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

Good morning, everyone. This is Gerard Cassidy from RBC Capital Markets. Welcome to our 25th Annual Financial Institutions Conference. In our next fireside chat, we have M&T Bank Corporation, and as some of you know it's the 16th largest bank with about $143 billion in assets. But with the recently announced acquisition of People's United, it throws them up into the 11th largest bank in the country with $200 billion in assets when that deal closes later this year. Company's market cap is approximately $20 billion and the stock trades about 1.4x booked. Has a dividend yield of just under 3% at 2.9% and the company is probably one of the best managers of capital over the 25-plus years, but with the deal pending there is no buybacks going on at this time. We are very pleased to have with us today René Jones, Chairman and CEO of M&T Bank Corporation. As some of you know, René joined the bank way back in the early '90s. And has been instrumental in their growth over that time period. And now, of course, has been CEO and Chairman since the end of 2017. Also joining us is Darren King, Executive Vice President and CFO. Darren has been CFO since May of about 2016, and he's been -- he was the head a retail banking prior to that. And Darren also has been at the bank quite a number of years, joining them in 2000. René and Darren, thank you so much for joining us today.

Thanks, Gerard. Good to see you.

Well, I'd like to start off with, René, before we touch on the People's United transaction, I'm really interested in getting your view. When you take a look at, obviously, last year, and I know this is an overused word, unprecedented, but it was an unprecedented year in our lifetimes last year. And could you share with us, aside from the pandemic itself what were some of the big surprises that you encountered? And how did M&T handle those surprises? And what are some of the lessons you learned?

Yes. It's really hard to say aside from the pandemic, because in terms of surprises, I think probably the first one was the nimbleness of our workforce. Their ability to shift and to not only meet their customer needs as they had before. But if you look back over the course of the year, we talk about it in our letter, so many things improved. I mean, in a year where people were working from home, we had a 6-point improvement in our Net Promoter Score in retail. Just think about that. I mean, you would expect that something would not be quite the same. But our ability to meet the customers' needs, whether it be through deploying digital capabilities that we had in the works at the time. But maybe even just our team's willingness to go the extra mile, really was something that you could have never predicted to come out as well as it did. I think the second one is an old one that we renewed this idea that M&T and the way we operate is more meaningful to customers during really difficult times. I mean you know Gerard, this is a story that even predates me. I got here in 1992, quite frankly, I thought the story was over by the time I got here. But the ability of the organization to really be relevant during economic downturns. And oftentimes, that turns into opportunities for growth as well, was sort of renewed again. I can't help but think that we talk about it a lot, but when you see it, you're always really surprised by it And then I probably would talk about, I think, really, while we knew this I think our operating model emerged as more relevant than ever. And if you think about 2016 and '17, the narrative was, you have to be really, really big. You have to be big because you needed national scale and you needed national brand. And what we found was that people really wanted to deal with people who are very familiar with them in times of really difficult needs. And so our ability to sort of improve our space around tech, be digitally forward, but combined that really with being locally focused, right? I think really emerged to say that as we sort of come out of the pandemic, we're going to run even harder with the operating model that we have.

Very good, René. Pivoting over to the big news, of course, of your transaction that you announced recently, can you touch on some of the specifics of the acquisition. But can you tie it into how it complements the work you guys have been doing all along? That's the part I think that maybe we all don't fully appreciate of what the focus has been and now how this ties into that?

Yes. I mean we've been working on things that have been talked about in the industry for a very long time. We have our own brand of it. You know that when I took over as CEO, we were scaling around talent and different disciplines. We were working on building our agile factory, at the center of that was putting up our tech hub as a symbol of sort of being tech forward and attracting talent. And all those things, if you think about it, probably '17, '18, '19, although our returns were fantastic. People were talking about, jeez, you are spending a lot of money. And we have always believed that you need to have those modern capabilities in order to be relevant to your customer to have better customer experience. If you step way back and think about it, if you measure across industries, the banking -- banking has never really been top of the list in terms of customer experiences. And so going forward, you're going to need to make that investment. As you step back, I've known Jack Barnes for a very, very long time. Our companies have known each other for a very long time. And over time, we would have discussions about those types of things, right? How do you really scale technology? Do you need transformation offices? How do you really ramp up digital and get the capabilities to do that? And we, over time, would share things, like how do you run business banking? And what is it that makes M&T's business banking go so well because we're typically an open book and really what came out of that is we got to know each other's cultures and our belief systems. And when you look at People's United, the way they operate on the ground, in the communities, heavily focused on making those communities better and being very close to the customer, you pretty quickly saw the ability to deploy lots of investment that we had made and turn it into local scale and to provide that as opposed to actually both firms doubling down their investment, we figured we could take what we had and we could actually turn the integration into much more of a growth story. Right? If you think about the idea that both companies are outstanding in credit, both companies have high deposit share, #1, 2 or 3 in most of their top 10 markets that these were 2 really healthy firms and instead of playing catch up, what we could do is divert those resources into actually running and delivering the value to the customers at a much faster pace. So we think it's been a growth story, maybe more so internal we have done in the past.

René, can you share with us, on this transaction specifically, were there any markets that were particularly attractive to you that they have presence in, and you're not there yet? And how did that play into the thinking about joining forces with People's?

Yes. That's a good question. I would say not really, not really are any one market more attractive to us. I think that you know our operating model, and we believe that it's not about the idea that if you're in a geography or an MSA that's growing, therefore, you will grow. It's really about can you add more value for the existing customers that are there than other institutions? And so when you start in Vermont, with #1 market share, to me, that's highly attractive. Very, very attractive. You start with #2 share in Connecticut, #1 in a number of -- at Fairport and so forth. To me, that's highly attractive. We also love the idea that we're 8th in Boston, in part because we think there's a lot of room to grow there. And we don't think that there's an institution that sort of mimics how we operate on the ground. I often say -- I've often said, you've heard me say it, there's not a -- there's not an M&T in New England. And so no, I think all the markets are equally attractive to us. And quite frankly, a lot of them are very similar to the places that we thrive in the people have asked us over the years, how is that possible? One of the most important things to me is the core deposit base and the stability of that core deposit base. More so than the idea that maybe I could be in Florida, where there are more people going.

That's interesting. Yes, go ahead, Darren.

I was going to say, it would be remiss not to say how important the Portland main market is because there's a certain influential analyst there that we want to make sure we were nearby.

There you go. And the branch is across the street from my office. So I guess, I'll be able to maybe experience firsthand then M&T service.

We sure hope so.

You could easily shop us. That's good.

Yes, there you go. René, you touched on something that is very interesting for profitability. About the market share. You mentioned Vermont. People's obviously the legacy Chittenden bank that they bought years back was the #1 player in Vermont. They've got a strong -- very strong market share in Fairfield County, Connecticut. And so when you look at those deep market shares, can you share with us -- and you touched on it with your Florida comment, some of the investors are always at the growth, growth, growth. And I don't think they fully appreciate how much better it can be in a market where you're #1 or 2. And if you don't have the top digit growth, you still can do very well. Can you maybe give us a little color on that?

Yes. Yes, sure. I mean, but first, let's just start with the stat. So we've now got a combined have a footprint with over 20% of the U.S. population, over 25% of the GDP of the U.S. So that's where we're -- that's our playground that we're going to operate in. I think the second thing to point out is that you almost have to ask somebody when they talk about growth, define growth, right? And so if you think about growth, as often we hear people do about loan growth, so on the asset side, if you think about what's been happening in the industry, that's really becoming commoditized. The ability to actually deploy capital in the form of loans. 10 years ago, you didn't have all the private investment funds that are actually doing that today. You've got the Internet companies that are doing that, they don't care where you live, right? But in terms of retail banking, in terms of the raw materials, to a new England guy, I'd like to say that the cream filling for the Dunkin' Donuts, right? But that is what actually allows you to be stable and to change your overall firm's growth prospects without actually taking outsized risk, right? So we could easily grow the balance sheet. I don't know that we could easily grow the balance sheet significantly faster than GDP without taking on more risk. But in terms of what makes the franchise have long-term enduring capability, is its deposit, core deposits and relationships. And so -- and those tend to grow at a GDP, if you're pretty good, maybe you can outperform GDP over long periods of time. But as long as you're combining that with the right risk management, right risk appetite, I -- we think you can produce really above-average risk-adjusted returns. So growth for growth's sake has never been something that we've been interested in.

You've already touched upon the cultures of the 2 organizations with your relationship with Jack over the years talking about banking, which is always a number one, and I'm pitching to the choirs quarter since you guys have done so many deals, and you know it so well about the cultural differences, how that could hurt a deal. But the second area of importance that we've discovered over the years is the integration of the systems. You guys have obviously moved a lot of people in-house in your IT area. On -- I think you just touched on about the tech center in Buffalo. Can you share with us your comfort level of integrating the systems with peoples and maybe compare that to 5 years ago before you'd made this big commitment into technology?

Yes. Okay. So I guess where I'd start is, there's a couple of things that are unique that are not new, one of which is that we've always maintained 1 set of core systems, right? So we're not on multiple systems. We've always maintained that just being simpler is going to be much easier in terms of conversion and much -- in terms of risk management. And then when you go to the People's side, a significant, the lion's share of their technology is outsourced to a provider. A provider actually who we know and who is pretty adept. So that really relative to other transactions, simplifies this, lowers the risk of conversion. It's actually what allows us to move so fast in terms of what Darren has indicated on timing of conversion. The thing that I think is different is that prior to 2017, 6 -- '17, yes, it's probably a good benchmark. We engaged in technology by having a waterfall approach, which meant we would do very, very, very large projects. And we would work on them over the course of the year and then deploy them in bulk, all right? And then we go back to work on the next thing. But what we've been able to do is just sort of reshape the way in which we work, people call it an agile fashion. But really, what we've been able to do is to break our work down into component parts so that we have a lot of continual improvement. Right? So if you think about it, we've got a big funnel of activities that we looked at when talking to the customer and the we've got a machine that can get that throughput. And it's more likely that what we'll do as we go through the period of conversion is we'll be able to slow the factory down as opposed to shut it down, right? And so if you think about it today, just take one particular area our call centers that we have outstanding today, a year ago, we were really struggling with capacity because of the way that they were designed. Today, we've started to unleash that capacity. But then we've got several projects underway where we are also able to sort of look at things like AI voice recognition we are able to take that voice recognition and then start saying, okay, we're going to split up our call center into 3 types of things. We'll send you to chat because you're calm, we'll send you over here because you need a little bit more service or you'll be able to get online with an actual person. So you think about those component parts we can start deploying them when and where they make sense or we can sort of scale them down in an interim basis to do the things that we need to do in the integration, but ramp them back up really quickly. And the way that you will see that is going to be not explained in terms of like a not good -- a question that would be not informative would how much did you spend on technology? The question is, how many stories did you deploy? How many things that the customers gauged the feature functionality that changed over the last 6 months? So we're much more nimble in going into on this acquisition and I think for the first time.

Yes. There just to build on that, René. If you think back over the last couple of large conversions that we've had, Hudson City was fairly straightforward, being predominantly a thrift. It was a pretty straightforward conversion. And before that, it was Wilmington Trust, which brought a whole new set of businesses that we weren't as familiar with. When you look at People's, it's kind of down the middle. And that there's a set of businesses that we're very familiar with core commercial lending, consumer deposits, but they do bring some businesses in the mortgage warehouse lending as well as in the equipment finance space. And those shops run reasonably autonomously. And so we'll keep that technology in place and leverage that and scale it into our organization. And so it's the -- we're very cautious to make sure that we don't treat any acquisition as cookie cutter. But the thought process is somewhat cookie cutter, right? And that you look at the product set, you look at the overlap between the 2, you try to figure out where the differences are and the customer impacts, you do the same thing with the technology. And understanding what changes are going to happen for your employees because if they get messed up, then the customer gets messed up. And that's just not the place that you want to be. And so that thought process is scalable. And then the last thing that I'd add is that we have the benefit of a partner on the other side who's also done this a number of times. And so they know what it looks like to do a conversion and an integration. And so if you look at the combined years of experience and number of integrations between the 2 organizations, you're probably not going to find a more experienced or seasoned group in the industry. And so you never take anything for granted you always got to be aware of what's happening and planning carefully and having contingencies. But when we look at the place we're starting from, I feel as good as ever about the ability to merge and convert these 2 institutions.

Very good. And maybe then just a last question on the transaction and then some other questions about what's going on in day-to-day business. René, on the call, you guys talked about the efficiencies from bringing the 2 organizations together and the enhanced profitability that could be achieved. There's not a significant amount of overlap. So are the efficiencies being conservative the way you looked at it? Or maybe too aggressive? Can you give us some color there?

No, no, that's a good question. I think they're right down the middle. I think if you just look at comparative transactions, they're probably slightly below average in terms of sales for a similar type of transaction there's not a lot of overlap. And I think we are very conscious about it because what we know is that we obviously want to gain the synergies and we want to start off in the right structure and format. But at the same time, we know that to deploy our form of banking there, there will be investment that's needed. And so to the extent that we are able to sort of self-fund those, right, with changing process over time and leaning into it. I think we sort of -- all of that is sort of left out in total. I think a good example would be that as we begin to think about both companies are serving our business -- small business customers. But I think sort of our approach probably on the ground and the model will require more staffing that's in there. And we'll get that from sort of reshaping the existing franchise with the team that's already on the ground. So that's an example. And I think really, we believe that after the initial synergies, we probably will be on a pattern for growth. We see a lot of opportunity.

Great. Super. Thank you. Moving on to more day-to-day type questions in the time that's remaining. Obviously, 2020 was a remarkable year for banking, the -- it was the pandemic credit pressures that all of you and your peers experience. But also loan forbearances were also there as well as a drop in interest rates back to 0 interest rates and the pressure on the margins that you all felt. Maybe now as we look forward into '21, can you share with us your thinking as on the macro environment and what that might do for the earnings for your organization as well as maybe the industry?

Yes. I mean I think we've already seen that fortunately, things like the vaccines have come on earlier than we thought or at least as early as we thought. So that's been a great development. All of those positive trends means that it's more likely that credit is not going to be what we all thought a year ago. And then you got to look at the stimulus packages, which I think are -- I have to bifurcate them. I mean, clearly, when you put this much money into the economy, you're going to see GDP growth, you're going to see a lot of activity emerge from this. I think it might be a little bit -- the form might be a little bit difficult to ascertain because there's so much cash in the system that I think there's a long way to go for people to be making the investments they need to make with cash so you might not see a robust growth in the loan books, but you're going to see a lot of payment activity, you're going to see a lot of healthy activity, healthy companies. So I think that will be great. I think we have to think about we had always have to think about what the macro effects will be from as much fiscal stimulus as we've seen. The numbers are really staggering. I was just looking at what Buffalo will receive from what was signed either last night or this morning. And there are things that will move the economy. And you have to begin to ask yourself what are the trends that you see today that you've got to be careful with. And just to talk about a few, we talked about the idea that our job in the letter is always sort of to look sort of a little bit further out and to understand what the next risk is, not what the last one is.

Right.

And a great example is already, if you think about we're all focused on commercial real estate, anything that's not warehouse or industrial is shut down but another way to look at that is the only thing that you can invest in with all the cash that you're sitting on is warehouse and industrial. And we're already seeing companies increase their limits for CRE, so that they can go after more of that market. But it's a crowded market because it's the only thing you can do and you begin to see pricing and structure move away. So automatically, we're constantly looking at those trends. I don't think we have an answer to the amount of cash that's in the system. But you can begin to see it. I mean we have one of the smaller security books today because we're a little cautious, right, at going out on the curve, while it would help us in 2021 and maybe even in 2022, we're not so sure the economics make a lot of sense for the long term. So those are a couple of things that we see.

I might just tag along with one other thought that we hear and are hearing again from clients is it's -- they're less concerned about access to capital, although that's always a concern for the businesses it's more talent. And as we were getting into the late stages of the recovery, one of the biggest issues that our clients are grappling with was talent. And the impact of minimum wage on their business and their ability to pass those costs through. And so it looks pretty good right now with where unemployment is and the opportunity to get -- to add to your workforce. But just kind of picking up on René's comment about how quickly folks will invest during the last cycle, people were slow to make investments in plant and equipment and inventory until they really saw the growth come and the way that they handled that capacity was through people. And so when you put the 2 things together, that there's -- even though there's a higher level of unemployment, there's still a shortage of skilled labor and the excess cash, I think that's the first place you start to see the recovery come back is by folks coming back into the workforce. And it's going to quickly show that problem, again, which is the lack of skilled labor. And I think that will be an issue that we'll have to work through.

I would say unless you get a lot of the infrastructure spending that we've seen and now are going to see, if it happens to be directed towards job training and workforce development, particularly in the high skilled tech areas, you could unlock that and that could be really productive. If it's not, you'll have spent a lot of money and you'll have shortage of the labor, which is not exactly growth, right? So the amount of fiscal and monetary stimulus is so high right now, right? That I think Gerard, it's really hard to predict. I feel good about our prospects and the work we're doing with core customers, and that will be great for the coming years. But we need to step back and take some time to absorb the quantity of money that's in the system.

I couldn't agree with you more. It's staggering. And we throw -- at the government level, they throw trillions around like what used to be billions, and it's something that there's going to be some sort of repercussions or consequences down the road, we'll just have to navigate through them, should they arrive. But you guys great insights on the subject. Maybe going from the macro to the micro, Darren, in the remaining time that we have on the call here, can you give us any updates on your outlook for 2021 from your January earnings conference call, if anything may have changed or if things are still steady as we go?

Yes. Sure. I think the top line is steady as we go. Obviously, the biggest change that's happened in the last 60 days is the tenure, and all the action that we've seen there. And I think the biggest impact you'll see there is less on the margin since most of our assets tend to be priced off of shorter-term benchmarks like 1-month LIBOR. But if you look at the mortgage business, and you start to see a little bit of a slowdown in maybe the refi activity. Purchase still seems reasonably strong, but that will also impact the gain on sale margin. And so as we looked at and forecast for 2021, we did anticipate that we would see a slowdown in that revenue line item, probably as much from margin compression gain on sale margin, that is. Compared to loan volume, but you probably see a little bit of a slowdown in loan volume as well. The nice thing is as that happens, prepayments slow and the servicing business should hold up fairly well, and maybe you see some reversal of impairment charges. And so we've always looked at those businesses as they kind of offset each other and naturally hedge each other. And so what we lose and when we would expect to offset to a certain degree in the other.

Very good. And maybe just 1 last question on the current conditions, Darren. Any thoughts on loan loss reserve releasing? That's been a big theme for investors in buying bank stocks so far this year? And any color or thoughts on what you guys are thinking about in terms of the loan loss reserves relative to any releasing that can happen this year?

Yes. I mean I guess it's something that obviously we go through at quarter end and true-up and look at what's going on with the forward look for the economy. It's -- as we talked about on the call, we expect the year to be lumpy. So far, things have been fairly benign into the year and into the quarter. But there's still a lot of uncertainty out there. You recall that in the fourth quarter, we moved about $500 million of loans on the nonaccrual, mainly in leisure and hospitality space. And I don't think that's played itself out yet. We've seen some positive signs where we're seeing some bookings go up with some of our clients, but it's later in the year. And so it's encouraging that the bookings are happening, and it's an indication that the people are getting more comfortable that they'll be out traveling again, probably to René's point about the vaccine. But until those show up in revenue and NOI, it would be a little bit premature to take action on that. So we've got some portfolios where the strengths -- you can see strengths and improvements. Other ones where it's still not quite there yet. We'll go through that process at the end of the quarter and make our determinations. But I guess, in a nutshell, it would be hard to foresee the provision is increasing as we go through the year and charge offs, I think, will be a little bit lumpy just as we work our way through the recovery.

Very good. And unfortunately, we're up against the clock. And as always, very insightful comments, René and Darren, I greatly appreciate you participating in our conference this year. It's always a real pleasure to have you with us. And now that your franchise has come into Portland, should you come to visit your new franchise area, a lots of rolls are on me. So look forward to seeing you may be here.

Same. Look forward to it, Gerard.

Okay. Take care, guys.

Thanks. Take care.

Same here. Bye-bye.