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

Good afternoon, everyone. I'm Gerard Cassidy with RBC Capital Markets. Welcome to the 2022 Virtual Financial Institutions Conference. With us for this afternoon session is M&T Bank. Many of you know this bank. It's about -- and this number might be inaccurate now that the deal has been approved, but the 19th largest U.S. commercial bank. The company is one of the most highly valued banks with a market cap of about $23 billion, trades at about 1.4x book value and has a attractive dividend yield of about 2.7%. We're very pleased today. We have Rene Jones as -- who's the Chairman and -- of the Board and CEO of M&T Bank. Rene joined M&T as part of their, I believe, Executive Associates Program going back to 1992. Many of you may remember, Rene for his role as CFO from 2005 and 2016. And in December of '17, he was named Chairman and CEO of M&T Bank. And joining him will be Darren King, who is the current CFO and Executive Vice President. Darren joined M&T in 2000. And we'll start it off. Rene has some opening comments. And before we get started, I do want to congratulate you on getting the approval for the People's transaction from the Federal Reserve. I know that's probably a great relief that, that approval is in place now. And with that, Rene, I'll hand it over to you.

Thanks, Gerard, and thanks for having us. It's always a pleasure to meet with you and chat a little bit about the bank and the industry and what's going on. Yes. So the biggest recent news, obviously, is on Friday, we received approval for our deal with People's United, which we're really excited about. We also announced this, I think on Monday that we're targeting [ our ] closing for April 1, which is long away, and we're very ready to go tackle that work. We also spent a fair amount of time. And while we had hoped to actually receive approval in the fourth quarter of last year, the bright side of the additional time is it's given us a fair amount of time to be really, really prepared for the integration that we have coming towards the end of the summer. So we think we're in really good shape. We think all of our employees and People's employees, the combined group is ready to tackle the work and get on to the business of banking. So really excited about that. Beyond the merger, there are things you know relative to when we, I think last chatted was in the fourth quarter in the fall. We now know that rates are higher, right, which helps us with our PPNR. Unfortunately, inflation is a real -- the real deal. And it gives us some sense that very, very likely that our earnings are going to be up. We know that has come down a little bit in terms of expectations, but since we last met, the direction is a positive one for rates. And then you come into yet another change, right, with the Ukraine and the war and the sort of heightened concerns that are out there around things like cyber and obviously watching payments in the system, right? So it's been really, really, really active. We think we're really well positioned. We think our credit is stable. You saw that we probably peaked in terms of classified assets in the third quarter and that started to come down. So we find that to be also encouraging. And then when you step back beyond the acquisition and beyond that current environment, we're really pleased that so far and how we've navigated the environment, we talked about the fact that we've got a lot of dry powder. And you sort of now see as rates come up to the extent had we've been fully invested on the cash balances that we've had, we would probably have a little more pressure on our capital, right? So we didn't have that with the rising rates. And we've been now really focused on utilizing some of that liquidity position to over time reposition our asset/liability position as we see rates move. So a lot of our time spent on that. It is also very nice when there's as much disruption in the markets to have the amount of liquidity that we have and not have to be worrying about that today too. So we're really pleased about that. And then also under the category dry powder, our capital is much higher than we had anticipated it would be at the close. I think we were probably around 10% or so at the -- [ 7% ] at the close. And so I think we're getting to be almost a full percentage point soon above that. And so we have the opportunity to deploy that capital. To the extent that loan growth comes back, that's where we'll do it to the extent that it doesn't, we would engage in buybacks as long as the environment suggests that things are stable enough to do so and it makes sense to do it, but that would be our intention. So I feel really good about really where we are. We're obviously cautious in watching the environment, the economic environment, but we tend to be positioned well for these types of environments. So hope that helps as a way to kick off the conversation.

Absolutely, Rene. Very useful, and as always, insightful, and I appreciate that. And maybe let's start with the big news about the People's United acquisition merger. Obviously, that's moving forward as you pointed out. When you look at it, have the benefits from the merger changed in any way since when you first announced it?

I think we -- as we examine it, the economics are all intact.

Yes.

I think by the time we close, the rate environment will be a little bit different, right? So that will affect our marks. I think we'll be closer to neutral around the capital as opposed to fully accretive, but then, of course, that then turns into higher income streams down the road because the market has changed as well. So you'll see some difference there. And -- but the economics are there. I think as we start thinking internally about how accretive it's going to be, it really depends on whether you're talking about what interest rate environment, right? So as M&T earns a lot more, that deal might be a little less accretive, but not from a cash flow perspective, all the cash flows are intact.

Very, very good. And mergers impact a lot of different areas, of course, and communities are one of the areas that are very much impacted by a merger of this size. So how has the community response been for this transaction?

Well, if you think about it last year, when we talked and tried to be as candid as we could about the implications of the merger, there was a lot of noise out there. And I think it's kind of odd to say that in hindsight, the combination of those conversations, particularly in the Connecticut area, and the timing -- time delay, right, has actually allowed us to be more engaged in our relationships in the community than we have in the past. Usually, we're waiting until the closing, and we're sort of forced to wait until the closing. But so many people engaged us that we were able to sort of tell our story. We had decided prior to announcing the deal that we would do our first community benefits agreement, which we call Community Growth Plan. And we met with 300 organizations. So we knew what the needs were, and then we were able to engage, particularly over the last 6 months on the ground each state, each organization in a way where I think there's a lot of positive anticipation about that $43 billion Community Growth Plan. So we're excited about it. Our teams are excited about it. The People's United folks on the ground and the markets are excited about it as well.

That's great to hear. Obviously, the deal hasn't even closed yet, so I recognize that. But for 30 years, M&T has been a great acquirer. I mean, that's been part of the success, in my opinion, at least, of what you've delivered for shareholders. And when you look forward beyond this deal, Rene, will acquisitions of depositories can still be part of the action to use that excess capital? And if so, how do you kind of narrow down the field? I don't mean the name names, but how do you narrow down where you need to be in an acquisition?

Yes. I guess I'll say a couple of things. I mean, if I stay in the acquisition space, like we've always focused on places that could give us deepen our share or give us some capability that we didn't have in close proximity. And so we're heavily focused on local scale, regional scale. And over time, we've actually become more a fan of that. When I think about things like tech space and I look at what we're all talking about in the industry, in some ways, everything has changed from the '80s when I first got into this stuff, but in other ways, it's not, right? The technical debt that's out there, the larger you are, the more borders you cross, whether they be states or countries, the more complexity that comes into the process. So we really believe that size is not something that we're focused on. We're focused on getting deep into the communities and to the relationships and maybe that might mean different services as opposed to more states and things like that. Having said that, I think we all have a very keen sense that our desire is to get better, serving the communities that we already have to get deeper to be more competitive on capabilities. And if that some point results in somebody else inviting them -- inviting us to their community or inviting us to help run a bank, then that would be something we consider, but it's not really our first priority. Think about, we've got about 1/4 of the GDP of the U.S. in the footprint that we have, I mean how big do you need to be?

Yes. No, no. Good point. Maybe on a related note, you already touched on the CET1 ratio being higher than where it was when you announced the acquisition of People's United. I think the Board just reauthorized the $800 million share repurchase program. I know that was temporarily suspended until the deal closes. So what are your thoughts about restarting the buyback program after the People's United closes?

I think we've been pretty clear. I think we took that step so that we had the ability to do that when we felt the time was right, wanted to wait as you said for the deal. And we've talked about the fact that we're -- we have a lot of excess capital. I think if you look back at -- I don't know how it's been so long now, 2 years ago on the stress test, when we went through the stress test, which was a very severe stress test on real estate, I think we started...

December 2021.

Yes, December 2021. We started somewhere around at [ 9%, 9.6% ] somewhere in there. Yes, your numbers are always better than mine. Right. So...

[ It's not just ] -- Rene, it's not just a pretty face, he's got a good number.

Well said, well said. So we're 200 basis points above that. We fared fine in that test. We actually also issued preferred somewhere along the way in that space. So we're more than well capitalized, and we would expect that at some point, we'll start buying back shares, just which I'll make sure we do all the right governance around it before we do. So, Darren, would you say any different?

No. No. I think you covered it well.

In terms of -- obviously, you and your peers will go through DFAST this year in 2022. The stress capital buffers will be recalibrated for you and your peers. And then as we all know from the announcement on the approval, you'll also go through the 2023 test off cycle, if you will, because of the deal. So when you think about what they could be stressing, will that have an impact on the future of you redeploying this capital -- excess capital through buybacks? Do you have any sense on that?

Well, obviously, you've got to follow the process, right, and go through the governance with their test with our test, and you've got to go through all that stuff. But my guess would be that our capital levels are so high relative to buffers that you could receive, right? So in some of those stress tests, even though we're still at a 2.5% stress capital buffer, the result would have shown that we would have been higher. And even at that level, we're so far above that for internal purposes that I think I can't imagine it really having a significant effect. I wouldn't anticipate that.

Yes. Got it.

Which is versus what we would do otherwise, Gerard, I don't think it has an impact in the short term. Right now if you -- if we ended up with a slightly elevated SCB and it remained that way, then maybe over time, it would become an impediment. But in the short term, meaning like the next 4, 6, 8 quarters, it would be hard to believe that, that's the case. But keep in mind, as much as going through the process takes a toll on some of the teams, the upside is, is every time you go through it, there's a new SCB calculated, and every time there's a new scenario, right? And so right now, if you're a bank like M&T Category 4 bank and you're going every other year, and you have an outcome that is less desirable than you could choose to go back into the test but you don't have to, in effect for the next 3 years, we're a G-SIB, right, because we're on this year. We're going next year at the request of Fed and then the following year, we would have been back in anyways. And so we'll have 3 opportunities to keep working on our portfolio and working on our balance sheet and refining our models to make sure that we're as close to understanding where the Fed is that will give us the latitude to be efficient with capital like we've always been.

Yes. I just add, as you then get to the test that we'll take -- which will be data with [ 12/31/22 23 ] tests, well, it's a pretty plain vanilla portfolio. Their track record of loss is lower than ours, right? And one of the things that's actually nice, I think in an acquisition is it's one thing to have a really a clean, a good, strong credit book, but your ability to actually have time to look at the data, right? So we now have time to make sure that if there are any data deficiencies and things like that in the book before we have to go through that, that we can -- you have time to actually address those things, and that can affect your stress test as much as anything.

Absolutely. In fact, just staying on the subject of the stress test in DFAST, in the December 2020 COVID stress test, there were some illusions to M&T's new commercial real estate strategy amongst investors. Can you share with us your thinking on those plans and how that might impact the stress tests going forward in the balance sheet over the near to medium term?

Yes. I mean, let me just start by doing my articulation of what we're talking about, which is -- yes, look, we have an expertise in the real estate business that it's a significant expertise and one that we'll continue to capitalize on it. The shift for us was looking at the landscape of CRE, which quite frankly has moved a lot, has been modernized, lots of things have taken place off balance sheet. There are private loan -- the private loan industry, right, is using their balance sheets to finance lots of things. And so what essentially we're trying to do is we're trying to increase our touch points with all of our customers to expand how we deal with them in real estate. And those expanded places, we'll be using our balance sheet less and then focusing on a fee income area. And so we already have a number of those capabilities, which we're going to have to lean into more. But in terms of our agency business, I think we've got $23 billion, $24 billion of servicing that we do there. We do $1 billion to $3 billion every year. We think we have more opportunities to help our clients with those services. And quite frankly, other people have made this shift, right, in the past. The benefit of that is that when you start to think of the tax that gets associated with having 16% loss rates, right, it just becomes extremely capital efficient. So overnight, I think we kind of look at our concentration and sort of say to ourselves, okay, it's just not capital efficient. So we don't want to abandon any of our customers. We're going to be there for our customers, but we're going to do it in a way that has an added benefit for our shareholders.

Got it. No, very clear. When you talked about dry powder and certainly, the capital levels certainly cut in or associated with the dry powder. But maybe we could go back to your comments earlier about the excess liquidity and your ability now to maybe deploy some of it with a rising rate environment and the asset sensitivity that you guys have. So can you share with us how that looks going forward in a rising rate environment, assuming we -- I'm not asking to predict how many Fed fund rates we're going to see, but if we do see 3 or 4 this year, just how you might leg into that, if you will, with your dry powder?

Yes. I think it's just -- it's sort of managing the risk/reward process, right? So you saw where we were last year, we kept the dry powder. As rates have risen and they've risen a fair amount, we've actually started to deploy that. And while it's increasing our investment securities book, adding fixed-rate assets to the space, it's producing income, but it's also actually starting to reduce that asset sensitivity. And that's how we're thinking about it, Gerard. As we see rates normalize, we'd like to make sure that we get to a place that's less asset-sensitive, ultimately closer to neutral. And that also helps us provide in the future for downside protection as well, right? So I think we just got ourselves to sort of a place where rates were so abnormally low, right, that the risk of investment was greater than the possibility of downside. So I hope that helps, but it's pretty natural. And over time, over most of my career, we've been like asset sensitivity has been like 1%, maybe 2%, right? That's a better place for us to be.

Got it. Got it. One of the areas you guys are known for many good things, and one has always been credit quality. You've demonstrated that historically with your very low net charge-off ratios. Is there any room left for loan loss reserve releasing? I mean that was obviously the '21 story for all the banks, not just you folks. But are you still able to take in -- take some reserves out or are you just comfortable where they are now?

It's a trick question. I'll -- yes, I will say 2 things. We're still higher than when the changeover happened. And I think we're kind of -- and there's this war going on that Darren's got to think about. So I don't know you want to talk about that at all or?

No. It's just a pretty face. I got a couple of thoughts on that, Gerard. I mean, obviously, we're a little bit higher than we were and remain elevated vis-a-vis the peers. It's important to look underneath the portfolio, right? And so the allowance is built up by asset class and looking underneath and taking into account the forward look of the environment. And so by and large, with the exception of the real estate, the commercial real estate portfolio, most of the other ones are back to the reserve that we were at Day 1 -- at CECL Day 1. And so the elevated part remains in the commercial real estate space. And when we look at where the criticized are, we -- to Rene's point, we saw them peak and they're coming down, but they're still there. And so while we're thinking about the reserves from that perspective, and then as we take the economic forecast and we usually use the Moody's baseline is for the main part, but we look at the upside and downside scenarios, obviously, what's happening in the world will be something we'll take into consideration at least as we go through the -- this quarter-end process. Over time, you would hope that if things normalize more quickly in Europe and we get back on the path that we were on as we start to see more vacancy in hotels and retail space fill back up and the health care facilities that are some of those that are in the criticized portfolio continue to show the performance they had been up until the stuff in Europe that you would over time expect those reserves to come out, but it will just take a little bit of time.

Yes. I'd say I'd be surprised if we don't continue to see improvements in the areas where we've had elevated classified assets.

Yes.

But the open question is what does inflation, what the higher oil prices do, if they're sustained? And what does that do when you think about the allowance. So you can't -- it might affect other portfolios than the ones that we have the allowance for today, [ we have it for today ].

Yes. No, no, very good point. And speaking of just these current events and the tragedy going on over in Ukraine, of course. When you talk to your customers, your commercial customers, in particular, how are they feeling today? Have they changed their outlooks? We went from maybe a very optimistic outlook at the start of the year to maybe a cautious optimism, but any thoughts on that front?

I'd say it's early with Ukraine. So what we've heard so far is a continuation of really, really very hard to find workers, very expensive to do so. Even when you pay up and you can't find them. I think we're hearing the supply chain issue a lot. And when you -- Gerard, when you -- we got to do some work here, but when you really break down the comments that you hear about the supply chain, they're not all the same. We were seeing a utility that provides pipe fittings talk about they're missing a particular resin and they trace it back to the storms in Texas.

Right.

We're seeing all kinds of supply chain issues, which I don't think it's one issue. I think it's a series of several issues, which says to me that that's going to last longer. But those are the 2 big things that we're hearing. They'd like to invest more. They'd like to be able to open up more sites and -- but their ability is kind of limited based on those 2 factors.

Yes.

Just to add on that, Rene, a couple of clients I talked to who were in like metals fabrication are quoting jobs labor separate from supplies because of so much movement in commodity prices, and they can't guarantee of the input price is going to be, they're telling their clients, hey, I'll fix what it's going to cost you for me to do my work, but you're going to have to pay if the price changes of the inputs along the way.

Right.

Yes. We've got a group of the milling and mining kind of steel, steel space, they're saying the mills are fully backlogged for 12 months, and -- but that doesn't yet factor in whether there's any disruption in the aluminum supply, right, [ from Ukraine ]?

Yes. Yes. Sure. No, no, good point. Maybe we could spend the rest or not the rest, but the next part of the conversation about any updates maybe for the first quarter versus what you guys were thinking on your call in January with fourth quarter earnings. And if you look at the forward curve today, it's looking like we're going to even still with the situation in Ukraine have more rate increases than possibly everybody was expecting in January. So if we do see these more rate increases, how does that affect your outlook for net interest income versus what you were talking about on the January call?

Yes. Sure. I mean if you look at what we talked about on the January call, probably the largest change is the rate environment and the biggest update would be net interest income forecast for the year. I think on the call, we had 3 hikes baked in the last one in December, the other 2 were a little bit later in the year. And so the net impact after some of the things that were going on in 2021 was that we said net interest income would be down low single digits. With the change in the curve and the rate hikes coming sooner, right now, we think we're probably flat to up low single digits on net interest income. No real change for the first quarter. We're talking about first quarter earnings would be kind of the trough on net interest income, and we'd go up from there. Just given what was happening with the portfolio, as well as the shorter number of days in the first quarter, you typically see a drop in net interest income, we would expect that we foreshadowed would come true. And -- but then from there with the rate hikes and the earlier deployment of some of the cash into securities, those things should help a little bit and help as we go through the rest of the year.

Got it. Darren, speaking on the securities, I think you guys had indicated you were going to be buying about $1 billion above the replacement, what rolls off every period. Has that thinking changed? And then second, what are you buying? What kind of duration are you holding in an available for sale versus hold the maturity?

Yes. We got a lot of parts in there, Gerard, as always. The pace, we've accelerated the pace, as Rene pointed out, the curve has changed a lot, and there's a lot of steepness there. So for us, the risk/reward makes a little bit more sense to be more active. And so by the end of the quarter, we probably have increased the portfolio by about $1 billion, and so we'll continue from there. We're following our traditional practice of trying to manage the overall yield and the duration, and so we kind of got a mix of 2 years and some mortgage-backed securities in there. For now, we're putting the mortgage-backed securities in HTM and the 2 years available for sale.

Got it. And possibly, how does the changing environment affect the off-balance-sheet hedging that you've done in the past, any updates on the spot or forward area -- forward rate area?

Yes. Well, if you look at the portfolio that we had pre-pandemic, it was a portfolio that I think at its peak was about $19 billion in notional. It was one that we had built up over time, adding forward starting swaps into it. We like that approach. We've started in this quarter to do some forward starting swaps. So they'll start 1 year out, but -- and we were looking at 6 or 7 hikes that were priced into the curve that seemed like a pretty good yield to lock in because to get [ 8% ], we'd be -- we'd only feel sad if there were [ 8% or 9% ], and then the rest of the portfolio, we feel pretty good about. So we started to do that, started to recreate that portfolio that I think it wasn't just $19 billion, but also went out about [ 2.75 ] to 3 years. And as we haven't been replacing them, we're starting to rebuild that portfolio. We also added a couple of swaps that will be starting this month. So they were forward starting when we did and they're kind of spot-ish now. And so we'll look to use both the securities portfolio and the derivatives portfolio. We like the derivatives because it's a little more capital efficient versus taking right, the AOCI and the equity risk. But over time, to Rene's point, we're looking to use both of those in concert with one another to reduce our asset sensitivity closer to neutral.

Got it. Yes. I think, Darren, on the call -- the fourth quarter call, you -- you'd given some guidance on attrition of deposits in 2022, and you were squeezing out maybe some of the higher cost deposits, any updates there?

Continuing at pace is what we talked about. You'll see that the cash balances are down a little bit. Some of that is because of the investments in the securities that we talked about and some of it will be from some of those deposit relationships rolling off. Some of them were trust demand deposits and other ones were typically escrow balances that were pegged to an index. And so some of those balances found another home.

Yes, I think it's important, as we talk about that, that they're not consumer, not high-priced consumer, they're not a high-priced commercial, they're really those 2 categories, right, that we can -- how do I say this, fill that function and get paid a different way.

Right. Got it. I know we're running out of time, but I'd like to try to get 1 or 2 more in. Once again, about just some commentary on guidance. The fee outlook that you gave us, Darren, I think it was mid-single-digit fee growth for 2022. And then you've had some changes in products on the ISF, insufficient fund fees. Maybe some color on what you guys did and how that might affect fee growth this year?

Yes. So I think on the fees, we were really kind of low single digit to mid-single-digit. I think we -- our view is that we're at the bottom end of that range, so for a couple of reasons. One is the changes we made to the NSF pricing scheme and how we make funds available for clients. Some of that, we had already planned some of it. It went a little bit further than we might have envisioned after some competitive moves, and so that would help bring down towards the bottom end of that range. And then the other piece in the fee guide was some of the Ginnie Mae buyouts that we had done over the course of 2020 and 2021, that those would start to reperform, and we would sell those and there'll be some gain on sale. And some of those are still slowly reperforming, they might not be coming as fast, and as rates are moving, the spreads are coming down a little bit. And so the combination of things probably puts us closer to the bottom end of that range of the guide in the upper end, unfortunately, right now.

Okay. And then just lastly then on expenses, any outlooks on what you're thinking for the core expense growth this year?

Nothing that we plan to change. I mean, obviously, we've talked before about some of how the -- some of our incentive programs, we tend to tie to the performance of the bank. And so obviously, as the rates improve and more of that falls to the bottom line, we probably put a little bit more away in incentive. But generally, we would prefer to wait until with the rate increases actually happen and the revenue actually shows up, and we've done some of our work to lock in that revenue to then think about our expense pace and the investments that we want to make. We have the ability to flex the expenses, obviously, to a certain extent with revenue, but the objective is to be more on a steady pace of investments so that we can manage the teams and give them certainty to get the job done. And we'll probably be distracted a little bit over the next little while with that thing called People's where we started. And that's priority one is making sure that everyone is focused on that and making this the best conversion that we've done in our history. And then we'll get those 2 franchises humming and stabilized, and then I'm sure there'll be lots of opportunity to invest and support the growth, and that's when we'll start to see some movement in the expenses.

Got it. With that, I -- we've run over, and I appreciate you guys sticking around to allow us to run over. And I do also want to take a minute just to acknowledge Don sitting back there in his pink shirt, that I think this is your last official, I think presentation participation before you hit retirement. Is that correct, Don?

That's correct.

Well, good luck in retirement. We'll [ miss you ]. I know you're leaving in capable hands with Brian. And gentlemen, really, as always, I'm really grateful that you joined us. And hopefully, if you will come back next year, we'll be in person here in New York.

I look forward, Gerard, to see you.

Okay. Take care. Thank you.