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

Okay. We're ready to get started. And up next is M&T Bank. We've got René Jones, Chairman and CEO; as well as Darren King, CFO. This is going to be all fireside chat. If you have questions and are registered for the conference, please enter them into the webcast, and I'll work to weave them in. But first, René, Darren, welcome, and thanks for joining.

Thanks for having us.

Morning, Matt. Thanks for having us.

So I want to first series of questions get into risk management and credit, which is both very topical now given the crisis, but also really at the core of what I view as M&T's strength over a very long period of time. So just to kind of get right into it, you have been viewed as this excellent risk manager historically. You performed very well as everyone on the line remembers in '08, '09, also though, during previous downturns. But I do wonder if this time is a little bit different because your geographical base does seem to be the hardest hit in the country, certainly from the virus perspective, if we look at New York, New Jersey. So I'm wondering if you could talk about this, first with respect to credit quality, but also just from a business volume perspective?

Yes, sure, sure. Thanks. I can't quote myself, but you almost, Matt, are reminding me of the opening of our letter this year, which basically concludes that every time is different. So -- and I agree with you, this is very, very different. I think the first thing to do is really just talk a little bit about in the current environment, what we don't have. To me, that is an important factor that sort of stands out. So we talked about a little bit about the fact that we have very minimal exposure to some of the disrupted, most disrupted sectors like energy, exploration and production, airlines, cruise lines and then shopping mall-based retail. And then in retail, in our C&I book, we've got about $1.6 billion there, and more than half of that is in convenience stores, auto parts and gas stations, which have really not been subject to the shutdown. And then the other half of that $1.6 billion, a little less than half is around grocery stores and home improvement organizations. So also really less impacted. And then on the restaurant side, maybe less than $1 billion of exposure. Mostly those are to fast food franchises where there's walk up as opposed to sit down dining. So I think one of the things that we're fortunate to have is not a lot of exposure to the most impacted areas from the pandemic. We do -- we will talk a little bit about real estate. We feel pretty good there in the sense that we think, broadly speaking, underwriting structures are even better than -- much better than they were in the crisis. We think our portfolio standards have held up there. Principally, and I'll talk about this a little bit more, but around the risk management side, there's lots of things that when you run models and so forth, you can't get credit for. And so you sort of talked about our posture. Right now, we are doing things that are very similar to what we've done in the past is that we tend to mobilize our resources and drive most of our resources to be closer to -- even closer to the customer. So folks that were doing lots of origination volume and those types of things, a number of them have been moved and shifted into looking at portfolios and dealing individually with customers who might be impacted the most. And so we are spending lots of time making sure that on a granular basis, each of our clients has a good sense of what their cash flows are, what their projections are for the rest of the year. And then we visit with them, I mean, constantly, but at a minimum, once a month to see if anything is changing. And I think that kind of work that we do, where we're very, very close to the situation allows us to solve problems quickly, and that tends not to be reflected in sort of our modeled performance. But if you look at our actual performance, it's what makes our relative loss rates much lower than pretty much anybody else you can find. That also means that at this time of uncertainty right now early in the process, it's really hard to think about new client generation because you have the same levels of uncertainty that you have with -- even with your existing loans, maybe even more existing -- more uncertainty. But I think what tends to happen is that this type of cycle produces lots of opportunity, and it just may be a number of quarters out as we get more comfortable with what we think the impacts of the pandemic are. So I'll just sort of stop there, Matt.

Yes. And then somewhat of a follow-up. Your loan books, and I guess, specifically, I'm thinking on the commercial, commercial real estate side, it's more granular. I've always thought than most, if not all of your peers, and normally that's a good thing, but it also means that I would think you're more exposed to small businesses or kind of quality small businesses and smaller middle-market companies, which I think collectively are getting harder hit in the cycle. So obviously, being close to customer health, there are these PPP programs from the government. So maybe talk about the PPP program specific to some of that customer base to start.

Yes. I mean, I'll start off by saying, I guess, I really think that the things that matter most are what business is your customer. And so we kind of covered that and what we don't have. And then I still think that the granularity is an important factor. And if you think about it, just step way back consumer-type loans, things that move in a much more predictable manner. So it's not to say that you couldn't get higher loss rates, but the fact that you'll get shocks to that system are less likely when you have a granular loan portfolio. I think the second thing that matters is that and we've seen this time and again, we definitely saw this in the crisis. Because for these middle market companies, one of the things that tends to happen is, if your client selection is strong, a lot of your customers will end up being the survivors, right? So we've been 10 years into this economic cycle. We've talked a lot about the fact that ultimately, there's going to be a shakeout when the recovery is that long. And we saw this through the financial crisis, where, like, for example, the auto dealers, the auto dealers that we banked ended up benefiting from having lots of consolidation and the shakeout of the weaker players. I don't expect that to be different. And so I expect to see very predictable patterns of challenges with charge-offs and things like that in our customer base, but very predictable. And my sense is that it will lead to lots of -- a lot more opportunity. PPP is interesting. Put this in perspective. We did some work up in Buffalo and Western New York, which is a slow growth market typically. Think about the idea that $2.6 billion of PPP loans were made in the Western New York counties. There's a thing a few years back recall that Governor Cuomo did, which was the Buffalo Billion, and it was the thing that spurred lots of economic growth. I think it brought in an extra $5 billion of economic growth. And the PPP alone was $2.6 million infused into that economy. So I think particularly PPP will be helpful in those rural and smaller communities that is a big part of our franchise.

And even, obviously, with good risk management losses are still going to increase. We really saw very little pressure on credit quality in the first quarter as we think about charge-off levels. What are your thoughts in terms of not just how high do they get but when do we start seeing a material rise for M&T and for the industry?

Well, the timing is so hard to predict, but I think you're thinking about it the right way. My sense, and Darren, you can weigh in is that we'll get a lot more clarity as we get through this year. And with CECL, one of the interesting things is that your sense -- you're trying to get some eyesight into the future. My sense is that we'll have a really pretty decent understanding through the successive quarters of this year. But right now, it's still a little bit uncertain. I think one of the biggest uncertainties is that there's been so much forbearance that you lose your sight into the individual credits and the typical metrics you're using around who's paying, which is what has forced us to go really, really granular with those individual forecasts. So my sense is what we'll be doing is paying particular attention to grades. And trying to make sure that we don't have -- that we get the issues quickly and so that we have a normal pattern of migration around the grade. And if we can get a sense of what that looks like over a number of quarters, call it, 3 quarters, I think that begins to give us a better sense of what's going on. But the traditional metrics have kind of been thrown out the window for a couple of quarters.

And so the timing of the charge-off is obviously tricky, but the reserves is being upfront, as you mentioned, for CECL. You did have a big reserve build like others in the first quarter. What are your current thoughts in terms of what to expect for the second quarter?

Well, Darren, I'll give this to you, but I'll simply say that the CECL process is pretty structured and you gave your best estimate of lifetime losses within the portfolio at that point in time at the end. So we'll have to see at the end of the next quarter what those forecasts are, whether they've weakened, and I think already by the time earnings calls that come out that the forecast had sort of weakened from the third parties out there. So my sense is there's probably more for the industry to do. Darren, do you think about it any differently?

No. No. I think there's a couple of things that were going on at the end of the first quarter. You mentioned it earlier, René, that the grading system and paying really close attention to migration of portfolio grades matters a lot, and that's an important part and input of the CECL process. And really, when you look at the first 2 quarters of the year, they're quite strong. And the change happened so fast that I don't think the portfolio grading moved as quickly through the first quarter as it has now since with all these various programs going on. And so the CECL allowance in the first quarter was largely reflective of the changing forward view of the economy. And so as we go through the second quarter, a lot of the forbearance and the grading will work itself into the portfolio. And then also to your point, we'll see how the economy is progressing as we go through the second quarter and where we see it finishing the second half of 2020 and going into 2021. Based on where we have been, I would suggest there's probably a little bit more room to go on allowance or reserve building in the quarter. And -- but it's going to be a function of where the forecast sit as we go do our work at the end of the quarter.

Yes. That's what we said, can't emphasize it enough, Matt. The broad forecasts from CECL, how do I say? They're broad, they're big macro forecast. But where you get your information where at least I get my information will be credit by credit. And so I think the thing that's more revealing to me than the sort of top-down part of the CECL will be the movement of the underlying credits, and that will give us a sense of where we're seeing issues and how fast we can get to them.

And then just to push a little bit on this, and then we'll move off of credit. One thing that came out yesterday was if we do get a recovery in the second half, it is quite conceivable that the reserve build will be either done or largely done in the second quarter. That comment was made by a money center bank, so a different mix than, say, you or the average regional bank. But do you think that is possible for M&T as well that the reserve build could theoretically be done in 2Q or the vast majority of it at least?

No. I mean, I don't know. I mean, it's hard to say. I mean, there's just too little sight going forward. And you've got big binary outcomes, right? So if a resurgence happens and who knows where that could happen, you get one extreme answer. And then you can get extreme on the other end. So it's just too hard to -- I wouldn't comment on that.

Yes, that's fair. Okay. So the other thing to managing higher credit costs. Obviously, it's all the things that we just talked about in terms of risk management, but it's also your earnings power before the cost of credit or PPNR. And I feel like one thing that's so different this cycle versus the '08 and '09 is that PPNR for the banks has been much more resilient for the first quarter, likely going forward. There's obviously pressure on NIM, but maybe some other areas are holding up. So just talk about that big picture, and then we'll drill into some the specifics.

Yes. I mean, macro, I think there are 3 things, which actually are relative to maybe this -- the great financial crisis strike me. One is that the structures everywhere are better under the credits. The credits are just stronger. There's more equity in credits, and that's really important. Two, for us, very specifically, we have really strengthened our PPNR and our overall profitability. And if you think about it -- when we went through the crisis amongst the things that happened because our losses were so low, we actually accumulated density through acquisitions, which, of course, is market power and local pricing power. But also we brought on the Wilmington Trust businesses. And that has both increased our PPNR, but it's also led to improved profile around volatility. So for example, not many people think of us in terms of this time of the year when our institutional capital markets groups are being signed up as the trustee of choice for a lot of the major bankruptcies that you're talking about. So those are -- you've heard Neiman and American Airlines, different ones like that. We end up building that business out, which is sort of countercyclical. So I think we feel like we're much stronger. And then finally, third, is just a simple capital basis, which is twice as high. So I feel like going into this we have some significant tools that are much, much stronger than before.

And maybe specific on interest rate risk. If you could comment on the NIM, there's obviously puts and takes. You've got pressure from interest rates, pressure that might be more temporary from line drawdowns in the PPP. But if you could talk a bit about the NIM, what we're seeing right now and looking out beyond the near term, kind of thinking medium term as well?

Well, I'll go longer than that. I think I'll leave the short-term and the forecast to Darren, but when I look at the net interest margin, and I go back over the past decade, where we had, I don't know, 7 or 8 years of near 0 interest rate levels. Our profile was that, I think the low we got down to, which was 1 quarter, which was 3.05%. And we were still above the median, and quite frankly, if I look back in any period of time, 10, 15, 20, 20-plus years, I don't know that I can think of a place where our net interest margin wasn't at some advantage to the median bank. Particularly the median regional bank. And so my sense is our profile hasn't really changed from that. And that if we go through a prolonged period of low interest rates, that while our advantage might not be as high as it is today, it will still be an advantage. And quite frankly, it's during those times where that advantage matters the most in percentage terms, so.

And then Darren, I guess, just anything more near term that you want to comment on in terms of what to expect for the NIM in 2Q and as we look out the rest of the year, which I know is...

Yes, I guess -- to me, Matt, the most important thing really is to think about 2Q and 3Q together. And the reason I put those 2 together is the PPP loans will have a positive or a negative impact in the short term on net interest margin, just because of the yield that they carry. But then as the forgiveness happens, and this is really kind of the wildcard, which makes the NIM a little difficult to forecast is as those prepay or get forgiven or pay early. And some of that origination fee gets brought into net interest income, it's going to push the margin up. And so it's a short term negative, really short term, and then it becomes a positive, and then we kind of go back to normal. And the other thing that's happening is there's a lot of cash in the system, right? So all the programs that have been put in place by the government, whether it's PPP, whether it's the PPPLF, whether it's the stimulus checks, there's a lot of cash in the system, and cash is high right now for us and from speaking with others, I believe, for the industry. And so the combination of the cash on the balance sheets plus the PPP will move the margin down in the short term. We'll see it come back up after that. Obviously, the loans are forgiven and perhaps as the cash gets put to work in the system. And then once we kind of get through that, then you're back to where we were pre-COVID watching what I would describe as a more normal balance sheet, which would be, if you look at us, our balance sheet minus the PPP loans in terms of loans. And a trajectory of rates that would reflect the prevailing interest rate environment, which right now, obviously, is 0 to 25 fed funds, we'll see where that goes as the economy opens up and then people go back to work and hopefully, we get a little bit of GDP growth.

As we try to look past, call it, the near-term noise from PPP and the liquidity and the lines. And I tend to think of M&T as one of the more exposed banks to short-term rates. Obviously, those have, you would think, bottomed out and will be reflected in the next couple of quarters in your NIM. But maybe the least exposed to lower long-term rates, you've got a very small securities book. You've been already running off the mortgage book for some time. Is that fair? And does that mean as we get to kind of call it, the 4Q or 1Q next year, like the NIM that's clean for all the moving piece that we just talked about, is kind of the underlying core NIM, maybe a little more stable than peers at that point?

Well, I think it's true that -- I think it's definitely true. Your first premise that we're more sensitive to the short-term rates is really true. And I think that when you think of long-term rates, there are 2 things. Obviously, the mortgage book you saw in Darren's first quarter update, we had a write-down of premium on some of the mortgages there. That's done lifetime, right? So that's done. And then servicing, similarly, you get the MSR valuation coming down based on that. But other than that, you're right. And to your -- I don't -- I can't pick the quarter. I can't give you like third quarter, fourth quarter, but I do think, back to my earlier comments, the structure of our advantage in margin over long periods of time, whether it be good times or difficult times, really has principally come from the deposit side, and the stickiness of the deposit franchise and the level of loyalty that we have in that customer base. And so it tends to work, as you said, right? There becomes floors in some sense relative to others. So my sense is that we will, at some point, begin to maintain sort of a change in profile and a benefit. But you're right, I think you're generally thinking about this the right way.

And René, maybe looking out a little bit longer term and kind of getting out of some of the weeds that we've been talking here. You did mention there will be opportunities that might be several quarters out. You alluded to some of the opportunities that you've had in kind of post or during prior downturns. Maybe give us some thoughts on what those opportunities might look like going forward or what you're kind of open to as you look out 1, 2 years or whatever the time frame is?

Yes. I mean, the first thing that I think really strikes me is, I've seen this before, but I don't think I've ever seen a period in my near 30 years now in the banking space of outsized customer loyalty than what I've experienced in the past 8 weeks. And that's not only from our own customer base. What has really become apparent is that during times of very difficult challenges and fear that your customer, particularly the business customers need and want to see somebody. And through the period of -- through the last period of a couple of months, either your bank that was available or they weren't. Sort of like you can't -- it's hard to say, like, you have a bad experience our customers have -- and customers in the banking industry have very, very long memories. And we have seen just a tremendous outreach of people sort of saying, "Boy, I heard the experience with you." Whether it be through PPP or through any of the other parts of the uncertainty, people just come out of the woodworks and sort of said, "Well, we heard it went really, really well at M&T." So I think across the footprint, we're probably set up for when there's clear sight for both the customers and for M&T, I think we're probably set up for an ability to gain share in the middle market and the small business space. Obviously, we think that we're building a platform, which we can talk more about that is unique. And typically, what will happen is there will be folks who go through this and have to decide whether or not they want to join on their own or they want to join our platform. And I think given that we're a pretty simple business model, and that we are sort of the right sized, there's a lot of room for us to grow, whether that be organically or through partnering with other people in terms of acquisitions. So I think hard to predict the events, but I think we're really, really well positioned.

And let's talk about the platform that you just alluded to, because I think it's a consensus view of strong credit quality, strong expense management and then all kind of tying that together, just excellent capital allocation, but there has been concern about the, call it, tech platform not just at M&T, but for regional banks in general. And you did acknowledge very early on in your tenure as CEO that M&T was behind in tech and some areas and that you were going to accelerate some of your capabilities. So bring us up to speed in terms of how you feel about your tech now. And I mean, frankly, with what the banking industry, and you've gone through the last couple of months, it was probably a pretty good test. With people working remotely and customers accessing you remotely and via digital. So how did you do the last couple of months? And how is that impacting your views going forward on how you spend and where you spend?

Yes. I mean, in short, I think your description is pretty good. I think in 2, 2.5 years ago, I was -- I kind of characterize it as we're behind. That's not all that. That doesn't provide you with all that much color. I think where we are today, while we have a lot further to go, I think the sort of model has proven itself. And what I'd say is we talked about moving with speed and agility. The issue is that it's not necessarily just a technology issue. It's a cultural and a behavioral issue. And so the way I've been describing it recently is that in the past, we had a mentality, I think, which I think was not atypical and is not atypical in the banking industry, which is I would call it, inside out thinking. So we would decide that M&T needed to be in a certain place or need to have a slightly different penetration somewhere. And then we would build something and we would go out and see if the customer would use it. And I described most recently, things like Zelle as those types of products. Okay, well, the banking industry gets nervous because Venmo is doing well and we're afraid they're going to take our customers. So we decided to build Zelle and then little M&T says, "Okay, well, we have to go now because everybody else is going." So we pull it out, stand it up and we show it to our customers. But really, if you think about what we were doing is we were trying to provide an instant payment experience, and we had yet to change all of our other postures throughout our systems and our servicing systems to have that same posture. And today, we have much more of an outside in mentality. And what that is, is looking at your customer, understanding specifically what their needs and struggles are, whether they recognize it or not, and then coming back into the firm to begin to look at what capabilities, and I think some of those capabilities are things that I would call enduring capabilities. What do you have and what's missing? And I think that process tends to lead you to realize that there are skill sets that you need that you don't have. Much of our resources and enduring capabilities come in the form of human capital. So if I would have told you before, probably even today, Matt, that we hire people with backgrounds in anthropology you'd kind of look at me like I'm nuts. But we do and we do because they have a really good understanding of customer behavior and understanding insights into the customer. Once we look at our capabilities, what we've begun to do is say ,"Okay, do we really want to build those capabilities or do we want to buy them?" And that's led us to do a lot more partnering. So recently, this has sort of all been put to the test. I've talked a little bit in public about our experience on PPP, where we worked with a fintech company, Blend, and the CEO, Nima Ghamsari. And we came together with our team and their team and in 72 hours, we stood up a system. But not only do we stand up the system for PPP, but we were able to figure out -- they were able to convince me not to launch on the first day, which I was thinking this is nuts. And what they use the 3 days to do is to sort of onboard a number of customers and test and learn through those customers over the 3 days, make changes and that led us to doing on Monday morning, 9,000 applications in the first 90 minutes. If you're looking at -- another example would be we've been partnering with a company called TimeTrade, because last year, as we ran our Mission Maryland and tried to figure out how to meet the needs of the customers in Maryland, more specifically to that region, we started doing appointment setting. And when the crisis hit, because of that, we were able to scale up to 3,000 customer-facing employees and giving them the ability to do customer appointment setting, which what we found is that there's something like 9 -- if someone signs up for an appointment, 90% of the time they actually come and attend that appointment. So our ability to move really quickly to meet the needs has been enhanced tremendously. It's given us lots of confidence. And I think what we're likely to see now is a huge customer shift in customer preferences and -- customer preferences from the pandemic that it's too early to see what they are, but it's definitely shifted them forward, some might say, by 3 to 5 years. And so if we were dealing with just our old solutions that we had on the table in January, I would not be too optimistic. But when I realized that my team is now more agile and able to understand those patterns and those customer needs pretty quickly, I think we've really built an enduring capability that was probably missing from M&T maybe 3 years ago.

And as I try and tie-in the investment and progress that you've made in tech and digital with your acquisition thoughts. I'm remembering it was probably 1.5 years ago, Darren, you and I, we had a breakfast. And you said something like our thoughts on deals are a little bit different now because we don't want to be distracted from some of the improvements we're doing in technology, and not that you wouldn't do deals, but they need to be even kind of more attractive strategically and financially than they've been in the past to kind of justify doing them and maybe slowing down investments in other areas. Are you now at the point where you feel like you wouldn't be kind of taking -- technology taking a backseat by doing a deal, i.e., like a deal wouldn't be such a big distraction you've made so much progress.

Look, I think I used the word earlier, but I think that what has now happened after 2.5 years of investment in people and building and changing our posture and applying it, which is really important to a very simple operating model, we now can take that platform in other places. And I think if you think about it, Matt, the last 2 years, we've spent a fair bit of money. And I was happy to do that because we produced a 19% return doing it. But what was most important is that we were building a platform and a capability that could be scaled. And so I'm more confident now than I ever have been around being able to do that. And I do want to point out that I think, like not much is more important than having a simple operating model. Because by trying to put in these changes and dealing with all these old legacy systems, you can have the right intent for your customer experience, but sometimes it just doesn't come out the right way on the other end. I think we'll continue to simplify our model, continue to build out our capabilities. And my sense is that, that will be deployable. And maybe also that people will want to join that, they might not want to quit banking, but they might want to join our platform, and we would be open to that.

And we're almost out of time, but I do want to sneak in just on the same lines of thinking here. As you look for opportunities, I guess what would kind of conceptually be on the list? Is geography important to you or not so much? You mentioned kind of tech partnerships. You've already built out some of the fee capabilities. What would be, I don't want to say the pecking order, but like what's important to you in terms of as you think about consolidation? We know it needs to make financial sense, so I'm going to already take that off the table. But what's important to you?

Couple of things. Let's start with the old. We believe that there is a model built around local scale and density and having a big presence, however, whatever that means in your markets. And we think that as we move out in the future, while it is true that some of the largest institutions, whether they be financial or otherwise, have a different kind of scale that allows them to introduce products and services across huge swathes of geography, which basically makes it low cost. So we think the existence of a regional bank that does something unique in the communities is more relevant than ever. I think this is a space there that is helping us out. I think in order to be able to do that, we will have to continue to build our reputation as a partner of choice around -- both partner of choice both in terms of hiring talent who want to come into the shop, but also in terms of working with others. And I've seen enough today to see that that's achievable, in part, again, because our business model is so simple, we're pretty easy to work with. And because our mentality is around test and learn, openness, I think that our ability to partner with others is -- could become an advantage. So you put those 2 things together, we have room to grow, and our partnerships could go in any direction in terms of whole bank things. But most likely, it will be a constant that we'll be partnering with others in the industry, maybe a lot of nonbanks build capabilities for our customers.

Okay. Well, we're out of time, but René, Darren, thank you so much, and this is the end of the session.

Thanks, Matt.