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

Good morning, everyone. I'm Jon Ashe from Wellington Management, and I am the host for our session with M&T Bank. M&T Bank is $140 billion in assets, ranking at around the 20th largest bank in the country. The bank's physical footprint mostly encompasses the northeast and Mid-Atlantic regions. Joining us today are CEO, René Jones; CFO, Darren King; and the IR team, Don MacLeod and [ Mike Riley ]. Here is a fun fact. Since Darren joined M&T in 2000, the American football playing Patriots and Bills have played each other 42x with the Patriots victors in 86% of the contests. As impressive as that winning percentage is, it is exceeded over the same period by M&T's win rate versus the banking industry on most financial metrics. Thank you for joining us. And I guess we'd start with René, if you want to open up with any opening remarks?

Yes. Thanks, Jon. As always, I really appreciate being here at BAAB, even if it's virtual. As I say, it's one of my favorites because we get to speak to everybody, and it's really inclusive. You talked about it a little bit, but what I just want to say, to open it up, is that we've had this really long history of success. And I think we often get asked lots of questions about whether our operating model is relevant today. Lots of what we've done over the years by focusing on our customers, focusing on economics, building an institution that really tends to thrive during more difficult economic times is all still in place today. But sometimes, it's hard to see. So I really look forward today to your questions to begin to sort of unlock some of that. What I would say, though, is there has been some change over the last couple of years, and we'll talk a little bit about how we've kind of moved and modernized the M&T model a bit to be digitally focused but -- digitally forward but locally focused. So trying to make the best of our operating model and sort of modernizing it with the tools that are available today, and we think we're having great success at it. We're really pleased with it, and we think our operating model is as strong as ever. So look forward to your questions, Jon, and I'll stop there and let you have the floor.

All right. Thanks. Well, we've -- question number one, I've been really interested in your views on for a long time and as relevant as ever, people have been talking about the banks as melting ice cubes or as Darren and I were talking the other day, maybe they're melting glaciers is more appropriate. But can you just talk about banking in the 21st century? So the universal banks, the mega banks, have been growing faster and taking share from regional and community banks. And I guess this narrative suggests that smaller banks are disadvantaged because they can't spend billions of dollars on technology, marketing and organic expansion in new markets. I guess can you just talk about your views on this narrative, whether it's accurate?

Yes. I mean I think what is true about the narrative over long periods of time is that the largest institutions post the financial crisis have really improved their performance. We always like to talk about it as prior to the financial crisis, we never really minded competing with the large guys because we could always win and there was ample places to go for success against their operating models, in part, because I think we were a little bit more nimble, able to focus on customers in a way that is difficult when you're really, really large. I think that has changed. I think the large banks have -- are much better competitors today than they were -- than they have historically been. And I do think while there's some advantage to the tech side that they've had, as we mentioned maybe a year or so ago, we do think that demographics also has a lot to do with the success that the largest banks saw for a couple of years in a row. Interestingly enough, if you look back not this past year but the year before was the first year where you saw in terms of core account growth that regionals and super regionals had the same growth, 1% growth in accounts, as large banks. And what we found is that where we focus and where we focus on running our operating model, which is getting deeply tied to the communities, we see that we can actually outperform. So in our minds, this idea that there's a simple formula which says the more you spend on brand, the more money you have, the more effective you're going to be really probably doesn't hold up in our minds. And it forces us to actually really go deeper into our own operating model and figure out how to unlock even better performance than we've seen in the past.

I guess -- you mentioned account growth. When you -- what do you monitor to determine if you're gaining or losing market share? Are there any other metrics?

We monitor -- I think long term, probably the most important thing is some measure like the Net Promoter Score. But are you getting more accolades from your customers than you're getting complaints? And let's not talk about M&T for a minute. I think when you step back and you look at the entire banking industry, relative to other industries, there's a long way to go there. There's a lot of upside, I think, in that space. And then we look at, internally, Greenwich surveys. We look at various forms of surveys around things that we talk about that don't get paid much attention to sometimes, the number of small business banking awards that we get. Think about the idea that -- Darren, I forget who it is, but we got named the #1 -- oh, it's Greenwich as well, we got named the #1 bank in terms of crisis management for PPP. Like, nothing is more important to us than that because that's when our customers need us the most. And we're not saying we were in the highest category. We were #1. And where that really bore out is the fact that we have lots of people on the ground close to our customers that our customers can get a hold of. And in a more modern world, we have lots of tools that we've now applied to allow our employees to do their job in a more effective way. So for example, a couple of months -- well, maybe 6 months before the crisis, the pandemic, we introduced appointment setting into our branches. When the pandemic came, we were able to leverage that across the entire footprint. We added early on, maybe February or March, just as the pandemic came on, we added e-notification -- notary, e-notary, which turned out to be highly effective because people would go to different branches, maybe their existing bank and the capability just wasn't there. But if you came to M&T, we could get your service done even if you weren't a customer, right? So those are the types of things we tend to look at.

René, if -- sorry, I'll pick up on that a little bit. One of the things that also we spend a lot of time looking at is our retention rates. So if you think about some of the geographies that we've always operated in, #1 objective is retaining the customers you have. It's easier to grow if you got less coming out of the bottom of the bucket and you don't need to outrun it as fast in the top by putting new customers in. And so we always start with that. And a lot of the things that René mentioned enable us to have retention rates that are higher than the industry. And of course, customer sat is one of the leading indicators of your retention rates and who's leaving you and understanding why and adjusting the operating model to build even better and deeper relationships and retention. And that sets the foundation that enables us to do the growth things that we're talking about. And obviously, having great customer sat and retention of your existing customers, if they're your biggest advocates, it makes growth that much easier. And so it's another one of the things that we'll -- we spend a lot of time worrying about.

One other thing, Jon, before you go forward that I'd just maybe like to seed, and it's a quote from Bob Wilmers, and the quote is -- he would always remind us that revenue growth is the easiest thing to get in banking. It's just a matter of what happens afterwards. And I think it's really important, in addition to what we've just said, is that when we're focusing on growth, we're not focusing on growth of anything or total deposits. We're focused on core operating accounts. So if we look at our market share gains, we've had some significant market share gains in the Mid-Atlantic and the Maryland area where we've outperformed over the last year, and you can see it in the FDIC data. What is not shown is we're only focused personally on core checking accounts, not money market accounts, not time account growth, whatever. And so even if we underperform slightly, you can't see on the outside of the quality of that outperformance. And you see that today where if you look at our deposit growth, we've outperformed our peer group pretty significantly, and that's because most of the money that's coming into the economy is going into core operating accounts, right? And actually, right now, because that core growth is outpacing the opportunities on the loan side, it tends to lead to margin compression. When we look at the quality of those accounts, the outside world may worry. But when we look internally, we don't worry at all. We're winning. It just happens to have a short-term negative effect.

The growth that you mentioned in a place like the Mid-Atlantic, is this a function of improving technology within the organization? Is it a function of local decision-making versus the competition or empowering your branch personnel much better, I guess, than the mega banks?

You hit them all: 1, 2, 3. I mean it's literally getting decisions to be more locally focused on what we do with our resources. It's supplying them with tools, both digital and other capabilities, that allow us to move faster in the service of meeting those goals. And the whole thing is about empowering your employee base, which I think we've done a great job of. As an example, we have run an employee engagement survey at the bank for now 20 years. This year -- it's grown steadily over the last several years, but this is the first year where we've been in the 75th percentile of all companies, right? And that employee engagement, allowing those guys on the ground to do their work, is tremendous. If you go back -- I talked a little bit about this before. We saw in the Mid-Atlantic, I don't know, several years, and particularly Rich Gold, our President and Chief Operating Officer, had noted that we were losing share in core deposits over time. So even though we had a leading type position, we were losing share. When we turned around to address that with those 3 -- through the 3-pronged approach, a year ago, we began account growth. We stopped any loss in market share. And then when you look at the numbers this year, it's -- we gained more share than any other financial institution in the Mid-Atlantic in that space by doing those 3 things that you've mentioned.

Is there an easy way for you and for the banking industry to monitor share of the wallet of millennials? I guess over the past several decades, the thought would have been, well, millennials maybe aren't as important young people because they don't have any money. It sure feels like out there, the narrative is that millennials don't bank with traditional banks. Do you see anything that kind of disputes that notion?

One of the things that you're going to see, Jon, is that we're going to start talking a little bit more about how we go about our operations. And so rather than to think about it as we're trying to get growth anywhere and everywhere, we're really beginning to more heavily focus on segments. And so if you look underneath in that example that I gave you, I think we've had over 2% growth this year in the Maryland area on opening core checking accounts. The majority of that is coming from millennials and the younger set of what we've focused on. And so you're going to begin to see us not talk necessarily about the overall growth as much but where are we winning. And in some of those places, they're really significant. And that's one of the things that I'm sort of encouraged by because if you remember, the large -- the story was the large banks were winning, but they were winning in that particular segment, right? And when we began to actually focus on it, now for 2 years, we were able to sort of turn that trend. And again, it doesn't mean you have to have the most dollars in advertising and technology, but you really have to focus as a regional or community bank on where you're going to be able to win. You can't beat them everywhere, right? That's just not possible.

And just to embellish a little bit on that point, René, when we looked underneath, we found that the big -- the larger banks were winning in the millennial segment in the 20 largest MSAs in the country, which was where all the millennials were migrating. And so there is still -- there's change. And when people change banks, it's usually related to 1 of 3 things: it had always been bad service, bad fee experience or people were moving. Moving with banking and technology is becoming less of an issue, but it's still there. And when people switch, they still value the convenience of a local branch. And so you saw that demographics that René had mentioned earlier was one of the things that was enhancing, in our opinion, what was -- what we were seeing in the results that were going on with the larger banks. We didn't ignore it. To René's point, we took a look and figured out what we could do, and Baltimore happens to be the largest MSA in our footprint, which is no coincidence why we focus there because we wanted to test ourselves to be able to compete with the best.

I guess, in a -- if we could shift over to growth. In a more challenged economic environment, I guess there was the belief that maybe this was going to create some financially compelling acquisition opportunities for you and a couple of the other acquisition-minded banks. So far, that hasn't been the case, but it's still early. Can you just talk a little bit about your expectations for growth opportunities, organic and inorganic, in the next couple of years?

Yes. Jon, let me first step back and do a little bit of backdrop of how we define growth. I think Darren and Mike and Don are putting out an investor presentation, I think, probably this afternoon, and there'll be a slide in there where it looks over the last 20 years on growth on our balance sheet categories. But what's different about it is it's growth, for example, in commercial loans, commercial loan growth per share. And so we tend to focus on not just growth in customer relationships but economically profitable customer relationships, keeping in mind on a risk-adjusted basis, we still want to keep our low profile. What you see over the last 20 years in all the categories is we're either #1 or #2 across all of our peer groups. It doesn't matter which loan category you are. What I was surprised at is how strong we've performed in terms of #1 in consumer growth. That actually surprised me. But when you look at that, what you miss is that we often say that we're built for the difficult times. So to give you a couple of examples, that if you were to go back a couple of years, let's say, 2017 and '18 and you were to look at indirect auto, we would have been growing our portfolio. We did about $1.7 billion to $1.8 billion of volume each year. But we weren't too psyched about that because we had booked on average between those 2 years just under a 9% ROE. We were just -- we weren't even breaking out really cost of capital with that volume. Today, when you look at that portfolio, we'll do about $2 billion this year in indirect auto originations at -- where are we -- at about an 18% return, fully loaded return. So both looked like the top line is growing, but what we can see is that the performance is better. Another way to think about it is commercial loan growth is down today. And in the third quarter, we probably had half of the new commitments originated versus the fourth quarter of last year. But we made significantly more, maybe 20% to 30% more in economic profits because the returns have gone up significantly. And then lastly, in our recfi business, 2 years ago, we did about $1.4 billion at a 15% ROE. This year, we're headed to do well above $3 billion at a 24%, 25% return. So quality of the growth is what matters, and if you simply look at the top line, you're not going to quite figure it out. So what we -- what I would say is there are a lot of opportunities for growth. I think they come from focusing and putting the customer at the center and solving a lot of the frictions that exist where the banking system has just not done a really good job of solving customer problems or maybe, quite frankly, what would be the opposite of that, pissing them off.

[ Right. People leave ].

And then I also think the other opportunity we have is moving to communities that we haven't gone to before. Some of those communities are within our existing communities. So for example, we started this year...

[ 14 ] months ago.

Yes, 14 months ago, we started a women- and minority-owned business segment within business banking. We piloted it in the Mid-Atlantic. It hit the cover off the ball. We signed up 80 new customers in the first year, right? So it's a place we just hadn't focused on, but it was sort of right under our noses. And we think there's a lot more of that finding new pockets of people within our footprint that have been underserved or just maybe missed by M&T.

And what about specifically with bank M&A? What are your thoughts there in terms of -- I guess, what will be the catalyst there? Will it be the need for more markets to penetrate? Scale?

A couple of things, and then I'll let Darren answer. I think there are still lots of places that don't have an M&T Bank. And what I mean by an M&T Bank is our purpose is to improve the quality of people's lives, and we do that by getting deeply involved and uplifting people in our communities and having a workforce that is just part of the glue of that particular community. I think there are still a number of communities where there's just not an M&T Bank. And when you look at it, I guess, the measure for me, I would use the word partnership because as we build out these capabilities, it will matter that people decide to join the operating model that we've built. And that's why doing such a great job is really important to us because it sort of is the right for others to join us in the operating model. Not necessarily sell their bank, but to sort of come on board and join forces around a really sound operating model. So the industry is going to continue to consolidate. We'll continue to buy banks when the opportunity makes sense.

And what about wealth management with Wilmington Trust? Where do you think the opportunities there will be?

I think -- as I mentioned, we'll talk more about segments, but one of the segments that we're focused on, think of the consumer bank first, is the astute, affluent segment, which is a pretty significant part of the population in our footprint. And you could think about Wilmington Trust and winning across the board on the wealth side. But really what we're beginning to do is take that platform and use it cross-segment, right, into that segment so that we're improving the quality of the astute and affluent segment not just from a deposit perspective or a loan perspective but from a wealth management perspective as well. So we are off and running. You saw our thing -- our partnership with LPL. And really, that was a strategic decision that said if we had to spend our time, would we spend it catching up in technology and improving the customer experience? Or can we partner and use that platform actually to make up most of the ground on experience so that we can actually use the M&T model and focus the sales force on what they do best?

I guess one thing I should have asked to kind of touch on was the consumer indirect and residential mortgage, you've been growing. Do you want to touch on those quickly, what you see in those markets as attractive right now?