M&T Bank Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 15, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the M&T Bank First Quarter 2024 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 turn the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Speaker 1

Thank you, Todd, and good morning. Like to thank everyone for participating in M and T's Q1 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. Also before we start, I'd like to mention that today's presentation may contain forward looking information.

Speaker 1

Cautionary statements about this information are included in today's earnings release materials and in the investor presentation as well and as well as our SEC filings and other investor materials. The presentation also includes non GAAP financial measures as identified in the earnings release and in the investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Darryl Bible. Now I'd like to turn the call over to Darryl.

Speaker 2

Thank you, Brian, and good morning, everyone. As you will hear today, our first quarter results were a strong start for M and T Bank. Turning to Slide 3. We start the year with renewed and strengthened commitment to making a difference in people's lives. Along with helping our customers meet their financial goals, have continued to launch programs to uplift our communities and partners.

Speaker 2

Let me share with you a few examples of how we put these words into action. Since the beginning of the year, M and T has provided $900,000 to 30 organizations across our footprint to address affordable housing and homelessness in underserved low to middle income communities. We launched a new Spanish language small business accelerator program in French Georges County, Maryland, which will support many small business owners in the region. We continue to invest in New England and Long Island through the 2nd phase of our Amplify Fund. We do this when our communities are successful, so is our business.

Speaker 2

Turning to Slide 4. We are excited to see how deeply we embedded sustainability across the bank and into our products and services. We have included several sustainability accomplishments from our upcoming 2023 sustainability report and look forward to sharing more when we release the complete report this quarter. Turning to Slide 6, which shows the results for the Q1. The quarter was highlighted by strong C and I and consumer loan growth.

Speaker 2

PP and R was a solid $891,000,000 Expense control remains a key focus and was evident as adjusted expenses increased only 0.6% compared to the Q1 of 2023. Diluted GAAP earnings per share were $3.02 for the quarter. If you exclude the additional FDIC special assessment, adjusted diluted earnings per share were $3.15 On an adjusted basis, M and T's 1st quarter results produced an ROA and ROCE of 1.05% and 8.49%, respectively. The CET1 ratio remained strong, growing to 11.07% at the end of the first quarter and tangible book value share grew 1% to $99.54 Next, we look a little deeper into the underlying trends that generated our Q1 results. Please turn to Slide 8.

Speaker 2

Taxable equivalent net interest income was $1,700,000,000 in the Q1, down 2% from linked quarter. The net interest margin was 3.52%, down 9 basis points from the linked quarter. The primary drivers for the decrease to the margin were a negative 6 basis points from lower nonaccrual interest and the impact of interest rate swaps, a negative 3 basis points from higher liquidity and cash moving into securities, negative 3 basis points from our deposit mix and pricing and a positive 3 basis points from all other items, including the benefit of asset repricing in the investment portfolio and consumer loans. Turning to Slide 9 to look at the average balance sheet trends. Average investment securities increased $1,100,000,000 to $28,600,000,000 reflecting the reinvestment of maturing security balances and a measured shift of a portion of our cash balances into investment securities.

Speaker 2

Average interest bearing deposits at the Fed increased approximately $500,000,000 to $30,700,000,000 as our decision to have more liquidity on the balance sheet was largely offset by the previously mentioned investment security purchases. Average loans increased $1,000,000,000 or 1% to $133,800,000,000 Average deposits decreased $648,000,000 or less than 1.5 percent to $164,100,000,000 Turn to Slide 10 to talk about average loans. Average loans and leases increased 1% to $133,800,000,000 compared to the linked quarter. Solid growth in C and I and consumer loans outpaced declines in CRE and residential mortgages. The growth in C and I loans was driven by a combination of increased line utilization in our middle market and dealer business lines, combined with new origination activity in equipment finance, corporate and institutional and fund banking as we continue to grow existing and new clients.

Speaker 2

Loan yields decreased 1% to 6.32%, but increased 2 basis points sequentially when excluding the impact of the cash flow hedges on interest income in our CRE portfolio. Within our consumer portfolio, we continue to see the benefit of higher rates on new originations compared to maturing balances. With the consumer loans yielding increased 12 basis points to 6.54%. Turning to Slide 11, our liquidity remains strong. At the end of the Q1, investment securities and cash, including cash out at the Fed, totaled $62,300,000,000 representing 29 percent of total assets.

Speaker 2

Average investment securities grew $1,100,000,000 reflecting the reinvestment of maturing securities and a shift of a portion of our cash balances into securities. The yield on investment securities increased 17 basis points to 3.30% as the yield on new purchases exceeded the yield on maturing securities. The duration of the securities portfolio at the end of the quarter 3.8 years and the unrealized pretax loss on the available for sale portfolio was only 263,000,000 dollars Turning to Slide 12. We continue to focus on growing customer deposits and we're pleased with stabilization of our deposit balances 0.5 percent to $164,100,000,000 while the average customer deposits increased sequentially. We saw average deposit growth in institutional services and wealth management, relatively stable deposits within commercial and a modest decline in the retail bank.

Speaker 2

This growth allowed us to roll off some of our brokered CDs. Average demand deposits declined $1,500,000,000 partially impacted by seasonal deposit declines in Commercial and Business Banking. The shift toward higher yielding products continued during the quarter, but at a much slowed meaningfully. The mix average of non interest bearing deposit was 30% of total deposits, largely unchanged from last quarter. Excluding broker deposits, non interest bearing deposit mix in the Q1 was 32%.

Speaker 2

Encouragingly, we saw the pace of deposit cost increases slow through the quarter with the cost of interest bearing deposits increasing 3 basis points to 2.93%. This represents the smallest quarterly increase since the start of the tightening in early 2022. Our core non maturity deposit costs increased only 1 basis point sequentially. Continuing on Slide 13. Non interest income was $580,000,000 up slightly from the linked quarter.

Speaker 2

M and T normally receives an annual distribution from Bayview Lending during the Q1 of the year. This distribution was $25,000,000 in 20.24 compared to $20,000,000 last year. Excluding the Bayview distribution, non interest income declined $23,000,000 sequentially. The decrease was largely driven by lower commercial mortgage banking revenues and syndication fees reflected in our other revenues from operations. Both of these fee items posted strong 4th quarter results.

Speaker 2

Recall that last year's Q1 included $45,000,000 of fee income from CIT prior to the sale in April. Turning to Slide 14. We continue to focus on controlling expenses. Non interest expenses were $1,400,000,000 This year's Q1 and last year's 4th quarter each had incremental FDIC special assessments amounting to $29,000,000 $197,000,000 respectively. Excluding the special assessment, adjusted non interest expense increased by $8,000,000 or 0.6 percent compared to last year's Q1.

Speaker 2

On a similar basis, adjusted non interest expense increased $114,000,000 or 9% from the linked quarter. This increase was largely driven by an approximate $99,000,000 of seasonal higher compensation costs included in the Q1. This figure is unchanged from last year's Q1. As usual, we expect the seasonal factors to decline significantly as we enter the Q2. The adjusted efficiency ratio was 59.6% compared to 53.6% in the 4th quarter.

Speaker 2

Next, let's turn to Slide 15 for credit. Net charge offs for the quarter totaled $138,000,000 or 42 basis points, down from 44 basis points in the linked quarter. CRE net charge offs declined meaningfully due to a resolution of 3 office related credits in last year's Q4. The 2 largest charge offs were previously criticized C and I loans and amounted to approximately $31,000,000 total. One credit was a non automotive dealer and the other was in the services industry.

Speaker 2

Non accrual loans increased by $136,000,000 to $3,200,000,000 The non accrual ratio increased 9 basis points to 1.71%. This was largely driven by an increase in C and I and CRE Healthcare non accrual loans. Loans 30 to 89 days past due declined sequentially across each portfolio. In the Q1, we recorded a provision of $200,000,000 compared to the net charge offs of $138,000,000 This resulted in an allowance build of $62,000,000 and increased the allowance to loan ratio by 3 basis points to 1.62%. The current build primarily reflects a deterioration in the performance of loans to certain commercial borrowers, including non automotive dealers and healthcare facilities as well as growth in some sectors of M and T C and I and consumer loan portfolios.

Speaker 2

Please turn to Slide 16. When we file our Form 10 Q in a few weeks, we estimate that the level of criticized loans will be $12,900,000,000 compared to $12,600,000,000 at the end of December. C and I criticized loans increased $641,000,000 while CRE criticized loans decreased 277,000,000 dollars with declines in both permanent and construction. Slide 17 provides additional detail on C and I criticized balances. Total C and I criticized balances increased $641,000,000 Majority of that increase is concentrated within dealer and manufacturing industries.

Speaker 2

We are seeing areas of pressure, particularly in certain businesses that may be more acutely impacted by the late effects of higher rates or those impacted by reduced large ticket consumer discretionary spending or a shift in spending on goods to services. For example, we saw an uptick in criticized loans to our non auto dealer industries as higher rates have impacted large ticket discretionary consumer spend and earlier COVID driven buying saturated demand for these types of purchases. Slide 18 includes detail on CRE criticized balances. Total CRE criticized balances decreased $277,000,000 from the last quarter. The decline is across most property types, though we did not see an increase in office and healthcare criticized.

Speaker 2

We are seeing improvements in occupancy and staffing within healthcare, but reimbursement rate improvement has been uneven, resulting in modest net increase in criticized balances within the portfolio. Last quarter, we noted an upcoming review of the construction portfolio. Over 80% of that review has been completed, and I'm pleased to note that the review resulted in limited incremental downgrades of construction loans into criticized. The remainder of the review generally consists of smaller balanced loans, but we would not expect the outcome of the remainder of that review to be significantly different than the portion already completed. Turning to Slide 19 for capital.

Speaker 2

M and T CET1 ratio at the end of the Q1 was an estimated 11.7% compared to 10.98 percent at the end of the 4th quarter. The increase was due in part due to the continued pause in repurchasing shares combined with continued strong capital generation. At the end of the quarter, the negative AOCI impact on CET1 ratio from the AFS securities and pension related components would be approximately 20 basis points. Now turning to Slide 20 for the outlook. The economy continues to perform well and the labor market remains strong despite the challenges faced by firms and consumers.

Speaker 2

The economic outlook that we discussed on the January earnings call remains unchanged. Shifting to 2024 earnings, the outlook is largely unchanged from our update in March with an upward bias to our NII outlook. For NII, recall that the outlook we provided in January considered a range of rate cut scenarios from 6 cuts to 3 cuts. As the forward curve has settled closer to 2 cuts, we expect NII to be $6,800,000,000 with possible upside. Our outlook for fees and expenses is unchanged.

Speaker 2

The expense outlook excludes incremental FTIC special assessment incurred in the Q1. We continue to expect net charge offs for the full year to be near the 40 basis points. The allowance level will be dependent on many factors, including changes in the macro economic outlook, portfolio mix and underlying asset quality. Our outlook for the tax rate of 24% to 24.5% excludes the discrete tax benefit in the Q1. Finally, as it relates to capital.

Speaker 2

Our capital coupled with our limited investment security marks has been a clear differentiator for M and T. We take our responsibility to manage our shareholders' capital very seriously and return more when it is appropriate to do that. Our businesses are performing well and we are growing new relationships each and every day. While the economic uncertainty is improving, our share repurchases remain on hold. We plan to reassess repurchases after the Q2 and we'll consider a range of factors, including the macroeconomic environment, the bank's capital generation, results from the 2024 stress test, the level of commercial real estate loans and overall asset quality.

Speaker 2

That said, we continue to use our capital for organic growth and growing new customer relationships. Buybacks has always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies. To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M and T has historically outperformed its peers.

Speaker 2

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 while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital. Now let's open up the call.

Operator

At this time, we will open the floor for questions. Our first question will come from Manan Ghasalia with Morgan Stanley. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Good morning.

Speaker 3

Daryl, can you unpack the NII guidance for us in terms of puts and takes in a higher for longer rate environment? I mean, it looks like NIB deposits are holding up well. You're moving some of the liquidity into high yielding securities. So is the $6,800,000,000 an easy bar to hit if we only get 2 cuts? And what would that look like if we don't get any rate cuts this year?

Speaker 2

Yes. So let me start with the latter part first, Manan. Thanks for the question. We are really pretty neutral to interest rates right now. So whether we get 2 cuts, 3 cuts or we get no cuts, we're going to probably pretty much be pretty comfortable with $6,800,000,000 plus in that range.

Speaker 2

I think because of the size of the balance sheet we had this quarter, we're a little bit heavy with liquidity and a margin of 3.52%. I think for the most part, our margin has bottomed out this year and we'll probably be in the mid to high 350s the rest of the year. But we'll probably have a little smaller balance sheet, maybe 2,000,000,000 or 3,000,000,000 dollars shorter than that. But we feel really good about it. If you look at how things are playing out, our deposits, the real value of our deposit franchise, I think, came out really strong this quarter.

Speaker 2

I mean, our core deposits hardly budged in increasing of interest rates. We still saw some growth in our retail CDs, which kind of drove the increase, but other than that, core deposits were flat from a cost perspective. And if you look on the asset side of the equation, we're getting nice reactivity both on our consumer loans. Our consumer loans are increasing nicely in auto, RV and HELOC, and all those are contributing positively. And then as we put money to work in the investment securities portfolio, I know it's not as high as what it is at the Fed, but as we help manage our sensitivities, we're going to have some really nice repricing on our investment portfolio.

Speaker 2

We're up 17 basis points. We could easily do that for the next couple of quarters plus throughout the year. So I think we feel pretty good about NII going forward right now.

Speaker 3

Okay. Did you mention what duration you're putting on the securities book?

Speaker 2

So the purchases we did this quarter, we basically did 3 chunks of securities And the way we look at it is trying to keep our convexity flat. So we've been purchasing treasuries and CMBS, which basically has positive convexity, coupled with some low convex MBS together. So the yields have been we've been getting in the Q1 4.6 percent, so 4% 4.6 percent yield, duration about a little over 3 years from that perspective. Where rates are today now, you can probably easily add another 30 basis points to 40 basis points higher yield from that. So as we continue to do the same thing we did in the Q1 and the Q2, we'll probably get some more uplift.

Speaker 3

That's really helpful. And then maybe a quick follow-up on the liquidity side. Cash as a percentage of assets is up another 150 basis points or so this quarter. Can you talk about like the rationale for continuing to ratchet up that liquidity level? Is it the CRE exposure?

Speaker 3

Is it partly some of the stress we saw in the markets last quarter? So maybe if you can talk about what the right level of liquidity is given the current credit environment?

Speaker 2

It was the latter. Anytime there's any scare in the industry, we're going to be conservative. That's just who we are. We're going to make sure we take care of the company, have strong capital, a lot of liquidity, and that's 1st and foremost. I would say we're comfortable as we kind of let some of this excess liquidity come out of our balance sheet, have it go down to maybe $27,000,000,000 $26,000,000,000 at the Fed ballpark over as we kind of go throughout the year from that perspective.

Speaker 2

So it will come down barring any other stresses that hit our industry.

Speaker 3

Great. Thank you.

Speaker 4

Yes.

Operator

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

Speaker 5

Good morning.

Speaker 2

Hey, John.

Speaker 5

Back to the balance hey, Dow. Back to the balance sheet trends, the C and I loans, you sounded relatively constructive in your commentary there and the growth you're seeing. You cited better line realization. Maybe elaborate there a little bit where you're seeing demand and what's your outlook there on that front or where you can actually see some growth in coming quarters?

Speaker 2

Yes. So if you look at our growth, it was actually broad based. We had really good growth in many sectors. So if you look at our dealer financial services area, just the auto floor planning is funding up, so you had increased utilization there. Our middle market business was strong and actually had increases in that space.

Speaker 2

Corporate and institutional was also up. Fund Banking was up. Our equipment leasing was higher as well as mortgage warehouse. So those were the businesses that drove it. If you look at the regions, we operate in 28 Community Bank regions.

Speaker 2

2 thirds of our Community Bank regions now are growing positively. The highlights were in Massachusetts, New Jersey, Philadelphia and Western New York were kind of the drivers where the growth came from.

Speaker 5

Okay, great. Thanks, Daryl. And then on the credit front, it's good to see the commercial real estate non accruals down in the quarter. What are you seeing on the CRE front in terms of NPA inflows? Are you seeing a slowing?

Speaker 5

Or is that somewhat impacted by an increase in loan modifications? And then just separately on the C and I front, I know you noted some higher non accruals there. Just what are you seeing on that front that's driving the added stress?

Speaker 2

Yes. So on the CRE front, I think we saw really good performance this quarter. 1 quarter doesn't make a trend yet, but it was a positive quarter. We had our criticized numbers come down. Still had healthcare and office go up a little bit.

Speaker 2

But overall, I think we're seeing that stabilize. We did I talked about it in the prepared remarks. We did go through that construction review. We got through 80% of the construction review. We only had $200,000,000 change in criticized.

Speaker 2

We have a little bit left to go and we'll have very nominal increase there. So getting through that construction book was huge. It was, I think, dollars 8,600,000,000 in size we went through. So that was a really good review. We'll continue to monitor it.

Speaker 2

Obviously, office and healthcare are more of the troubled sectors and those we will work with over time. But our teams are working with our customers each and every day. We're trying to get out in front of working with them to make sure we can help them through any stress that we have. And I think we feel pretty good just going forward with that. So definitely not out of the woods with CRE, but I think we're feeling that we're having some positive trends.

Speaker 2

As far as C and I goes, to be honest with you, we had 2 really credits. 1 was a non auto dealer and if a non auto dealer was stressed a little bit with higher interest rates. It was a marine dealer such that a lot of activity in the boats was coming down, didn't have as much demand there. And we just basically had to put a specific reserve on that and take a charge off in that sector. And the other one that came through was a healthcare credit.

Speaker 2

And those were the 2 largest C and I credits that came through that really impacted the numbers. So it wasn't for those, you probably wouldn't have noticed anything from a charge off perspective or provision.

Speaker 5

Thanks, Bill. If I can ask just one more on the credit front tied to that. Your criticized loans do trend above your peer levels. But is there a degree of conservativeness in there in terms of, I guess, how you treat your recourse agreement as part of CRE and elsewhere? Is there something in the way you're doing their internal risk ratings that may influence your criticized levels?

Speaker 5

We're getting a fair amount of incomings regarding that.

Speaker 2

Yes. So we have had a long history of running with a higher level of criticized. We do that intentionally because we want to work with our clients, because if we work with our clients and get them through these stress times, they're very loyal to our company. It's the right thing for our communities and all of that. So that's 1st and foremost.

Speaker 2

I would say, we just tend to be a conservative company. I'm on the financial side, so I'm conservative with capital and liquidity. You have Mike Todaro and Bob, our Chief Credit Officer, they're conservative on the credit side. So it's just how we run and operate the bank. We're going to do the right things and try to work with our customers to get through issues.

Speaker 2

And when we customers are not supportive in getting through issues, that's when we might to sell some credits, but that's usually few and far between. But our history is to work with them. We find that working with our clients over the long term produces less losses, better capital preservation and better for both shareholders as well as us as a company and all that. So that's how we're going to continue to operate.

Speaker 6

Thanks, Terry.

Speaker 2

Yes.

Operator

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

Speaker 4

Hey, good morning, Dan.

Speaker 2

Good morning.

Speaker 4

So I guess a question on commercial real estate, you've done a lot of work over the last year deep diving on the portfolio. If we think about I think the stress in the market and it's been the wet blanket on your stock is around what higher rates could mean on commercial real estate risk. Give us a sense of when you look at sensitivity, be it loan to value discounted sort of debt service coverage ratios, if we don't get any rate cuts for the next 2 years, does that and the economy and that's because the economy is doing fairly well, does that lead to worse outcomes just because rates are higher? Like give us a sense of no rate cuts, elevated yield curve, what the sensitivity to that portfolio is in terms of credit losses?

Speaker 2

Yes. If you don't mind, Ebrahim, I'm going to pivot a little bit because we actually ran a scenario last quarter and stressed our CRE portfolio up 100 basis points of what impact that might have for us. So I mean if you look at it from that perspective, it really depends on what level of rates are going higher. So let's just assume right now the Fed rates, the short term rates. If you look at our CRE portfolio, the vast majority of the CRE portfolio is fixed rate, either a fixed rate loan or they synthetically have swaps that have it fixed.

Speaker 2

So only 29% floats. If you look at going up 100 basis points, we see really very minimal impact on the portfolio, maybe at most approximately $500,000,000 might go into criticized, say fall below the 1.2 debt service coverage ratio. That's what we had from that. You look at the C and I book, C and I book $58,000,000,000 is all floating. Now the vast majority of the C and I book has debt service coverage ratio is well over 2% and very strong.

Speaker 2

But if you look at a subset of the leverage book that we have in there, that's closer to $5,000,000,000 We call them leverage, but when we put them on, they were leveraged, about half of those aren't even levered anymore because of their performance. So you're really only looking at about half of that is really pure levered loans. And when you look at those levered loans coming through and stress them 100 basis points, it's a minimal impact for us, a couple of $100,000,000 from a criticized. Now if you go to the longer end of the curve and in longer end of the curve, let's say, 5 or 10 year goes up 100 basis points, that really impacts more our construction book because you need to have takeouts there. And from that perspective, it's going to it's just what's happening now.

Speaker 2

People are going shorter. They aren't going 10 years, they're going 5 years, try to get placement and all that. So all that being said, we think it's very manageable if rates even go up 100 basis points that we can get through and not have a significant impact on our credit performance.

Speaker 4

That is good color. Thanks for talking through. And then one question, in terms of buybacks, you have a lot of excess capital. You called out 4 things macro, overall asset quality, stress test results and the level of CRE. If the first three are okay and fast forward to July, no issues on the first three.

Speaker 4

Is there something around the level of CRE that we should be mindful of when we think about potential for buybacks getting started in the back half of the year?

Speaker 2

Yes. So there's actually 5. So let me go through them again. We kind of missed when I was going through it. So macroeconomic environment, bakes capital generation, results from the stress test, the level of CRE and then overall asset quality.

Speaker 2

I would say, we're going to evaluate those the end of Q2 from that perspective. There's still a lot of uncertainty in the marketplace and we just want to be good stewards of our capital. The capital is not going anywhere, and this capital is for our investors. It's going to come to the investors sooner or later. It's just a matter of when we feel comfortable right now.

Speaker 2

We just don't want to make sure that it's now is the right time and we can basically put it over, but it's not going anywhere. I would feel that if we did decide and I'm not saying we are, but if we did decide, I would say we'd probably start off modestly and probably keep 11% plus CET1 ratio, and then just kind of see how that goes. But right now, what I can tell you is we're going to review it at our earnings call 3 months from now, and we'll let you know how we feel about share repurchase at that point in time and then we'll go from there. But it's not going anywhere. The investors, it's core to who we are.

Speaker 2

We buy back stock when we don't deploy it in acquisitions and that's what we're going to do.

Speaker 4

Got it. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Ken Usdin with Jefferies. Please go ahead.

Speaker 7

Thanks. Good morning.

Speaker 2

Good morning. Dar, I

Speaker 7

was wondering if you can elaborate a little bit more on deposits. So I think typically M and T you see a little bit of a seasonal decline in the 1st Q and I think quarter had like a weird ending date with a holiday and payroll, but it really interesting to see your DDAs and interest bearing up at period end versus the averages. Can you talk about your flows, what you're seeing and how that dynamic is changing with the higher for longer environment?

Speaker 2

Ken, it's really all around trying to make sure we grow our core deposits. And to be honest with you, our some of our businesses, I mentioned it in prepared remarks, but in our trust businesses, they're growing nicely, again, a lot of traction. And we had some nice wins in those businesses that added to our deposits second half of the first quarter, early part of the second quarter. So we have a lot of momentum in that business and doing really well. I can't be more pleased though with the other areas.

Speaker 2

Our commercial bank is really focused on growing deposits as well as well as the retail bank. So I mean everybody is focused and doing the right thing and that's where we are. Our bread and butter is really getting the operating account and we're really good at that. And once we get them, they tend not to leave us. So we're happy with that as we move forward.

Speaker 7

Got it. Great. And one question on the loan side. Can you talked about the benefit from securities yields grinding higher? Can you give us any color on your fixed rate loan repricing and what that looks like over the

Speaker 4

next year or 2?

Speaker 2

Yes. So if you look at the yields on give you a couple of examples. So let's just look at auto and RV and give you examples. So if you look at it on a spread basis, our spreads are higher and this is to our marginal cost of funds of 24 basis points in auto and 63 basis points in RV. But when you look at the yields that we're getting incrementally versus what's rolling off, we're getting 190 2 basis point higher yields in auto and 140 basis point higher yield in RV.

Speaker 2

So that's really what's moving the yields in the consumer loan portfolios as an example. Does that help?

Speaker 7

It does. And are those the 2 books that are the majority of where you'll get that benefit over the next year or 2?

Speaker 2

I would say for the other businesses, it's competitive in middle market. But some of our other businesses that we're in, I think we're getting a little bit higher spreads and yields overall if you look at some of the businesses. So I think overall, we feel pretty good about that. And then on the securities portfolio, that's going to reprice nicely. I talked a little bit with that with Manon, but with what we have maturing on the securities portfolio and what we plan to buy and repurchase, we could easily go up 20 plus basis points in the next couple of quarters in that whole yield of that portfolio.

Speaker 2

Great. Thanks, Daryl.

Operator

Thank you. Our next question will come from Steven Alexopoulos with JPMorgan. Please go ahead.

Speaker 8

Hey, good morning, Daryl.

Speaker 2

Hey, good morning.

Speaker 8

I wanted to start, I appreciate all the comments on what the CRE portfolio could do under different stress scenarios looking forward. But if we stay with what actually happened this quarter, I know you guys have roughly 8,500,000,000 dollars coming due this year. What can you do in the Q1? And walk us through how did it play out? What percent of these refinanced?

Speaker 8

What paid off? What did you have to extend because they couldn't refinance? Could you just give us some color on what actually happened this quarter in the portfolio?

Speaker 2

Yes, yes, I can do that. I think we had about $2,300,000,000 which are in the Q1. Out of that $2,300,000,000 I would say 56% of it was basically extended and out of that was extended. There was about 9% of that was in upgrades. We had, I think, another percent, maybe 23% actually paid off.

Speaker 2

And then we have the residual that we're working through right now, and that's going to easily either be extended out or paid off. So very little incremental win into that criticized, small portion. But for the most part, our teams are working very closely. But that was the impact of the maturities we had for the Q1. We hope that plays out through the rest of the year.

Speaker 8

Got it. And when you say extended, do you mean refinanced or they weren't in a position to refinance, so you gave them another year as an

Speaker 2

example. So typically, when we extend, you always try to get more equity or more recourse from the customer. So if he's wanting to extend out a year, we're going to try to right size the debt service coverage ratio and go put more equity in or give us more tangible assets to protect us as we move forward is kind of how where the negotiation goes. And typically, we extend anywhere from 6 months to a year after we're willing to support it.

Speaker 8

Got it. Okay. And then just on the margin, so I heard you earlier, you said you thought it would be mid to high 350s for the rest of the year. But it's funny when you look at deposit cost, it slowed materially, seems you're fairly close to market. And when I look at the components of earning assets, right, loan yield 6.3 percent, C and I is coming in way above that.

Speaker 8

You've already outlined securities coming in higher. Why is the outlook not more robust for Nick? It just seems like you're there on the deposit side. You have a lot of room for earning assets to reset higher. Just curious what's on the other side of this?

Speaker 2

Thanks. Yes. I'm trying to give you the best color that I can give you with what I know. But I at the end of the day, the biggest factor and it's been this way my whole career in asset liability management, how deposits behave, especially the non maturity deposits really drives your interest rate sensitivity. And while it's slowing in the commercial, we're still going to see growth in the retail CD book just because you're over 3%.

Speaker 2

So you're going to have that. Now to offset that, we are paying off some of our broker deposits, which is a good guy that counteract some of that. But this intermediation piece is just really hard to model, and we put our best guess out there is what we think is going to do there. Obviously, we could outperform, but I'd much rather under promise and over deliver right now.

Speaker 8

Got it. So it sounds like you're being conservative. Okay. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

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

Speaker 6

Good morning. I was hoping you could talk about the recent action by S and P to lower your ratings to or a negative outlook. There was no rating change, but just a negative outlook. I mean, obviously, capital is strong, earnings strong, liquidity is strong. So a lot of those boxes are checked.

Speaker 6

But I do think they one of the things they flagged was the CRE concentration. But maybe just address that topic overall and how you think you can alleviate some of their concerns? Thank you.

Speaker 2

Yes. So Matt, we actively meet with all of our rating agencies, all 4 of them on a very frequent basis. S and P did put us on negative outlook, but I think we feel very comfortable that, that won't result in a downgrade. We think we have a good handle on both our CRE exposure and the amount of criticized that we have and what we're working towards right now. So I think we feel that where we got strategies in place to over time get that to be less of a risk in the balance sheet from a credit perspective.

Speaker 2

But agencies are one constituency. It's an important constituency. We also have to deal with our other constituencies as well too. But we're all doing the right things. We come to work every day and I'm excited to be working with the professionals that we have in our commercial and credit teams.

Speaker 2

They're working their asses off each and every day. I answered the call in question earlier about going through the $2,300,000,000 maturities we had in the Q1. We really worked through almost all of those to fruition and had very minimal impact as we move forward. We're going to continue to just grind it out and do a good job and we'll just see how things play out.

Speaker 6

Okay. And then just separately on the trust fees, you talked about them being a driver going forward. Maybe just like frame how much equities drives that business, what some of the other drivers are? Obviously, like the underlying trends are a little tricky to see because year over year, as you mentioned, you had a sale linked quarter. I think there's some seasonality that maybe a drag from like annuity sales or something.

Speaker 6

But just talk about some of the underlying drivers of that business and what gives you confidence in that being a key driver of fees this year?

Speaker 2

Yes. I mean, if you look at that business and I think our disclosures are a lot easier to understand now as we move forward with our change of segments that come out on quarter end, you'll be able to track our business performances there. But the ICS business specifically, they have a little over 20 different product services that they offer. Some of them are fee based, some of them are fees and funding based oriented. Examples would be escrow, M and A activity from that.

Speaker 2

Some of it can be lumpy at times, that can go back and forth. But just getting in the in that business and just doing a good job and good reputation, Jen, who runs this business, her and her team, they've built a really great reputation and really have done a good job growing this space nicely over the last couple of years. And we're investing in this space. We think it's a good business core business for us, and we're really happy to have it, and we'll continue to focus on it. And I think we are seeing some of the benefits that you saw in the Q1 hopefully play out throughout future quarters for us.

Speaker 6

Okay. Thank you.

Speaker 2

Yes.

Operator

Thank you. Our next question comes from Brian Foran with Autonomous. Please go

Speaker 9

ahead. Hi. I just wanted to follow-up on the 11% staying at or above that even if you restart buybacks this year. Is there any thought you can give on framing? Is that a moment in time given the five factors you cite versus is that maybe where the new normal is trending?

Speaker 9

Just kind of any thought on when we look at this 11.1%, I guess ultimately how much of it is excess capital and how much is the new normal for running the business?

Speaker 2

Yes. Brian, I think we need to kind of see where our stress capital buffer comes out. But I mean at the end of the day, we're going to be really conservative. We are in uncertain times, risky times. So we are just going to be a little bit more cautious typically.

Speaker 2

I would say long term, our average might be lower than that. But just starting the share repurchase, I think would be a significant change to be honest with you as we move forward. So not saying that's going to happen, but if it does happen, we're going to be very modest as we started out.

Speaker 9

And then maybe I could ask the same question. I think you noted on cash $26,000,000,000 at the end of the year as a potential landing spot. Again, is that still an excess cash position in your mind? Or is that kind of more of a normal cash position you see going forward? Any thoughts on the level of excess liquidity right now?

Speaker 2

So there's a new liquidity proposal that's supposed to come out from the regulators probably in the next quarter or so. So we'll see what's in there. We've done some of our own modeling, the treasury team has. And when you look at what we need from an operating basis with the fluctuations that we have within our businesses, our minimum is probably $15,000,000,000 So we would operate with a cushion over that. But we are no way going to come near that in the near future.

Speaker 2

We're going to be much more conservative than that as we move forward.

Speaker 9

Thank you. Thanks for taking both. Yes.

Operator

Thank you. Our next question comes from Peter Winter with D. A. Davidson. Please go ahead.

Speaker 10

Good morning. I was wondering, there's been so much focus on commercial real estate. So I guess I was a little bit surprised by the increase in criticized loans on the C and I side. I'm just wondering, do you feel like we're in this is an early stages of more C and I just given that we're in a higher for longer rate environment?

Speaker 2

Yes. So for us, it's really 3 primary industries are kind of at the bigger piece that we see within our book right now. The non auto dealer, so like RV and marine, that has some specific items where some of those dealers build up inventory post COVID in 2022 and had to flush that inventory and losses. So that hurt their operating performance coupled with higher rates. You have lower discretionary spend in those spaces as well.

Speaker 2

So they have some issues there. Healthcare, we talked about as far as Healthcare goes, I think it's getting a little bit better from an occupancy perspective, I think, and product, but still reimbursement rates are lumpy. Staffing might be getting a little bit better there, but that's still a stressful place from that perspective. And the other theme that we would have is more in trucking and freight. During COVID, we increased a lot of our clients increased capacity because there are a lot of things that needed to be shipped.

Speaker 2

Now they're stuck with that excess capacity. They're just moving a lot less freight. So their operating performance is just a little bit lower. So those besides the one offs that I talked about earlier, those are probably the 3 underlying themes I would say within the C and I book that I would be willing to discuss.

Speaker 10

Okay. And then just separately, Darryl, you had said at conference, you're looking to lower the CRE as a percent of capital reserves to about 160%. How long do you think it will take to get there? And is that one of the I know you listed 5 things about starting up the buyback, but how important is that in terms of the overall theme of starting buybacks?

Speaker 2

Yes, I mean, it's one of the 5 themes. It's important, but we're I mean, you have to remember, we started when we were, what, in the 220s? 260, yes. 4 years ago, we started, we were 260. So I mean the tremendous progress we've made over the last 3 to half, 4 years.

Speaker 2

I pretty much expect that we're going to be in the mid to low 160s by the end of the year on the pace that we're going right

Speaker 4

now. Okay. Thanks, Daryl.

Operator

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

Speaker 5

Good morning.

Speaker 1

Good morning.

Speaker 5

Wondering if you can Daryl, just in terms of the criticized balances, the reduction in CRE overall. Curious if you can just point to any specific driver there. I think this is the 2nd quarter in a row where you've seen a reduction in criticized balances. Is it just occupancy is better and debt service coverage better? Is it stuff moving, maybe into modification?

Speaker 5

Just any sort of like specific driver in terms of last couple of quarters seeing those balances move lower?

Speaker 2

Yes. I mean the CRE portfolio with the exception of office and healthcare, the operating performance of the CRE businesses are performing well. Some of them are stressed just because of higher rates. But as we continue to work with our clients going through, we feel very good that we're going to work through the issues. It's one that we said earlier in other calls, Frank, but our customers work with us and put capital in, and we're definitely seeing all of I think it really starts with client selection and we have really good client selection that really helps win the day for us.

Speaker 2

So I think you're just seeing that commitment come through, and we're working really closely with them and I think that's really important as we move forward. So I think we will continue to work through this, but definitely feel that CRE is very manageable and we're going to continue to address that.

Speaker 5

Okay. And then just to follow-up on the expense side. I know even though you have limited expense growth baked in for this year, you do have some investments you guys are focused on. And just wondering if given the stronger NII outlook driven by rates, if you could potentially foresee accelerating some of that investment in 2024? Thanks.

Speaker 2

Yes. I would tell you, sometimes you can only do so much in a company at once. We got 6 major projects we're working on right now in the company. We're all making really good progress in these 6 major projects. And they're going as fast as they can go, to be honest with you, with what we're doing.

Speaker 2

I can't imagine that we would push them to go faster or if we try to start up another project. There's just a lot of change going on in the company and I think we're just going to be conservative, get these things across the finish line and then start up other ones as we move forward.

Speaker 5

Great. Okay. Thanks for the color.

Speaker 2

Thanks, Frank.

Operator

Thank you. Our next question will come from Gerard Cassidy with RBC. Please go ahead.

Speaker 10

Hi, good morning. This is Tom Asletti calling on behalf of Gerard. Given the jump in criticized loans in the quarter, and the fact that you guys tend to historically carry a little bit more than peers, just curious how does it criticize levels today compared to where they were in the 2008, 2009 and then 2020 peaks?

Speaker 2

I'm going to see if I have a friend here to help me with that. I don't have that here. Hold on a second, Tom.

Speaker 4

Okay. So

Speaker 2

back in 2008, 2009, 2009, it was more I'll just let John talk about it. John is our Corporate Controller. He was here back then. I'll let him talk about it. I don't know that.

Speaker 1

Yes. I'll just say that obviously, 2008, 2009 was more of a residential mortgage type issue. So we don't criticize per se. We monitor delinquencies on the residential side. There were pockets of criticize, so they did rise.

Speaker 1

I don't have those numbers at my disposal, but these numbers on the commercial side are higher than what they would have been back then.

Speaker 10

Okay. Thank you. That's helpful. And then just a quick follow-up. With the increase in criticized C and I loans reported today, do you guys still feel pretty confident that you can maintain M and T's historical track record of outperformance in terms of credit losses relative to peers?

Speaker 2

Yes, I think we do. We have a long term history of performing in good times and stress times, and I think we will continue to do really well and perform and all that will come to fruition. I mean, I couldn't be more pleased with how hard everybody is working and the success that we're making. We have a ways to go, but you kind of see that we have a path and how we're going to get through that. And I have no doubt in my mind that we will get through this positively and still have really good credit performance.

Speaker 10

Okay, great. That's helpful. Thanks for taking my questions.

Operator

Thank you. Our next question will come from Christopher Spahr with Wells Fargo. Please go ahead. Hi, good morning. So two questions.

Operator

First is just reconciling your outlook for the NIM and the increase in long term borrowings that we saw both at end of period on

Speaker 1

an average basis this quarter?

Speaker 2

So we basically did some Federal Home Loan Bank advances back closer when New York Community was happening. And then we did an unsecured issuance in the month of March that will carry through. I think for the rest of the year, our focus is really on growing customer deposits and paying down non customer funding. That's really what we're really focused on. You might see us do some more securitizations.

Speaker 2

We've done securitizations now in our equipment leasing business as well as our auto business. That's something that could possibly play out down the road. But we will prudently grow customer deposits as much as possible. And then we're going to work and try to work down our broker deposits and work down our federal home loan bank advances and put it into more other types of funding like securitizations if we need to from that perspective. That way we have more capacity if and when there's another stress period.

Speaker 2

We will always want to keep it open in case something happens, so we can fund if we have to.

Operator

Okay. So thanks. And then so my follow-up is just when I look at the schedule on Slide 17, criticized loans and see that motor vehicle and RVs kind of had a huge spike in criticized. And then in response to Ken's question though, you talked about the increase in yields and highlighting the increase in yields. So how do you reconcile

Speaker 5

the issue of just some

Operator

of these portfolios under more weakness and yet you're kind of also highlighting you're getting greater yields? I mean, I would think they kind of fight against each other. Thank you.

Speaker 2

Yes. No, so it's 2 different businesses. So the stress is in the floor planning business for the non auto, so RV and marine. So that's floor planning. That's where the stress is.

Speaker 2

We also are all in the indirect business for RV. Just like you have indirect auto, you have indirect RV. And that's where we're getting the yield pickup on the consumer loan portfolio. So we have a very prime based consumer loan credit box. If you look at the average FICO score that we have in that portfolio, it's 790.

Speaker 2

Dollars So it's pretty pristine in there and we feel good about the performance of that portfolio.

Speaker 9

Thank you.

Operator

Thank you. At this time, I will now turn the call back to our speakers for additional or closing remarks.

Speaker 1

And thanks, Todd. And again, thank you all for participating today. And as always, a verification 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

And this does conclude the M and T Bank First Quarter 2024 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
M&T Bank Q1 2024
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