M&T Bank Corporation (MTB) Earnings Call Transcript & Summary

Good morning. This is Gerard Cassidy from RBC Capital Markets. Welcome, everybody, to the 2020 RBC Capital Markets Global Financial Institutions Conference. Obviously, it's a virtual conference with what's going on today with the coronavirus. Joining us for this fireside chat is M&T Bank Corporation. And with us from M&T includes René Jones, the Chief Executive Officer; and Darren King, Executive Vice President and Chief Financial Officer. As many of you know, M&T is headquartered up in Buffalo, New York. The asset size of the company is just about $120 billion. They have a market cap of over $14 billion. And as they've done for many, many years, it's a very profitable institution with an ROA of about 161 basis points in 2019 and an ROE of 13 -- over 13%. So again, thank you, both René and Darren, for joining us.

Thanks for having us, Gerard.

René, maybe we could kick it off with you. You've been in the role as Chairman and CEO for just over 2 years and I was curious, what have been some of the biggest surprises that you've experienced and how has the culture in M&T evolved since Bob's death in December 2017?

Yes. I don't know if I would characterize it as surprising, but I think the thing that has been the most remarkable to me is the resiliency of the firm that Bob built in the sense that the firm has really rallied since then. And it's been able not only just to continue the great tradition that we're known for, but at the same time the management team and the employees have been able to adapt and willing to adapt in a pretty rapidly changing environment, and I think that's probably helped us a bit. The same value system that has always existed at M&T is in place. But you probably could say that there's been a little bit of a cultural shift, more towards being more agile, agile development, things like a value chain focus in each of the businesses and understanding which part of the business matters most and where the value is created for customers. And then just in a commitment to invest in technology, whether that be people or software that is maybe at a greater realization today than it might have been 5 years ago. And all of that has actually sort of reenergized the company. And as you pointed out in our results, what I'm really excited about is we've been able to keep our performance.

And that performance, obviously, has been very strong and everybody, obviously, counts on that with your organization. And speaking of performance, we recognize that this COVID-19 coronavirus, it's a tragedy going on throughout the world and in this country with many people vulnerable to it and they're obviously in our prayers and thoughts. But as it spreads throughout the United States, can you share with us what parts of your portfolio you're tracking more closely because of what's going on with the coronavirus and how it's impacting maybe your balance sheet and income statement and what your customers are sharing with you about their operations?

Yes. So it's a little too early to see the actual impact on our balance sheet, but we've been out in a very diligent way. All of our RMs are talking to customers very actively, and that covers lots of portfolios. But we've got a special emphasis on health care where we have maybe about $6 billion of loans in assisted living facilities, basically, senior housing and those types of things. And then we're staying focused on hospitality. So I think there of about $4 billion of real estate around hotels and so forth. So from the get-go, our culture as you know real well, gives you some sense that we've always been relatively conservative. So for example, in the hospitality space and the hotels, I think our loan-to-value is something around 50%, 54%. So we feel good about it, but we're just paying really close attention and watching the trends, and I think it's going to take a couple of weeks to sort of get any feedback, but nothing negative today.

Very good. And Darren, we're now in the third month of the first quarter. What are your views on the performance versus expectations? Possibly touch on loan growth, deposit costs. And obviously, you're a big player in residential mortgage. That business has been very strong with the drop in rates. And any color you might want to provide there as well.

Yes. I guess the high level thought about the quarter is it's actually tracking pretty closely to what we expected and what we talked about in January on the call. There are some changes that we're starting to see and some nuances based on the change in rates and expectations that you've talked about. Just kind of going through some of the categories, loan growth has been very solid through January and February and continues to look pretty solid in March. The deposit book has had some of the changes that we anticipated that we talked about and impacting the securities portfolio. If you look at the mortgage business, with the rate movement, we start to see a little uptick in activity in refinance, which is -- will be positive for gain on sale. And maybe a little bit better than what we thought on that side of the balance sheet. Probably a little bit higher escrow balances than we might have anticipated just because of that transition. That might impact the margin a little bit, but it's kind of temporary. And then with the shift in the stock market, when you look at assets under management in the wealth business as the assets under management come down and we paid as a percentage of that, we'll start to see that flow through. But most of those things that I talk about there are really kind of happening in later in the quarter, so to speak. And that's why I say, I think, from an overall perspective, when you look at the underlying operations of the bank, it's about what we expected. As we go through quarter end, obviously, there will be some things that we'll be paying attention to. You look at -- back in the mortgage business, as we do more originations with refinance activity and some modifications in the servicing portfolio, we probably have some adjustments to the MSR. And obviously, we'll look at that and whether we need to take impairment based on where rates are at the end of the quarter. And then we'll be looking at the provision with the new CECL and what the outlook is for the economy and how that impacts the provisioning. And so those things, which are as much timing and noncash-related will impact what gets printed. But when we look underneath it, what's going on in the core operation, things have been pretty much as expected.

Very good. And maybe can you share with us -- this yield curve, obviously, has flattened and the long end of the curve has fallen to unprecedented low levels, there's an expectation that the Fed will cut again next week. Can you share with us your thoughts on just how that change may affect the margin throughout the year as we go forward?

Sure. The short answer is, obviously, as the yield curve moves down, then we would expect the net interest margin of the institution to move down. When you look at our disclosure in the 10-K, we look at it went down 100 looks like on a gradual basis. So if you think about what just happened, on a gradual basis, that's over 12 months, so the average is down 50 basis points, similar to a 50 basis point instantaneous shock. So that kind of would give you an indication of what might happen to the net interest income. And then as we look at our disclosures in the past and where our net interest margin tends to move with the rate cuts, we've talked about kind of 4 basis points to 10 basis points of margin movement per 25% in Fed funds. And given where the portfolio sits today, that seems like a pretty reasonable place to start for what the margin impact might be as we go through the year. But there's some up and down as you go through any individual quarter based on deposit repricing. And we've seen the deposit costs move down in the fourth quarter, and where deposit costs ended the year was lower than where they started the fourth quarter. So we'd expect some of that to continue through the first quarter as well. And then, I guess, the other thing, just -- that we pay attention to is just where the 10-year sits and the impact that, that might have on the mortgage portfolio and as we look at the acquired loan book, what impact that might have on the margin, at least in the short term.

Very good. René, when you look at capital allocation for M&T, one of the real distinctions your organization has had for the last 20 years is that you manage capital very effectively and efficiently. When you look out going forward, can you share with us how you approach the allocation of capital or excess capital as well in the form of dividends, repurchases or mergers and acquisitions?

Yes, sure. Gerard, I guess, I have to start with a -- if I start to think about, over time, what sometimes people miss about M&T is that we just have this relentless focus on cash flow and cash flow that actually gets to the shareholder. And so at times, you'll see things like people ask us about our loan growth. And we're generally less focused on our loan growth, but more focused on the results. So when you think about Hudson City, for example, one of the big things that, I think, is missed is that, that really was -- a large part of that transaction was about recapturing the cash flows from -- that were embedded in mortgages and using those cash flows to shift them over to commercial loans. So a great example is that through the last 3 or 4 years we've been getting a huge capital benefit that goes to the shareholders or that is reinvested in commercial loans, which has improved the profit profile of the institution. So if you were to just look at the loan line, for example, you might get confused and you think we're not doing as well. But in fact, actually, we're doing very well. So we tend to believe, as we have in the past, that in terms of our dividend, we keep it relatively on the lower side of the payout ratio. We think that that's really helpful when times get very difficult because we can suspend the share buyback and generate a lot of capital. So think about last year, we generated a 19% return on tangible common equity. We paid out a dividend and what that left us with is about 13.5% growth, right, that we have to account for some way. And the idea that when GDP is 2%, the idea that you can possibly get 13.5% growth in customers on the loan side. As you know, that makes very little sense and so therefore, you have to buyback. But we'll continue with doing buybacks and things like that because we generate lots and lots of capital. And then we worry less about acquisitions. And I think the way to think about that is that if -- we never warehouse capital for an acquisition because if we have an opportunity that comes before us, we figure we can just go to the capital markets and ask them for that capital. And if, by chance, they say no, then we probably shouldn't be doing the deal anyway. So that's what it really focuses us on, us not having a lot of excess capital, right? And actually deploying it either in the business or giving it right back to the shareholders. And then if an opportunity comes, if it's a great enough opportunity, we'll take it. I often say that if Mr. King is here with me, makes a small inefficiency of $100 million on some capital action, then it would take the branches a hell of a long time to make up that $100 million. And that's something that we always keep in mind.

That's very good. In fact, I should point out that when we go back to the financial crisis, you were 1 of only 2 banks of the top 20 that did not cut their dividend during that time period, which goes to the successful management through the cycles as bankers like to call it. And I just want to remind people, if you're interested in asking a question, you can do it through the webcast, in that box in the lower left-hand side is where you send the questions in on. René, when you look at a regional bank in the modern economy, you already touched on technology. We hear from some of the biggest banks they're spending multiple billions of dollars on their technology. How do you guys prioritize your tech spending? And also with that, there's some talk lately of a branch-light digital-first expansion strategy that some of the bigger regional banks are doing outside their footprint. I was curious of your insights on that type of strategy as well.

Yes. Gerard, I think we have a belief -- we see everything that's going on in today's world around customer convenience, all driven by the speed of technology and new capabilities. And so we just have a belief that says that, yes, there probably will be fewer banks in the U.S. over time. We think that there are large advantages of some of the largest banks who not only have resources but the ones in particular, who have gotten much better at focusing on the customer that those guys will be around. But we also believe that there is a role alongside those institutions, in particular communities, if we differentiate the experience that you have from doing business with an M&T versus a large national. And so that really, really requires us to be much more targeted with our resources to pick our spots. And as we like to say, over the past 2 years here, in part, we're in the business of killing really good ideas in the interest of great ones. And that's about resource allocation. So you've seen, I don't know if you've seen in the letter, we talked about we've hired almost 1,000 people over 2 years. Most of that is all around people who can help us with capabilities around asking our customers' opinions of the things that need to be improved and then that -- having that direct our resources to where we want to innovate. So for example, secured cards that we issued have gone really well around our footprint came from one local ZIP Code in Buffalo that told us that we were the greatest bank ever except we really hadn't done anything for them in terms of the banking products. And so we worked with them to kind of come up with something that would meet their needs. And as it turns out, it works really well with millennials and it works really well with other communities in our footprint. So I think what you're going to see is you're going to see, pound for pound, we're going to try to match up but in really unique ways. And M&T has always been a people-centered institution, right? So you can expect a lot of our tech investment to be geared towards making our workforce more effective at meeting customer needs. To go further, we're optimistic. I mean, there's a narrative out there that has been out there for 1 year or 2 about, if you're really large, then you're just going to win the day. And one of the things that's fascinating to me is, when I just look at our own results, and if you were to sort of do a chart where, on the horizontal axis, you have a return on tangible common equity and that's the median, and then the vertical axis is the growth. So over the last year, we're above average growth and we're above average return. Over the last 2 years, those are 2-year compounded, we're in the top quartile as well. If you look at 3 years, we're in the top quartile as well. There's only 2 other banks that do that, JPMorgan and Silicon Valley Bank. It's really interesting. One is big and one small. When you look at the performance of all the large banks, what you see is there's no guarantee that size, even though you have all those assets, results in the same consistent performance. And I think what the argument mix misses is that this whole issue around how you execute. And there are a number of banks over time who have really proven an ability to allocate resources to the right places and execute. I also believe that it will be really, really hard for 5,000 to 6,000 banks that actually differentiate themselves, right, in the community. So that gets you down to really is the time in these next 5 years where you have to hone in your investment and really show up as a different institution for the communities that you choose to serve.

Very good. We actually received a couple of questions through the webcast, and they're circling back to mergers and acquisitions since you folks have had such an incredible track record in doing it. And because of your profitability, your valuation level is quite a bit higher than many of the banks that are trading now below tangible book value or book value. So the questions really relate to, is there an opportunity to do something, and not in the next 30 days, but does it come more up on the radar screen because of the pricing advantage that you might have versus some of the folks that may want to join forces with you?

Well, I think the way we're valued, which is a reflection of our operating model, does is it makes things possible to the extent that someone wants to join us. And I think the way that typically has happened. I mean there's been very few exceptions to this. It's really been somebody thinking, okay, I want to join forces to build a stronger combined franchise. And so you can look at it in terms of multiple and I know that does wonders in terms of the initial deal. But the way to think about it is, how can you extend our operating model into another community, right? So we're typically looking for people who raise their hands and want to partner. Oftentimes, those institutions end up being part of our combined board, right. And an extending community banking style way into a new region. So we think those opportunities will come up from time to time. And I don't know if under stress it makes it easier to do or not, I couldn't tell you, and we just sort of sit around like the Maytag Man and wait for the phone call.

That's very good. René, can you share your views, just staying on this M&A topic for 1 last second here. We've seen some high profile mergers of equals. What's your view on mergers of equals?

I think mergers are challenging. I think that if you're going to do an MOE you got to know exactly what you're trying to achieve. When you think of the narrative around scale, big scale, we run our bank with local scale. But in terms of big scale, I think what's challenging to me is that if you think of Google, Amazon, Facebook, they can proliferate a product instantaneously across the U.S., across the globe, but there are very few banking franchises that can do that. And so when you bring 2 institutions together, it's almost a rare case where you end up with that. So what you're getting, for the most part, is probably local scale, which I think is a must. If you don't walk away with local scale on an MOE, I don't quite understand the transaction. And then today, there's a lot of complexity so you've got to make sure that you're not shutting down your innovation. From my perspective, in the last 2 or 3 years, looking at the speed of innovation, just in our own firm versus the previous 5, incredible. So I think it has to be really the right deal, and I don't think MOEs, in general -- I think they're pretty rare, I guess, is what I would say, the ones that work.

Yes. You just mentioned local scale, René. How do you measure local scale to obtain it?

Well, I mean, if you look at our -- we won 2 or 3 deposits here and predominantly anywhere we look. That has come from: one, being a good operator; two, from when we have done acquisitions, we've tried to stay relatively close to home and we -- where we can see the tangible benefits there. And we continue to believe that, that's tremendous benefit -- the strength of our organization, really, the core is the depository. And we continue to see benefits from being part of the community, being really aware from having our employees highly engaged I don't know if you saw, we wrote about our work that we call Mission Maryland in the annual letter this year. And the sense you should get is that when you unleash, in this case, in Baltimore, the 2,300 employees, yes, we have top deposit share, yes we have top brand share, but we actually have tough employee share, right, who are involved in everything in those communities. And you can quickly, actually using those assets, have a pretty dominant impact on a community, particularly if you're focused on the right things and trying to be helpful.

Very true. No doubt about it. Darren, when you look at credit quality, now I know with the coronavirus, it's too early to tell, and you guys already cited certain sectors that you're certainly going to focus on. But overall, when you look at credit quality, how do you see it evolving? And in particular, if you could talk about maybe some of the more interesting areas of the portfolio, like leverage lending on how that's performing and holding up?

Well, I'm knocking wood here because so far when we go through the portfolio, it's holding up very well. And when we look across the various segments of the portfolio, we look at delinquency rates and enroll rates and things have so far been very consistent with what we've been seeing before. We've talked in the past about when we have had some blips, so to speak, in the charge-off line that there hasn't been a lot of consistency to it in terms of one industry or one geography or one sector, but they tended to be more episodic around the company and its unique characteristics. When we look at our leverage lending portfolio, it really hasn't grown much, hasn't shrunk much, it's less than 2% of the portfolio. And when you look at the types of businesses in our leverage lending portfolio, by and large, they are actually former customers or existing customers who happen to perhaps sell their company or partner with a private equity firm. And as part of executing that transaction, there was a debt component and we would play that role. And so it's typically customers that are well-known to us whose management and operating philosophies and characteristics are well known to us and so we feel a little bit more comfortable with that even though the leverage is higher but we pay attention to it. But coming back to where we started, when we look in that portfolio, so far no signs of cracks and we feel really good about where the book is today.

If I could just add, sometime last year, mid last year, we just decided that we were going to sort of change our monitoring posture. So above and beyond everything that is in place to do the normal monitoring, a group of us meet every Wednesday -- started meeting every Wednesday and just started asking much deeper questions. We did portfolio reviews. And what is encouraging about that process is that we're sort of rolling into this tougher environment that looks like it's coming. We do not change our posture, we're already in that mode of looking deeper underneath. And I think it's going to position us well to find issues early. We talked about that a little bit as well, looking at the portfolio last year and trying to find issues of where stress could cause a problem.

Very good, and we're running out of time here, and we've got the privilege of having both of you. So I'll ask this question for maybe both of you to answer, which is, if you were sitting in the shoes of an institutional investor today, what kind of questions would you be asking the bank management teams that you were listening to and maybe René, you could start it off.

Sure. Sure. I would be asking -- all my questions from the audience would be asking about talent. I would be asking about succession planning, bench. But maybe more importantly, are you investing in the right talent that is going to be able to make the decisions and the choices that are necessary in the future, and a lot of that comes with people with different skill sets than the traditional bankers carried over time. And I think by asking those questions and by meeting those individuals, you can really get a sense of which institutions are positioned to be in the game for the long haul.

. Darren any thoughts?

Yes, just picking up on that, my questions will be about the view on the business and the business model and how it operates through the cycle. And talent is obviously a big part of that and investments that are made not just in capabilities and technology but philosophies around credit and underwriting and portfolio management. And the situation that we are in today is, in my eyes, just that is this situation that is part of cycles that are always going to be there and how well are you prepared to deal with those things. And looking for cultures and management teams that have built the operating model that can work both in good times and in bad.

Well, thank you. I really appreciate both of you, Darren and René, joining us today. We're very lucky to have you, and it's a privilege to have you. So thank you so much for joining us. And hopefully, if you can join us next year, it will be an in-person conference rather than a virtual one, but thank you again.

Our pleasure.

Our pleasure.

Take care. Thank you.

This does conclude today's program. We appreciate your participation. And you may now disconnect.