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

Good morning, and welcome to KBW's Financial Services Winter Symposium. I'm Brian Klock, and it's my pleasure to have M&T Bank participating in the conference this year. We have CFO, Darren King; and Head of IR, Don MacLeod; and we also have Mike Riley here as well. So good morning, guys, and thank you for your time today.

Good morning.

Thanks for having us.

So before we jump in, just wanted to cover a couple of housekeeping items. And if you look at the top right of your screen, you should see an option to ask questions. So we'll save some time at the end of this presentation for you guys to cover your questions. So go ahead and send them in using that link. I'm not going to be checking my e-mail, so that's the only way we're going to be able to ask the questions if you use that link.

So with that, let's kind of jump right in. And guys, so thinking about -- a lot of us are happy that 2020 is over. And so we've turned the calendar now into 2021. And while the pandemic was a big story, obviously, that's continued to play out here to this year. And we think about sort of the 3 themes that kind of dominated bank stock investors' discussions last year, were technology-related. How you guys have serviced your customers with the economy shut down. Number two, asset quality and the impact from the CECL accounting rule. And then third, obviously, the 0 interest rate environment. So I guess when we think about it, as you look back, what have you learned from this unprecedented time? And maybe first start with the technology angle. I guess, think about what have you guys learned about the investments you guys have made in technology over the last few years? And what kind of things have you learned from customer behavior when you think about distribution channels for your customer?

Yes. Thanks, Brian, and again, good morning, everyone. If you look at last year, I guess, the first thing we learned, we learned in short order, and that was that the technology infrastructure we had built and upgraded over the years leading into the pandemic delivered as we expected. As we moved quickly from operating in-person environment to a working remote environment, within about a week, we had pretty much all of the bank operating remotely, about 85% of the people. That would be the crowd that could work remotely. We had -- and then we were up and running as continuing operations in the branches, in the operation centers and the call centers for folks that needed to come in to be able to support customers. But it really went quite smoothly. This is one of these things that you plan for in your contingency plans and your business continuity plans, and hope you never have to put it into effect and it went very well. And so we were pleased with how resilient the bank is and how quickly we responded. I think we saw a similar aspect from the customers. And for their safety and protection as well as that of our employees, we moved to a posture in the branches of appointment-only as opposed to just coming into the lobby. And we were able to quickly expand our virtual appointment setting capability that we had in pilot in one region, and we were just kind of moving -- getting to know how to use it and interact with the customers and with the customer-facing folks. And we were able to take that across the network quite seamlessly and have our clients interact with us by setting up appointments remotely and then coming in. We saw fantastic adoption of the mobile app, which was already making great strides. And people just continued to add that to their daily repertoire for moving money around, paying bills, checking balances. And we saw some uptick in account opening that was online. I think for us and for the industry, last year, switching banks wasn't #1, 2 or 3 priority for most people.

Right.

With, I guess, the notable exception maybe of PPP. And I think the other place where our shift in posture a little bit in how we think about technology was really evidenced there. And if you recall, and we all try to forget this time, the rules for PPP were very fluid, shall we say. And didn't really get finalized until about 6:00 on Friday night before the Monday morning -- or Thursday night, I think it was, before the gates, the floodgates opened. And so rather than open up on Friday, we chose to work Friday and through the weekend. And we've talked a little bit before about how we're using more agile methods and teams to deploy technology. And we put that to the test. And the agile teams did their part, understanding the process and trying to make it as easy for clients to interact with. We partnered with a fintech to bring in skills that we didn't have and integrate them fairly seamlessly, and the result was $7 billion of PPP loans. And in that first week, I still -- it blows my mind to think about, we did, in effect, 20 years' worth of business in a week.

That's amazing.

It's just incredible. And obviously, the technology was part of that. And we make a big deal of it, but I'd be remiss not to talk about the 2,000 people from business bankers and commercial RMs, to their partners in the treasury world. We had back-office folks taking phone calls, branch teams on the phones just helping clients through the process and helping them get their money. And that was -- there are so many great stories about how that went. And so when I think about that example, I think about it's a display of our thought process about agile and partnering, but it's also a display of how we think about technology interacting with people, right? And then for us and for our bank and for the client base that we deal with, which tends to be a little bit more business-oriented, that feels like the right space, where it's -- they're complementary, people and technology. It's not one versus the other. They both make each other better.

I want to come back to PPP in a minute, but I guess staying on the technology theme and thinking about what you guys just accomplished during a pandemic. And you kind of did -- like you said, it was technology, these agile technologists that you guys have deployed, but it's also the people part. One of the narratives that you've heard, I'm sure, over the last few years, has been are bank's -- M&T's size big enough to compete with the larger banks when it comes to scale and especially with the technology dollars that these bigger banks have spent. So M&T has taken a little bit of a different approach of how you guys kind of think about scale. So maybe just kind of talk about how you think about scale and technology?

Yes. I guess to start with scale, we look more at scale as local market scale as opposed to just absolute size, right? And so we think about the geographies that we're in, that we want to be a 1, 2 or 3 player in those geographies. And if you're a 1, 2 or 3 player in those geographies, that gives you an ability to become the primary bank for the clients there, whether that's consumer, small business or commercial customers. And if you're their primary bank, where they run their payroll or do their operating accounts for a commercial organization or where you get your paycheck deposited if you're a consumer, then you're in the #1 position. And that gives you the first option to look at any other products or services that you might be able to help that client with, and then usually gives you the last look as well. And so that's an important spot for us to be. And everything we do is geared around that philosophy, that we want to be the primary bank for all of our clients. And so we take that same thought process to our technology. And it's no doubt that, as you get bigger, there are some economies of scale and your technology investments can be spread across a broader customer base. But it's also true that if you're a bank like M&T, we're a pretty straightforward commercial bank, right? We don't have a trading desk. We don't have an investment banking operation. We don't do a lot of international things. And through the years, as we've merged with other banks, we haven't maintained multiple systems. So we have one deposit system. We have one consumer loan system, one commercial loan system. And so we haven't created a lot of the complexity that might plague some of the larger organizations. And so to start with those 2 things, and we think right away, you can run with maybe a slightly smaller budget than everyone else. And then, that said, you just have to be very careful with how you spend your money. And we've seen lots of examples of investments in technology, where they didn't pan out the way people thought. When you're a bank like ours, we just don't have the luxury of having too many of those kinds of failures, right? We don't have as big of an R&D budget, but there's still an opportunity for us to work. And so the way we come at it to try and minimize the downside risk is really just starting from a customer and working backwards, right? And it's that relentless focus on who are your clients, again, commercial, small business, consumer, understanding their needs, understanding how they're behaving, understanding where their pain points are and working backwards. And if you start with that, you're probably going to get it right 9 times out of 10, and it will minimize the inefficiency of getting it wrong. And it's resisting the trend or the temptation to deploy things that look cool. And they might be solutions looking for a problem that doesn't exist. That's when you kind of get into trouble, right?

That's right.

And so one of the things about M&T is we've always done a good job of avoiding temptation and sticking to the tried and true, and those tend to avoid blowups, both with technology investments as well as with credit.

That's right. That's right.

And those have worked for us over time.

I think that besides all the negative stories and things that came out of last year, I mean, 2 positive things that came out of Buffalo last year, were, one, the Buffalo Bills making the AFC Championship game. And number two, Seneca One opening for business. And I know there's probably a lot of people that have heard you guys talk about Seneca One, but it's a technology hub in downtown Buffalo. And it's something you guys are obviously pretty involved in when you think about a lot of your technologists that you've planned to move into that building. And so maybe just step back a little bit and talk about how this is something that's actually pretty unique, and it's something that, like you said, the way you guys focus on technology and your -- the way you approach it is a little different. So maybe you can just talk a little bit about that Seneca One development? And how that ecosystem may be something that is a benefit to the future for M&T and for Buffalo?

Sure. Well, I have to make a comment about your Bills' reference because that was such a great thing for our city in such a year where there was so much -- things that could frustrate you or bring you down, the Bills were a source of inspiration. And our hat's off to Kim and Terry Pegula with what they've done. And Brandon and Sean, they've really created a franchise and a team that we're all very proud of. And I think it's a great reflection of the upswing that we're seeing in Buffalo. The Seneca One is just another example of what's happening in Buffalo and how things are on an uptrend. Just for folks that aren't familiar with Buffalo, the building that we refer to as Seneca One is the largest tower in Buffalo. And it has a storied history. I'll get it wrong, because I'm not all the way up to speed, but it was, I believe, the Marine Midland, and it became the -- through acquisition, the headquarters of HSBC, I believe it was the North American headquarters for a while.

That's correct.

And so it's a large building. I think it's about 13 -- 1.3 million square feet, and it had been laying fallow for probably the better part of 2 years, maybe 3 after HSBC sold to First Niagara. And so it was an iconic downtown building that could be repurposed. And as we started to shift our thinking about technology and technology development and how we work together, really, again, using these agile methods, what became clear to us was that having our technologists distributed throughout the footprint wasn't as effective as it could be and that we wanted our technologists, our design engineers, our user experience folks working elbow to elbow with the business and product people. And that way, you could shorten cycle times and get iterations of new product or feature functionality turned around faster. And so the whole logic behind designing that space was to enable those practices to happen. And what we also believe, and we've talked about this through the letter and through time, is that we believe that the bank is only successful if the communities in which we operate are successful. And with the world becoming more focused on technology and those skills being in such short supply, that if we partnered with other local organizations in turning Seneca One into a technology hub as we describe it, not just for M&T, but for Buffalo and invite other organizations to kind of do the same thing we're doing in that same building, it will become a hub where it will attract talent. And the idea is we're attracting technology talent -- top technology talent, not just to M&T, but to Buffalo. And so it helps acquire and encourage folks to come because they might be able to build a career at M&T, but they have other options. And so they could go work at one of these other organizations and deploy their skills there, and the reverse is true. They could start at another organization and then come to M&T. And so the whole logic is if you build that kind of environment, it's much more attractive to the technologists. And really, that's what matters, right? I mean, we see the outcome in the form of what's in front of you on your mobile app or on your screen.

That's right.

But that doesn't just happen, right? There's people behind that. And so for us, we always talk more about the people behind that are the ones that make a difference as opposed to the absolute technology itself. And that's why we spent that money and that time trying to create that environment and focus on that tech hub.

Okay. Great. And I guess just one last technology question before we talk about credit. The plan was, before the pandemic, was to move a few hundred of your technologists into Seneca One. So it does seem like those dollars for the moving have already been spent. It's just even though some of those folks may be working remotely, a lot of that -- that shouldn't impact the tech spending when those folks can actually go back into the building, right?

Yes. I guess, not to get into accounting. You know this probably better than I do, Brian, given your background, but the investment in the building really is capital expenditure, right? And it gets depreciated over time. And so while it's a large number, absolute in terms of its usable life, its impact on the P&L in 1 year is really not as significant. Really the big cost in fact it's the people; it's the technologists, right? And then some of the software and the licenses that you invest in. And so the expense run rate that we were at, at the end of last year, we should be running pretty much there. We're still going through that process. We've talked about converting some outside contractors to on-staff, but we're in a groove now where the prior conversions that we've done of contractors to staff can fund the next round. And so we don't anticipate a large uptick in expenses related to technology, but we're building capacity. And so it's our belief that we can continue to deliver more and better outcomes for the same investment that we're at right now.

Okay. Great. Great. And then, I guess, from the second story, obviously, with -- I mean, CECL by itself would have been an interesting impact, if it wasn't for the pandemic, and then you put all these things together last year. And obviously, maybe you can talk about what did you guys learn about your conservative underwriting approach, as you think about how the pandemic hit different regions and economies differently? Obviously, a lot of conversation over the last year was about New York City and commercial real estate, et cetera. Maybe just kind of step back and talk about what you guys have learned, I guess, when it comes to credit quality and CECL? And how you have navigated through that so well last year?

Yes. It's hard for me not to think back to Mr. Wilmers, René's predecessor, Bob, and his simple plan. Just lend money to people that pay it back. And it's obviously a trite little saying, but it's a reminder. And when we think about our underwriting, what we don't talk enough about and most don't, is what happens even before that, and that's client selection. And so the first point is we -- we're involved in our communities because it's the right thing to do, but because it gives us insight into the character of the folks that are in the community and those that we're doing business with. And I think that one C of credit character doesn't show up in a model and doesn't show up in a scorecard, but it's probably one of the biggest and most important factors in the quality of the portfolio that you have. And so what we've seen this year is we feel really, really strong and positive about that first thing, client selection. And watching our customers react to the pandemic and how they're running their business, you can see that they were thoughtful in managing their expenses and conserving cash, and that the lessons of the great financial crisis have not been forgotten.

Right.

And so I think that actually, as perverse it sounds, was a great thing in preparing people for where we are. This was still tough, but that was a great jumping off point. And then from there, it goes to the structure of your underwriting. And we've always been known in the market as not necessarily the loosest on credit, but consistent. And I think that's the key, right? And what our clients value in our underwriting is we don't shift our thought process dramatically loose when times are good or dramatically tight when times are bad, but we try to have a very consistent viewpoint and thought process about our underwriting. And that's predictive -- that gives the client predictability, which is really important to them. And it keeps us out of trouble, which means we have availability when they need it in times like this.

That's right.

And so that's the relationship that we try to have with our clients. And when you get into a situation like last year, it's not the deal you did yesterday that's going to kill you, it's the deal you did 5 years ago and 4 years ago. And so the reminder in times like last year is you have to be thoughtful and careful all the time, not just in bad times, because that's the portfolio that you're going to deal with when the times get bad. And so we saw last year, the quality of that underwriting showed through. Certainly not to say that there aren't challenges, and certain sectors have had challenges because of the pandemic. But overall, I think we continue to feel really, really good about the overall portfolio and the strength of the clients.

Yes. I think that, obviously, some of the issues that came up, like you said in the COVID impact to their industries, and obviously, in regions like New York City, so you guys did have an increase in NPLs in the quarter, but we didn't see this big spike in charge-offs. So I guess, maybe think about -- how do you think about the next 12 to 18 months? Trends in your criticized loan book and net charge offs, how do you kind of see them progressing? And as far as this reserve that you've built up with CECL, I guess, what would you need to see happen for reserve releases that come through in 2021?

Sure. Well, you said a lot there, Brian. So let's unpack that a little bit.

That's right.

First I want to comment about the spike that happened in the fourth quarter -- oh, we lost you, there you are -- with charge-offs. If my memory serves correct, the third quarter was 13 basis points, then it was 39.

Right.

So it went up by 3x. So our long-term average charge-offs are 36 basis points. And so I guess spike is in the eye of the beholder. Relative to the...