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

All right. We can kick it off. Disclosures first. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that out of the way, we're delighted to have with us today M&T. Daryl Bible, new CFO; Darren King, Head of Consumer and Business Banking. First of all, I want to congratulate both of you on your new roles at M&T.

Maybe to start with Daryl, since you're new to M&T, I'd love to start with a few questions on your experience and career? And what can you say about your decision to join about M&T and what you've learned so far? I know it's early days. It's less than 2 weeks, but?

Who's counting? So it's 10 days; counting weekend, 14 days. For me, it really started with the purpose, making a difference in people's lives. That purpose statement really connects with me. And at M&T, they really believe that. So it's something that I can abide to and really follow. And I try to personalize it and bring it home every day by growing and developing my team. I think that really makes a difference. Joining M&T, I think, is kind of a dream come true for my career. I've had really good companies I worked for in the past. But I see kind of the strengths of my 2 former companies blended together at M&T that really makes them why they're such a strong outstanding performing company to kind of take the purpose in carrying from my BB&T Truist days and take the operating side and the business side from my U.S. Bank days, blended together at M&T and really shows that we have a strong performance.

And any early plans in your first year of CFO? Or is it too early to say?

Rene was saying everything was running perfectly before I got here, so there's nothing to change, okay, with that -- so I do appreciate Darren leaving a stacked deck in the finance team. We definitely have a strong team going there. Rene has got a pretty good list for me to work on. It starts with updating our systems in the finance area, put in a new general ledger, did that before probably about 7, 8 years ago. But as we get bigger, making sure that our company is prepared for Category 2 or Category 3 regulations, that would have been one thing. Now with new regulations coming, that gets added to that. So it's basically a huge buildout. But the mindset we have to have is we have to be operating at those levels before we try to get a deal to those levels. That way, the regulators have confidence in us and we'll approve from that perspective. So it's really getting us to operate at Category 2 or 3 levels. For my world, it would be liquidity and capital, like working with Mike Todaro and Bob Bojdak, our Chief Risk and Credit Officers and helping them build out the whole company there as well. So I think that's really important. And I'm just excited to be around -- I'm around a lot of operators. It reminds me of the days that -- Darren, he'll be a great operator because he was a CFO, and he knows what we need to do to make it happen. But we were just -- in my few days here, we saw our guide or whatever, I said, we probably should do maybe a little bit better on expenses and Chief Marketing Officer. I didn't go to him, he comes in my office, starts laying out, this is what I can do, what I can't do and all that. Tracy, our Chief Administrative Officer, sent an e-mail to Darren and I saying we can do this. And Darren chirps in and says, we can do this and this as well. I mean, that's without the CFO even being proactive. I mean, that's the cooperation that I see and how we really work together. You don't see that at every other bank, trust me. And what you see here is a really tight knit, focused group to really succeed for our communities, clients as well as shareholders.

And then maybe one more question given the wealth of experience on the stage. In your long careers in banking, have you ever thought that there would be so much focus on uninsured deposits and liquidity?

If you look at it, and I kind of try to be you the last 2 quarters since I was on garden leave and whenever I looked at the landscape, listened to a lot of earnings reports of our peers, annual conferences and all that, it was really a mess in the industry and the regulators is how I view it, and that we really never differentiated, insured and uninsured in how we model deposits. At M&T though, I give them a lot of credit. They have really long-dated commercial consumer clients. Even with that long dating, they're still very conservative in their assumptions when they look at the liquidity stress scenarios and the interest rate risk scenarios. So I'm sure we'll have changes and modifications, but I think ours will be probably more modest than maybe others in the industry. The other thing that I noticed in the last couple of months, though, is diversification still really matters. If you go back to the great recession, the guys that had trouble really weren't as diversified. The guys that had trouble this time really weren't that diversified. And guess what? The next thing is TCE really matters. And to M&T's credit, they didn't go along in the investment portfolio. So even if AOCI gets adopted and goes into our regulatory capital ratio, it's only a 20, 30 basis point hit to our CET1 ratio. And we already have probably one of the highest, if not the highest, CET1 ratio in our peer group. So we are in a position of strength from both a capital and liquidity perspective, which gives us a lot of optionality as we move forward in running the company and the ability to stay and serve our clients in times of stress.

So lots to dig into their capital liquidity, deposits. But maybe before I get into all of that, Darren, can you talk about just the impact of the turmoil we've seen in the industry in March. What does that do for returns across the sector? Does that drive returns lower for longer? Does the industry rebound back to where they were before? Can we get your perspective on that?

Yes. I mean, I guess the -- in the short term, what I think everyone is seeing to what you've seen at the conference is movement in deposit pricing, right? So when the crisis hit, the flight to both treasuries and to the G-SIBs was fairly -- I think it was not recognized the same across every regional bank. We saw some customer split deposits. We also saw some customers bring deposits to us because of the strength of our balance sheet. And we were about net neutral to slightly up. But overall, what it's done is it's put a lot of pressure on deposit pricing. And you can see margins are compressing. That's a short-term thing, right, because the rates are moving faster than the book is repricing. But in general, if you look over time, whether you go back to the regulation that came out of the great financial crisis, things that are happening today with -- free checking went away, overdraft reform, credit card late fees, capital, what have you. What happens all the time is there's this belief that these things are permanent and systemic and the industry is doomed. And what I think our industry has proven is that we're resilient that we work with clients. We figure out different ways to make sure that the value of the services we provide is understood, and we're compensated appropriately for it, right? And so you can't gauge. We don't want to because that's not good for us and good for our clients. But we do provide services that have value. And we've done a lot of things over time as an industry to kind of teach people that they don't have value, and we need to reestablish that. And so I think you'll see some momentary shifts down in profitability that, like I said, happened in a moment. But then, as the NPRs come out, as the rules get finalized, then we will go to work. So will our colleagues at other banks and figure out how to adjust how you think about your institution in light of those new regulations.

And what does that mean strategically for M&T?

Well, at the heart, we always start with the beliefs that we have in our model and how we think about the bank, and there's some core tenets there. One, Daryl touched upon that I think is kind of what has kept us out of trouble. We fundamentally believe that we're in a consolidating industry, right? So you got to start with the belief that banking is consolidating and it's going to continue. We also have a belief that stable low-cost funding is a competitive advantage. And that over time, if you've got that funding base, that's a critical element of any bank and its success. And you said, it's hard to believe we're talking about uninsured deposits again. Well, that's because we all went to sleep for 15 years with rates at 0 and everyone forgot the lessons of liquidity and the value of deposits. When we were thinking about our merger with People's, one of the #1 reasons why we were so attracted to that franchise, very similar culture, but they had one of the largest low-cost stable deposit funding franchises in the Northeast. And because of that, we were very attracted to that organization and that just brought another set of diversification, as Daryl talked about in terms of customer and geography and client type to our funding base. And so we start with those core tenets and then go from there. And so as we look forward, we'll think about what's the value exchange and consumer checking accounts. What's the value exchange in the mortgage space. What's the value exchange with commercial customers. And there's -- the more time you spend with clients, which is really the key, the more you understand what is valuable and what services to provide and how to charge for it.

So on the topic of stable low-cost funding, Darren, you pointed out recently that bank balance sheets could start to move towards what they look like before GFC in terms of the mix of NIB and IB. Based on what we've heard through this conference, you're probably in a minority of 1 on that topic. Can you expand on that a little bit? And what do you think -- why do you think this will play out for NIB and IB over time?

I guess, I find it easier to look back and learn from the past than to try and be a prognosticator. But looking back at what's happened over the last 10 or 15 years, again, the rate environment we've been in, we can debate, is this a new normal or not? I don't know if you look back far enough, you would say the answer is no. But to me, the question is if rates stay at -- if Fed funds stays at the rate that it is today for a prolonged period of time, how will customer behavior look and what -- how -- what will they do? And to me, the only way to start to answer that question is to look at how did they behave the last time when it were at this rate. And what you see is people get smart about managing their excess liquidity and become more rate sensitive. It starts with wealth customers and commercial customers, and it works its way down to consumers. And you see a shift in noninterest-bearing. Those balances come down. But everyone has a level that they're comfortable operating their accounts at. It will get to that. And time deposits and money markets will go up as a percentage of what's on the balance sheet. And so back to the advantage, when we talk about low cost, stable funding, that's really code for operating accounts, right? The primary checking account for a consumer, where do you have your check, your paycheck deposited? For a commercial or small business customer, where do you run your payables? Where do you pay your payroll out of? If you own that count, you own the relationship, but that's also the best source of funds, and that helps manage down your overall funding cost. What we pay for noninterest-bearing deposits, the same as everybody else. It's 0, right? And what we pay for money market, real competitive environment, we're going to be within a few basis points of what the market is, same with time deposits. And so what differentiates your cost of funds is the mix of deposits that you have on your balance sheet, not your ability to price, although to a certain extent, that's the case. And so I just look back over long periods of time and say, assuming the market adjusts and the mix on everyone's balance sheet adjust to what it was and pricing adjusts, then you kind of have a picture of where you think the world is going to end up, right? And so we started talking about this back last September that earning over 4% in margin is highly unsustainable, it's momentary. And obviously, that's kind of happened. I didn't think it was going to play out this way, but we ended up where we are. And so you just got to be careful not to run your bank assuming something that's happening in the moment is going to be permanent, right? It's like charge-offs. Charge-offs for the last 6 or 7 years have been for us below 20 basis points. And that's just not real that, that's going to stick around that long. And so to adjust the way you run your bank and the way you manage capital, I think that rates are going to -- I mean, margins are going to stay over 4% and charge-offs are going to stay low, you're setting yourself up for a problem. And so you just try to look out at the changes that are happening, preserve your optionality and think about what banking looks like over the long term, and that's kind of how we start to think about changes.

Perfect. Hold that thought on credit because I do want to dig into that. But Daryl, I want to bring you in here on just deposits for the industry as a whole. As the treasury starts to refund the TGA, what do you think happens with deposits in the banking system? Do you think we see another period of outflows across the system?

I think there is a big risk that outflows will continue. It's hard to know exactly how much it's going to go down if it's going to go on to where it was or level off before that. I think for us at M&T, we really need to continue to focus, like Darren said, focusing on serving the client and getting the operating accounts and growing that space and really leveraging the relationships that we have to continue to grow the liability side. And that's really what's going to really spur the growth of the revenue in the balance sheet is by growing the core deposits on the liability side. So that's really our strength, and that's really what we're going to focus on. And it's going to be more challenging if money is coming out in the system. But I take what Darren says, we are really good and we serve the communities that we're in, and we have strategies and operators that know how to get the job done.

So to brings that down to what we're seeing now in the second quarter for M&T specifically, the deck yesterday noted that deposits were down I think in the 2% range. Can you talk -- could you give us a little bit of an update on the deposit trends you're seeing in the second quarter in general?

Yes. In a nutshell, I would describe it as pretty typical second quarter deposit activity. A lot of the stereo went through the banking system through March and into the early part of April, April also is tax time and so we see money move out from business accounts, commercial accounts, a little bit from consumer, although they kind of half get half pay. And so you saw a little bit of seasonal decline early on in the quarter and then it starts to build. And so the typical behavior is we see commercial deposit balances decline in the first 4 or 5 months of the year, and then they build up the rest of the year and that cycle repeats. And that's what we're starting to see a little bit in the second quarter. So it feels like there's some stability out there against the backdrop of what Daryl was talking about and you were about what's going on with the Fed and the government with how they're trying to fund the deficit, likely to put pressure on deposit balances for the whole industry in the coming months. But again, we'll adapt and we'll figure it out.

So what does that mean for deposit betas? You noted that NII could be down in the 1% to 2% quarter-on-quarter range in the second quarter. How do you think about deposit betas as we get to the next 2 or 3 quarters?

Sure. Daryl, Do you want to start that one or do you want me to go?

Doesn't matter.

So we've talked about our through-the-cycle deposit beta being kind of high 30s, low 40s. We think about that based on the mix of deposits on our balance sheet. This quarter, I think just given everything that's going on in the market, betas are going to be high, they're going to be high for everybody. But that doesn't necessarily change where the terminal beta is through the cycle. It's just how fast or how slow you get there. And so we're watching what's going on. The more there is pressure from things that might happen in the government, it's possible that those betas start to move up as we go through the year. The other question is what happens with Fed funds, how stable is it? Is it still going up? Do they start to cut? But for now, we still feel comfortable with that range. It looks like we're moving towards the higher end of that range, a little faster than maybe we thought. But that's really the big thing that I see happen. I don't know, Daryl, do you see anything different?

The only thing I would call out when we fund the company from a treasurer's perspective, you have a lot of noncore deposit funding sources. You have a federal home loan bank, you have broker deposits and you have federal and unsecured debt. This past quarter, we decided to use more broker deposits. So when you actually look at the beta on deposits, including broker deposits, it is going to basically make that look a lot higher. If you adjust for that, it's probably going to bring it down 5 or 6 percentage points and actually look at what the core deposit is of franchises. I think that's more of a pure way of doing it because whether you do broker deposits, unsecured debt or home bank advances, it's really just a treasurer decision how we're funding the company from that perspective point.

And how does that compare, I guess, you spoke about broker deposits, but when you look at commercial betas, wealth management betas, consumer betas, how do you think that compares to where are we in the cycle?

Well, commercial and wealth betas, they move pretty quickly. And they've been reacting. I think we talked last time it was in 70% to 80% range. This quarter, we're probably more like in the 80% to 100% range, maybe even slightly above. And consumer betas are always at the lower end. We've kind of been in the range of, let's say, 15% to 20% betas, whether we actually even get above 30% in the cycle, again, remains to be seen.

Why do you say that? Shouldn't we -- should we get higher betas on the consumer side as we go later into the cycle?

Yes. I think it just depends on for consumers. They're slower to react, and a lot of times, they move into time deposits. And so time deposit betas, if you're doing a 12-month or a 15-month or an 18-month CD, you don't actually see that repricing until you get to the end of the maturity. And we'll see where Fed funds is at the end of that time. If Fed fund stays high, people that bought CDs early, you'll start to see that beta go up. People that bought CDs late, you might actually see that go down depending on where Fed funds is at the -- when those mature. The other question is how stable is the environment then, right? So there's been a lot of competition on price to hold deposits right now. If that competition subsides even if Fed funds are still high, you might be able to reprice those at a lower rate.

Got it. So before we change topics, I know you gave a pretty comprehensive guide in your deck last night. Is there anything you want to add or talk about there?

No, I don't think so. I mean, we tried to spend our time running the bank and focusing on the annual performance as opposed to the quarterly performance. And when you look at where we're trending, we feel like we're -- right now, like we're in the range that we saw back in January, and we feel like we're tracking towards the kind of EPS for the year that we thought we would have. How you actually get there is not always the way you think. Whenever you tee up a golf course, you hope to hit it down the middle, put it on the green and two pot and get a par. And sometimes you're hitting the rock or hitting the bunker, you got to get up and down to make a par. There's lots of ways to hit your EPS. There's lots of ways to get at par. And so as we go through the year, we'll make adjustments based on what's happening in the economy. I think some of the things that will be a little bit of nuance to this quarter that will help everyone through is we completed the sale of our collective investment trust business, it happened at the end of April. And so we had the gain there in April, but there was 2 months of fees that obviously were in effect pulled forward in the gain. We'll have the full quarter of the mortgage servicing rights that we purchased at the end of the quarter and then the deposit betas. But all that stuff taken into account, we're kind of in the range of where we expected to be for the year. I think there might have been some confusion, probably we miscommunicated a little bit on maybe where expenses might be in the quarter and that we talked about them being a little bit elevated in the first 2 quarters of the year and coming down. And so I think there was some miss there it looked like compared to consensus. So hopefully help people understand what the trajectory looks like. But it's not the overall for the year that's changing. It's more how it looks through the year and quarter-by-quarter.

And just to clarify on the fees, does that include -- does the guide include or exclude the CIT gain?

The guide that we put out now includes -- well, the CIT gain, the gain will always hold it aside. So this will be the fee revenue ex CIT plus MSR.

Right. Okay. Perfect. That's a good clarification. When you look at the fee income, it's pretty straightforward, very consistent. There's just a little bit of noise with the sale and the purchase of those 2 actions, but it's pretty predictable when you look at it.

All right. Perfect. Maybe to dig into credit because that's been a big topic, especially on CRE. Just given the stress we're seeing across the CRE market, can you talk about how you're prepping to work with your borrowers in an environment where things get tougher? Is there capacity for sponsors to bring in more equity? How are you working with your borrowers as you get into a repricing cycle from here?

Yes. I guess a couple of things. I mean, I think when we communicate sometimes, we get lazy and we talk in generalities and we say there's stress in the CRE market. Well, there's stress in certain segments of the CRE market. It's not across the board issue. When we look at industrial, we look at warehouse, we look at multifamily, rents have been strong, the ability of borrowers to refi and manage debt service coverage ratios, not a problem. The place where even retails really come along ways from where it was during the pandemic and the place where the real focus is clearly office, and we continue to see some stress in health care although the health care for us when we look across our broader set of geographies now is a little more acute in New York State than some of the other states, right? And so there's state-specific funding and funding issues that happened in New York State. And so it's a little bit more acute there. Within office, office is also very nuanced. We clearly have some properties in New York City. People might have heard about that over time. But the difference that we see between downtown and midtown, right? So just to say New York City office is not being explicit enough that as we look at what we see coming, you see it's more property specific and sponsor or client specific where you're going to have challenges or not. And so to get to your question about how we work with clients, I mean, many of our clients have been around for not just 5 or 10 years, but 20 or 30. And their cost basis in these properties is incredibly low. And we underwrite each individual property, but many of these clients look like a REIT. And so they have other properties. They're not always in one asset class, and they cross -- we get the benefit of their other properties and the cash flow of those other properties because they will support one if it's not moving or they're not cash flowing properly. We still have to write that up as criticized because we look at each individual property, which is why you see some of our criticized numbers. But the difference between what ends up in nonaccrual and ultimately charge-off reflects people's outside sources to help support those individual properties. Some of it will be that cross collateralization I talked about. Some of it might be they just have wealth and cash because of their situation and their personal wealth. And so the issue will always be when a loan comes to maturity and what the current occupancy is and what the current debt service coverage is, which will affect the cap rates in the LTV. And so if the LTV has moved up because values have come down, we'll look for clients to bring in outside sources and inject some equity and bring the LTV down and then we move on and everything is fine. Some people will do that. Other people might not have the wherewithal and we might do something on like an A note, B note structure where we put the A note at a reasonable LTV and then the B note looks more like mezz debt. You may -- it probably carries a higher rate. You may or may not charge some of it off at that time as a partial charge-off and then you help keep them in business. Some people might go interest-only and it becomes a TDR. But each situation is unique, and we try to work with each client to figure out what's the best alternative to keep them in business and keep this property functioning so that it's got the best chance of coming out of it on the other side without a loss for our client or for us. So does that mean everything is going to work out great? No. There's going to be charge-offs. They will come, they'll be lumpy. Probably see a little bit of some of that this quarter. But if you look over the course of the year, again, you look at where we've been last quarter or the quarter before, the average is still well below our long-term average, but there's going to be some of that stuff that moves in and out as we go through the year. It's going to take a while. I guess, to me, the 2 key messages. It won't be Armageddon all in one quarter, it might not be -- it probably won't be Armageddon at all, but there will be some consistency through this as the Fed stabilizes where rates are as the clients can adjust their properties and their business models to that new environment.

And what does that mean for criticized assets? It sounds like criticized assets might rise, but at the same time, that might not really translate into loan losses. Is that the message?

Yes. I mean, it's no secret, our criticized have been high for a while and that's because of the grading. But the criticized -- creating something as criticized doesn't always take into account these outside sources, right, because that's not part of credit policy and what you can do. So that's why you don't always lead to charge-offs. When we look at our criticized book, it's down from its peak and it's been coming down, but what's happening is it's remixing, right? So the hotel portfolio that everyone was scared to death about in the pandemic because no one was ever going to travel again and stay in a hotel, well, guess what? Hotels are probably one of the most profitable parts of the portfolio right now. So those are coming out of criticized and you see some office moving in and a little bit of health care. And so it's kind of stable. Hopefully, we'll see it stabilize and actually continue to come down.

And what are you hearing from borrowers in general for -- in terms of the rate repricing, right? Like presumably, a lot of them have hedged for the increase in rates. So what are you hearing from them? And how do you work with them on that?

Well, in the short term -- again, it's really about what happens when the loans mature and at maturity. Because by and large, the borrowers will take a floating rate loan and they'll swap it to fixed at the time they originate it. And so their shock impact from rate increases in the short term is basically 0. It's all when you get to maturity and your repricing. And that's where you go back to the other conversation we're having about how we look for equity, we look for outside support, we do whatever we can to structure the notes so that it's -- they can cover it.

And how does private capital come in here? We've seen headlines recently that private capital is more willing to come in and buy whole loans or help the banks where the banks originate the loans and they buy them. How does that figure into the M&T strategy, especially when we think about deemphasizing CRE a little bit here?

Well, we think of it as part of a way that we can help our clients. We try to be agnostic about whether it sits on our balance sheet or someone else's, that our relationship is with our clients and our borrower and our job is to help them make sure they get the capital they need to run their business. And in some of these situations, I always say, I'd rather have a payoff and a charge-off.

So maybe as we get towards -- let's start talking about regulation, right? Because clearly, regulation is moving for most of the regional banks. Can you talk about...

That's Daryl's specialty.

Well, then Daryl, where do you think regulation is going for some of the regional banks? And how are you preparing for it?

Probably it's a given that AOCI is going to be in regulatory capital. I think we are prepared very well for that. Definitely, I think that the regulators are going to look at our liquidity, stress scenarios, look at our LCR calculations and really look at the underlying assumptions that basically they use and those will probably get adjusted over time. That will probably be a longer-term change from that perspective. If you look at other potential changes out there, interest rate risk, we'll probably go through that same type of process as well. So -- but I think from what we have at M&T, we've been very conservative. We take a long-term approach to how we manage the company and really, we want to be a strong capital, strong liquidity and make sure that we can serve our clients and communities consistently over time. So if there's adjustments we have to make, we will make those adjustments and we'll probably lead the pack in trying to do that to get ahead of everybody else. But I'm very confident that whatever it is, we will get to where we need to be. And I agree with Darren that the industry will adjust from a profitability perspective, and we'll figure out to make sure that we get adequate returns and support our shareholders and communities at the same time. So I think it's something very doable, but definitely changes are coming down the road, and we'll manage through it.

One of the things M&T has done quite consistently through QE is hold more and more liquidity as some of those search deposits were coming in. Cash is still at about 12% of total assets. It's still one of the highest in at least a group that I cover. How are you thinking about that liquidity?

Yes, I would say, that you want to manage it right now about half at the Fed and half in the investment portfolio. It really comes make sure we have really strong liquidity and make sure that if we don't have it at the Fed, we have it and also very short-term, very liquid securities like treasuries and all that. But we will have a strong HQLA 1, that’s a given. If we end up investing in more securities, the securities we're investing in, it could be your agency MBS, but we've done a good job in investing in agency CMBS. We have much less convexity than many others in the industry. And I think we will continue to run a really conservative portfolio. And depending on what will our rate sensitivity be, we don't want to take a lot of interest rate risk at the end of the day. The way you grow earnings and revenue is really by growing your businesses and your clients, and that's how you grow consistent revenues. If we get right on rates this year, we can't continue to get that track record year after year. So we're going to keep that pretty tight band to interest rate risk to be no more than plus or minus probably 2% for a decent move of interest rates. So we just don't want to take a lot of risk. We want to grow our businesses and serve our clients and communities is really how we're going to run M&T.

5.25% is not a bad rate on cash right now.

That's fair. Before I go to the audience, maybe on the balance sheet front, you noted more liquidity. But how do you think about the duration of the deposit side of the balance sheet, right, both Valley Bank and Signature? And how does that inform your view on the asset side, whether it's the rest of the securities book as well as the loan book?

We have definitely a long-term relationship with the vast majority of our clients. So you start with that. You look at the diversification of the industries and the clients that we have, so we don't really have any overconcentration in any one specific industry. So diversification really matters from that perspective. My guess is we will continue to shorten up. But we already have a conservative -- when I looked at our treasury assumptions that we have and our interest rate risk and liquidity stress scenarios, they're shorter than what I've seen in my past. So will we make them shorter in the assumptions, I think we'll just have to see how the rules play out. But I feel pretty good where we are today, and we'll continue to manage what we need to as we move forward.

I'll just pick up on that a little bit. So we take our cues from our customers. And through time, probably for the last 15 years, maybe 20 years, we've modeled the deposit base, particularly the non-determinant deposits. And we've looked at customer behavior against themselves to see where do they kind of keep their account balances of their consumer, small business, middle market client. Where that consistency as we call those operational balances, those are the ones that we'll tranche and think about giving them a little bit more duration credit. We can see in moments of time, money flows in and out. Like someone might sell a business and you'll see a big pop-up in their deposit account. We don't give them immediate credit for that, right? We need to see what happens over time with the operational balances. And it's that thought process that played itself up in the pandemic. And when those balances came in, we could see here's the level of operational balances, but holy-moly, there's this big surge that came in. If it came in overnight, it can go out overnight. And so we need to see some pattern before we would start to think about extending the duration of it. And it was that thought process that kind of kept us from going longer into securities with the cash while we're waiting to see it play itself out. And so just exactly on Daryl's point about the mix of the clients that we have, their behavior tells us how to think about their deposit base. And we use that data to watch and think about how we think about the value of those deposits.

There a quick question in the room before we wrap up. So maybe to finish up, if you can talk about capital return, you have a gain on sale from the CIT sale. You still have a lot of excess capital. I think your CET1 after the CIT sales is around 10.5%. Can you talk about how you're thinking about capital return, not just from the CIT sale, but as we go through the rest of this year?

Yes. So our window is closed. We took the quarter off. When we were watching what was happening with the industry, we're kind of starting to feel a little more comfortable with things, and then we had the final change with JP and First Republic and with the stress capital buffer results coming out, with that, let's just sit tight and see how the world shakes out. As we see things stabilize and we look at where our capital ratios are today, where we think loan growth is heading and our ability to generate capital, plus our -- the size of our allowance and our confidence in our underwriting, we think that we've got some room to bring those capital levels down. And so we'd be looking to get back to work on some repurchases in the coming quarters.

All right. Perfect. With that, we're out of time.

One comment. I just want to thank Darren for kind of helping me through this transition. He's been a trooper and I look forward to seeing how we grow in the consumer business, but I just can't think...

That's a little commercial. I'm not doing that.

No. No. It's been a great transition. I really thank him for all that.

Perfect. On that note, Darren and Daryl, thanks so much for joining us.

Our pleasure.