sort of 1% growth linked quarter.

Speaker 6

Do you think that's a pretty good bogey even going forward from there as you talk about pipelines building, maybe Korea has a couple more quarters to trough? Is that a decent bogey? Or do you think you could see quarterly growth maybe even accelerate from that sort of 1% linked quarter on annualized number?

Speaker 2

We're still in the midst of our planning season for 2025, Frank. I would love to tell you that answer right now. I would say it's anywhere to maybe a little bit less than 1% continuously to maybe a little bit more than 1%. 1% might be an average give or take. We're going to do the right thing and support our customers and the communities that's the most important thing we do from that.

Speaker 2

And we are very selective in the customers that we do business with from that. But that said, we will get as much growth as we think is prudent out in the marketplace. We aren't going to stretch or change our credit levels all of that. So, we'll just see how it plays out, but I'll give you more color in that at next earnings call.

Speaker 6

Okay, fair enough. And then, you also talked about the repricing of the back book. And I think you just mentioned kind of on the security side where you think yield could get to. If we just for modeling purposes, we think about the loan book repricing. You set aside rate movements for a minute.

Speaker 6

And just any sort of color you could give in terms of where we sit now with rates where they are currently, what you're seeing or what the sort of pickup is on a quarterly basis on loan yields from the repricing of the back book?

Speaker 2

Yes. So I'll give you a high level of what we're seeing this past quarter. So when you look at our C and I portfolio and we'll look at these are all fixed rate loan categories. The C and I fixed rate loan is averaging up about 1% on what's rolling off, rolling on. The CRE is averaging up about 1.3%.

Speaker 2

Mortgage is averaging about a little over 2%, consumers at about 1.4%. Net net, if you blend that all together, of all the fixed rate loans rolling on, rolling off, it's around 150 basis point benefit.

Speaker 6

Great. Okay. Thanks for the color.

Speaker 2

You're welcome.

Operator

Thank you. Our next question will come from John Pancari with Evercore ISI. Please go ahead.

Speaker 6

Good morning, Daryl.

Speaker 2

Good morning, John.

Speaker 6

In terms of expenses, I mean, you put up some pretty good operating leverage this quarter. It looks like your outlook implies some continued positive operating leverage near term. Could you give us your thoughts as you look into 2025, what type of acceleration in that positive operating leverage is possible? I believe right now the Street is looking at about 150 to 200 basis points positive operating leverage for you guys as we look into the full year 2025. Curious in your thoughts on what you believe is achievable?

Speaker 2

Yes. So we're still putting 2025 together. I do believe we will have positive operating leverage for 2025. Whether we're 150 or 200, I think you're in the neighborhood of where plan will end out, but we aren't 100% have it all kind of figured out and everybody agreed to it. But we will get there.

Speaker 2

I feel very confident we will get there from that. If you look at the expenses that we guided, they were up a little bit in the Q4 and that's mainly due to projects that we have. We have a fair amount of projects going on in the company and we're making a lot of progress. We do have an increase there. The other thing that we're doing is, we've had a pretty good year from a performance perspective, both financially.

Speaker 2

We made good progress on our asset quality and good loan and deposit growth and just improving and getting good some of our priorities accomplished. So we actually are increasing our corporate wide incentives in the Q4 for payout for everybody for a good year. That said, I still feel that 2025 is going to be a better year than 2024 to be honest with you. We continue to have a lot more work to do and make progress. But we have a lot of positive momentum now and need to reward the people that are making it happen in the company and feel good about that.

Speaker 6

Great. All right. Thank you. That's helpful. And then on the credit side, your loan loss reserve ratio as a percentage of loans ticked down a bit or so this quarter, I guess, around 162 basis points where it stands now.

Speaker 6

Where do you see that trending here? You cited the expected decline in criticized that you'll see in the quarter and then pretty good trajectory there. Fair to assume continued modest decline here in that ratio? Is that fair to assume as you look out?

Speaker 2

Yes. I think when you look at it, this past quarter, we had some good macro factor positives with CREPI being much more positive and that helped drive a downward drop in criticized, which is good. I think as you look forward though, we are growing all of our lending categories. So you have a mix change that you're seeing occur in the balance sheet. And that mix change is more heavy on the consumer side.

Speaker 2

Consumers definitely have, for the most part, higher overall spreads and yields, but they also come with higher net charge offs. So you're seeing a mix change. So right now, it's we're feeling really good where we're operating right now around $40,000,000 Could it be a little lower than that? Maybe. Could it be a little bit higher than that?

Speaker 2

Possibly. It really depends on how quick that mix change happens. We look at it, I have it obviously from a net overall spread and making sure we're getting good returns on the assets that we're putting on our balance sheet. So it's a good capital use for our shareholders. So we think we're doing the right thing from that perspective.

Speaker 2

But I think it's the mix shift that could potentially play out over the next couple of years of having just a little bit higher charge off company as we get a little bit more diversified. John, we are really trying to be a much more diversified company, not so much 100% relying on CRE. We never were 100%, but really try to have much more diversification. So we have strong consumer businesses, C and I businesses as well as CRE businesses and a lot of great fee businesses like ICS and wealth out in the marketplace. So we're really if you look at all the things that we present at the investors and all that, it's really talking more of a diversified company as we move forward.

Speaker 6

Thanks, Darryl. Very helpful.

Speaker 2

Yes.

Operator

Thank you. Our next question will come from Matt O'Connor with Deutsche Bank. Please go ahead.

Speaker 9

Hey, all. This is Nathan Stein on behalf of Matt O'Connor. I wanted to ask about the NIM trajectory given it came in strong this quarter at 3.62% and you expect it to be low 360s next quarter. So this is above your prior guide to be in the high 350s in the second half of the year. In September, I think you'd said a 3 60 range NIM makes sense for next year.

Speaker 9

Have your thoughts changed regarding the NIM trajectory given how strong it's been to date?

Speaker 2

So what I would tell you is that I think we feel comfortable in the low 360s for our 4th quarter margin and we'll give you 25 guidance in January when we do our next earnings call. But we're really positive about the momentum we have, good repricing and reactivity on the deposit side is really going well and good roll on and roll off rates on our fixed rate loan assets as well. So I think we have a lot of positive momentum.

Speaker 9

Okay, great. And then kind of a nuanced question, but other revenue was in line with 2Q levels. And I think you'd previously suggested it would come down a bit on lower syndication revenues and interchange fees. Do those come in a bit better than you'd expected? Or was it something else that kind of helps these?

Speaker 9

And then how do you expect this fee line to trend going forward?

Speaker 2

Yes. I would say that within the other, the 2 largest categories are loan syndications and merchant and card fees. Those tend to be going very well and that's really what drives that other category of those two line items for the most part.

Speaker 9

Thank you.

Speaker 2

All right. Thank you.

Operator

Thank you. Our next question will come from Zach Westerlund with UBS. Please go ahead.

Speaker 10

Good morning. This is Zach on for Erica. I just had a quick follow-up on the expense question. I know you mentioned that there were some projects that are going to hit in the 4th quarter. Can you just clarify if those are kind of one time type projects or is that expected to stay in the run rate?

Speaker 2

It's a mix, Zach. Some of the things that come online like our new data centers that we're putting on are coming online Q4 that's going to be in run rate. We also have some project expenses that we have that are more being expensed in the Q4 from that. So it's really a mix that we have there. We'll give you 25 guidance in January and give you good projections.

Speaker 2

But like I said, I think we're going to have good strong positive operating leverage in 2025. So I feel good about that and we'll give you more specifics as we get into January.

Speaker 10

Helpful. Appreciate that. And then just on the credit front, clearly you guys have made a bunch of progress with better net charge offs trending down, credit quality trends looking pretty good. Can you just remind us how you think about like a through the cycle charge off number if you're able to kind of share your thoughts around that?

Speaker 2

So if you look historically, our through the cycle charge off is 34 basis points. But what I said on an earlier question is that the mix of our loan portfolio is changing. And as that portfolio mix changes, having more consumer as a percentage of total loans, that will drive higher just allowance balances. It's still good. We look at it to make sure that we have a good net spread on those loans, good capital return on the loans that we're making there.

Speaker 2

So it's nothing to be concerned about. It's just that it's a mix change that you have, as we continue to be a more diversified company moving forward.

Speaker 10

Got it. Thanks for taking my questions.

Speaker 2

Yes.

Operator

Thank you. At this time, I would like to turn the call back over to Brian Klock for any additional or closing remarks.

Speaker 1

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

Operator

Thank you. This does conclude the M and T Bank Third Quarter 2024 Earnings Conference Call. You may disconnect your line at this time and have a great day.

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Earnings Conference Call
M&T Bank Q3 2024
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