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

All right. Up next, we are pleased to have M&T Bank joining us once again. M&T Bank has had an excellent year, led by its strong capital position, improving credit and strong balance sheet management. This has led to them being the best-performing stock in our coverage for the second straight year. So not to set the bar too high for you for next year, Daryl. Joining us once again is the CFO, Daryl Bible. Today's presentation is going to be a fireside chat. Although, if anybody missed it, they did post slides last evening about 5:00. Brian Klock was running around trying to get them posted. So they were out there.

So with that, Daryl, maybe to start off. 2024 was an encouraging year for the industry despite all the uncertainty. For M&T, as I highlighted, it's another outstanding year. Credit showed signs of improving, balance sheet is in a better place from a risk perspective, and you began returning capital. Could you maybe just talk about some of the key things that led to such a strong outcome once again and how this positions you to succeed into '25?

Yes, first, I just want to thank you, Ryan, for inviting the company here to present. And we really appreciate that. That's something that we enjoy doing closing out the year and all that. So we've had a lot of success this year. It's been a huge team effort. René has kind of led the charge in the company, but we've had great execution throughout. And at M&T, we really live our purpose to make a difference in people's lives. We really think that we are the best bank positioned to serve our communities that we have out in the marketplace. For us, it's really executing on fundamentals. We're really talking about fundamentals that we have. And if you look at what we've done in the credit risk management side, the interest rate risk side, capital managed side, we've had really strong execution. From a credit perspective, this past year, when the year started, there were some doubts, a lot of questions around where we were with our large criticized book. We've seen that come down now 3 consecutive quarters. Our nonperforming assets are also decreasing, which is very positive. Our charge-offs that we gave at the beginning of the year this past year, we're right on track for achieving those very solidly. I think if you look at our CRE, we've been shrinking CRE since 2019. We were at 31% of our balance sheet in CRE. We'll probably be at 20% in the fourth quarter. We're at a level now where we think and we have opened up and started to make CRE loans again. It will take some time before you see those balances start to grow on the balance sheet and stabilize. The key right now, though, is to get all of the balance sheet growing with what the market will give us. We don't want to get the CRE portfolio to be oversized again. It still means we have to continue to grow our C&I book, our consumer book, maybe even our residential mortgage book as well as that kind of moves out from that perspective. From an interest rate risk perspective, I would say we've done a good job. Treasury has done a good job neutralizing our balance sheet pretty consistently. We aren't big where we make big decisions and throw it all in on the chips, we kind of dollar average in over time. And we've done a good job with that, both with moving cash from the Fed balance into the securities portfolio. We're probably at $34 billion at that now. So we've added a good $5 billion or $6 billion to that over the year. We've added hedges that start in '25 and '26 that now will be averaging up throughout '25 60 basis points. We have really good strong repricing of our fixed rate lending books. If you look at the investment securities book, that's going to price, we have $5 billion maturing at 2.80%. We're buying with our mix of securities now. That's going to go up a couple of hundred basis points. Our fixed rate loans, both on the consumer side, resi mortgage side and even some fixed commercial assets are repricing positively up, probably about 150 basis points. So we have a lot of trends. But I think the most important thing that we really want to focus on is trying to stay as neutral as possible and really try to grow our businesses, grow our customer relationships. When you really look at it, any bank can grow maybe 1 year really well and maybe position something really right. We want to be consistent and be a continuous grower in good times and bad times throughout all economies. So it's really focusing on growing your businesses. We have 6 really great businesses at M&T. All of our businesses are really queued to have a great '25, all growing more relationships, more accounts, growing both deposits and loans, very, very strong commitment from that perspective.

Great. So Daryl, while it's only been a few weeks, I know you and the team are probably out talking to clients. What are they saying about the environment that they think we're about to move into?

I would say right now, people are, I think, more hopeful that things will be better as we move forward. But with the administration, obviously, they're going to have flat to lower corporate tax rate. So that's a positive for the economy. I would say more reasonable, maybe smart regulations rather than piling on more and more regulations, so that's a positive for the economy. I think people are hopeful that will continue to go through. But if the government -- and it seems like they're going down this direction of really trying to be much more pro business and grow the economy. And if the economy grows, I'm a firm believer that our loan book will grow. If loans grow, then our deposits grow. It all kind of plays together. I really think this administration believes in our industry. Our industry can basically continue to have capital to basically have the economy grow. And they will help us to help that growth actually occur in the marketplace.

So maybe switching a little bit to the near to intermediate term. In the slides, you gave an update on the fourth quarter, where you highlighted loan growth as an example. The market has gotten excited that we're going to see loan growth return at some point in '25. How are you just broadly thinking about growth? What are clients saying? And what do you see as you look into next year?

I think we're optimistic that we will continue to grow. If you look at the past 1.5 years, we've been shrinking CRE, growing C&I and consumer. I think in '25, it's going to be a little bit different in that CRE is going to start to level off probably midyear and start to grow second half of the year. So you'll basically have all the portfolios growing on the balance sheet from that perspective. Right now, what we project, probably economy growing at 2.5% to 3% range. So that's probably consistent with what the market will give us to grow. We are going to change our credit box. We're going to grow what the market gives us really serving our communities and customers to make them be financially successful.

Maybe just a 2-part question. First, for the fourth quarter NII outlook, I think you're saying $1.73 billion, plus or minus. I think in the prior it had been plus. Maybe just talk through what are some of the moving pieces that have impacted the NII this quarter before we talk more broadly about it?

I think we're pretty much on track. I think we feel good about fourth quarter being approximately $1.730 billion from that perspective. How we're getting there this quarter is a little bit different than what's planned. We gave guidance that deposit betas would be around 40%. We actually had expectations that they had actually outperformed. We thought they'd be closer to 46%. But what's really happened in October-November and still hanging in December is that we've actually had really strong deposit growth. And even though our betas were higher since we're getting more growth in some of the higher-rated betas, we're coming in closer to 40%, which is good from that perspective.

Yes. Because you're bringing in higher costs.

Yes. But I think of it as a real big positive because it's coming in under our funding curve. We have a lot of maturities that are maturing in the first quarter. We have $4.5 billion Federal Home Loan Bank advances. We also have some debt maturing, so over $5 billion. So come January, early February, we will rightsize our balance sheet and get our balance sheet to be much more efficient. I would expect second quarter margin, everything else being equal, to really bounce up really nicely as we go forward.

Yes. Got you. So maybe just to build on that, I know we'll get formal NII guidance in January. But maybe if you could just discuss some of the drivers of NII for you? And could 2025 be a record year, like every bank seems to be out there highlighting?

For us, it really comes down to fundamentals. We're working really hard, our treasury team and our senior leadership teams. It's really -- where we have interest rates in the marketplace, interest rates are moving. So it makes it fun and interesting. And our treasury team is working their b*** off trying to keep us relatively neutral from that. But it's really how you price your loans and deposits. We want to make sure that we're pricing loans and deposits either over the funding curve on the lending side or under the funding curve on the deposit side so we can capture revenue. The jobs of our businesses is to maximize the revenue while serving our clients. It's a job of the treasury to neutralize that interest rate risk. And that's the role everybody plays in the company. And we believe that's really how we kind of grow consistently your NII over time is working and really executing on the fundamentals that we have.

So just to wrap up the views on the fourth quarter, we talked about the NII, the outlook for loan growth. Anything else, in particular, you wanted to highlight, whether fee income, expense, credit or -- it sounds like deposit is coming better. Anything else that you wanted to make sure that we were aware of?

Our fee guide actually was up. If you look at our core fees, they're up from the guide that we gave in October. So we're having a good strong fee income performance. We are -- have some notable items. On the fee side, we did sell some, I would call, noncore securities. We own some trust preferred from other banks. We sold those. We owned some preferred stock from the GSEs. We sold those. So you're going to have a gain in there of about $16 million. We noted that in, in that guide look. So I don't count that. But if you don't count that, we're still beating fees on the guide basis. On the expense side, our expense guide didn't change for core expenses. But we do have 2, I would say, notable items on the expenses. One is that we had preferred stock on our books. We called all 6 tranches. Three of the tranches had 8% coupons, which is really high interest rate, obviously, to carry. The other 3 had SOFR plus 500-type spreads. So we called all those. Because they were marked to market when they were acquired through bank acquisitions, there's a charge in there, a little over $20 million. It's about a 3-year earn-back. So that's going to have a part of the charge there. I think it's $46 million total. The other charges, we're exiting out of 2 buildings from a space perspective, one in Wilmington, Delaware, and the other one, we're shrinking some space in Baltimore. And that's another charge that we're taking. So I don't count that as core expenses, but those will improve run rate as we move forward there. We kind of called that out in the guide as well.

Got you. And maybe shifting gears a little bit. So this may have started a little bit before you arrived, but really accelerated, in your time, just the transformation over the past few years of the balance sheet. You talked about rightsizing CRE, holding on to more cash, investing in more securities. I mean you had taken on some more wholesale funding, added hedges, talked just before about rightsizing some things on the balance sheet. Are we now complete with the transformation? Or is there more work to be done on the balance sheet, recognizing there's always more work to be done?

From a CRE perspective, we've really invested heavily in our off-balance sheet capabilities, and we think we are at the right point from an on-balance sheet perspective. So we believe we can really serve our customers the best way possible in a more capital-friendly way from that perspective. I would say, from a cash and securities perspective, you will see us drift in '25 probably average closer to $20 billion at the Fed, assuming the economy stays in good shape, which we believe it will, and kind of drift up the securities portfolio into the mid-30s on the investment book. And that will just kind of play out over time. So in total, we'll have $55-plus million in highly liquid securities from that perspective. But things are always fluid and change. But for us, it's having really good, strong liquidity, really core. I think we've done a good job cleaning all that up. So it's -- I think we've made a lot of progress this past year. We could continue to tweak things a little bit, but now it really comes down to our businesses and execution from that perspective.

Yes. And just to add on to the point that you said cash coming down to $20 billion and securities in the mid-30s. You've obviously been adding to the securities portfolio, and it sounds like you're likely to continue. I guess given the movement of rates, you guys were in a very short-duration portfolio. Has there been any consideration to extending at this point, just given the opportunities that the market's presented?

So I think right now, we -- from an AOCI perspective, we believe that's going to get in the regulations. We think that's probably the smart thing to do to protect tangible capital in the marketplace. Given that, we think our AFS portfolio needs to operate with a duration in the 3-year time frame, plus or minus, from that perspective. There's a couple of ways to get there. You can buy longer-duration MBS, if you want, and you can do a layer of hedging. It's a little more complex. Those hedges aren't exactly appropriate. Right now, because of the shape of the yield curve and all that, we've been actually just buying shorter duration. We haven't really had to cost any revenue from doing that strategy. But we'll look at both. Net-net, we'll keep our portfolio relatively short in the 3-plus area overall. But whether we actually just buy securities outright in shorter durations or buy longer and hedge, we'll let Treasury make those decisions and do what's best long term for the company.

Daryl, the fourth quarter guides for the NIM in the high 350s. You've sort of outlined a handful of different pieces across some of your remarks, changes that are coming in the second quarter, neutral stance on rates, success repricing deposits, fixed rate asset repricing. Can you maybe kind of bring these things together? And what do you expect this means for the trajectory of the margin over the medium term? And where do you think you can inevitably operate?

Yes. We are very positive for 2025. We think we have an upward trajectory on net interest margin for all the reasons we've noted earlier. I think the year averages in the 360s. I feel pretty confident with that. We'll give you more specific guidance in January from that. But we have a good trajectory. All of our businesses are planned to grow loans and deposits. They're all planned to grow more revenue than they had this past year. So we feel very optimistic for '25, and it will come down to execution from that perspective. I think if you look at the other pieces for '25, fee income might actually be high single-digit growth. We're having really strong growth in our fees, really driven by our trust businesses, both on the wealth side as well as ICS. Our mortgage platform, residential as well as commercial are also very strong. We think those will actually help -- be the drivers on the fee side. On the expense side, we've talked about our 4 priorities that we have: building out New England, building out our risk management framework, optimizing our resources through simplification, and then making our processes and applications more resilient and scalable. So those are our 4 priorities. We are putting more money into those priorities. We think now is the time to get some of these finished off because of -- it's giving us more flexibility to actually grow our company faster potentially. So our growth in the expense side will be in the 3-plus percent range. I think our operating leverage will probably be 100 to 150 basis points positive operating leverage. But we're -- this is a little bit different than we had in '24. In '24, we had less expense growth. Here, we're having a little bit more expense growth to get these projects done. But we think we got the revenue, both on the balance sheet side as well as the fee side, to support the higher expense fees to still have positive operating leverage.

And NIM could set you up well for exiting '25 given all the things that you're going to be doing. All right. No, that was great. I appreciate all the color on that, Daryl. Maybe to spend a minute on deposits. So you talked on the slide -- on your remarks about having greater -- having faster-than-expected growth, which is obviously great to hear. We've been watching noninterest-bearing deposits or disintermediation, as you refer to it, has been happening at a slower pace. You've been bringing down brokered. So as you think about the potential for loan growth coming back, what are the strategies in place to replace wholesale funding as you talked about happening in the late first quarter, second quarter and also to grow core deposits?

Yes. So I'm a big believer in having both oars in the water. Especially as '25 rolls out, we want to grow our loans. As we grow loans, that will grow deposits. That's just math from that perspective in the economy. So both of those will grow, hopefully, consistently throughout. We've had tremendous loan growth in the fourth quarter, basically driven by commercial, municipality, our corporate trust businesses as well as our mortgage servicing businesses, all really strong positive. But when you look at our 6 businesses, they are all planned to grow, all planned to grow deposits, all planned to grow our lending platforms from that perspective. So we feel good with that overall.

Daryl, you talked about the deposit repricing, thinking it would be at 46%. But obviously, you've had some solid growth that has brought that down a little bit. As you think about, over the last 2 months, how the rate cycle has evolved, so less cuts, steepness in the curve. How does that at all impact the way you think about the ability to reprice deposits, not just for the near term, but over what could be a shallower easing cycle?

For us, it's -- in the markets that we serve, we have different strategies. In some markets, we have more market share than other markets. We try to be leaders in the markets that we have more share in, and we've been able to be successful with those strategies. In other markets where we aren't leaders, we tend to be kind of the agitators in those markets and kind of drive more growth and all that. So our business leaders and their strategy people have really good execution models, and we have a lot of growth. We're growing accounts, we're growing balances, and I think execution is really strong from that perspective.

So you mentioned earlier that there's going to be a shift in CRE, which has been shrinking, 31% down to 20%. You got the concentration level below 150, which I know was the goal of yours. And then I think you made a comment before that we should be down in the near term and then start to level off. Can you maybe just talk about the lessons learned from the past cycle and how that impacts the strategy of where you want to grow in CRE? Obviously, office has been through lots of trouble and there were some issues in parts of multifamily. How does this formulate where you want to grow in commercial real estate moving forward?

For us, it starts with customer selection. We have generational customers at M&T, people that have banked with us for over 50 years from a family's perspective. Our customers are basically committed in supporting their credits. And if you look even in our office portfolio, we have about $4.5 billion there. LTVs are under 60%, closer to 50%. So all that, it seems to be very positive as we play out there. We are exiting the CRE space. We're going to still be large players there. We're just going to try to blend in and use a lot of our off-balance sheet capabilities that we have with MTRCC with our agency placement basis. We actually have actually a partnership with Blackstone that's public now, where we're helping execute some of their clients as well through that channel. So that's a positive. But we want to basically grow and support everything. Well, we aren't actually looking to grow office right now. Everything else is actually a fair game if it's within our credit box. But we really want to support our customers that have supported us over a long period of time and great relationships. We want to be the bank that's really dependable, the bank that's really focused at supporting our communities and helping grow our communities. I believe that our bank is really a representation of what the community really looks like. And if the communities are healthy and strong, the bank will be healthy and strong.

And Daryl, so I think the markets have gotten excited post the election that we've seen some changes. We could see some changes regulatorily-wise, either the way the banks are supervised or whatever rules are going to come into play. I guess, what are your expectations? Obviously, we're talking about AOCI. But obviously, there's a lot of other things lingering out there. I know we need to see what people get put in, in what seats. But I guess, just broadly speaking, what are your expectations regulatorily-wise?

I think at M&T, we are actually in favor of smart regulations. What we've seen in the past several years is there have been more and more regulations and no unwinding of all that. So I think if you have people in these seats that are much more balanced and actually understand where the risks really are and really focus on regulations that basically make sure that those risks are well contained and controlled, but really do the right thing that actually helps the economy grow as well as make the banks stay safe and sound from that perspective. We're going to do what we think is right at the end of the day. We have things that we do now that the regulations just don't make us do. Like we're keeping all this money at the Fed, right? We're doing it because we think it's the right thing to do because of the volatility that we have with our business flows and all that. So that's something that we don't have to do that we do. We have limits now on how much AOCI we're willing to take for changes in our AFS portfolio. Nobody made us do that. We just think it was the right thing to do. So we're going to run a good conservative bank long term, and we want the regulations to also be smart to actually reflect that as well.

So Daryl, you recently announced that you plan to participate in CCAR 2025, it's like torturing yourself. You're one of the few banks who had a very successful 2024 with your SCB actually coming down. Most others went in the opposite direction. Maybe just talk about the decision to participate. I know you recently highlighted the hope is that it could bring it down further. But maybe dig in a little bit deeper where you think are the opportunities for the optimization. Inevitably, where would you like to see the SCB get to?

Yes. I think we were very pleased we were only 3 banks out of 31 that actually had dropped, so we went down 20 basis points. But when you look at our SCB, we're still higher than most. And we really think that our balance sheet and our posture is better than what we have there. We've had good declines in our more troubled assets in the criticized nonaccrual. We think that should play out positively. We think that the PPNR, we're now a couple of years away from the People's where we had higher expense charges there. So we think that should be much more positive from that. So there's no guarantees. We know there's a risk there. But I think, net-net, we feel pretty good that opting in for this year, we will hopefully continue to bring down the SCB. One of the things that's important, too, so we have a lot of other constituencies besides the regulators and some of those constituencies, like the rating agencies, really use the stress capital results to help them make some of their decisions. Because if there's one thing that is objective in the marketplace, that everybody is treated the same way, right or wrong. And having good relative performance in that, I think, will be beneficial to us.

And obviously impacts the level of capital that you run and your ability to distribute. You have one of the healthiest capital ratios in the industry, north of 11.5%, highest adjusted ratio.

A real 11.5%, too.

Yes, highest adjusted ratio in the industry. Two quarters ago, you began repurchasing shares. You highlighted on the fourth quarter that you repurchased $200 million. I think you recently said you can repurchase $2 billion and stay above 11%. So can you maybe just talk about what you need to see to start that journey towards 11%? And where would you ideally like to operate the capital ratios of the company?

Yes. So we have a lot of flexibility. We have a lot of capital. We don't really need this capital to run the company with the risk that we take from that perspective. I would say that continuation of bringing down our criticized book and our nonaccrual book will be positive for us to continue to lower our capital thresholds. We think we're going to have a nice drop again in the fourth quarter. We have submitted to our Board our plan for next year and actually for the next 3 years and believe that our criticized numbers will continue to come down in '25 and beyond. So we feel good about that. Obviously, the economy still needs to stay in relatively good shape. I know there are certain pockets that are stressed. But net-net, overall, it's a pretty strong economy, and it could be even stronger as '25 actually starts to play out from that perspective. We're optimistic that we will have a much larger share repurchase in 2025. We'll give you the exact pieces of that in January. But we feel really good about what we can do now, and I get super excited for what we can do long term. From a share repurchase perspective, I think our flexibility is maximum. And we can repurchase a ton of shares and still grow our balance sheet really well and really drive good core operating earnings for our company for many, many years to come.

So obviously, in addition to buying back stock, M&A has been a core competency for the bank. You sound a little bit more upbeat on considering M&A. So a couple of questions. Talk about maybe like what you would look for in a partner if you are interested. And how do you think about accelerating some of the investments that you talked about over the course of 2025 across the 4 pillars and your technology upgrades versus considering doing M&A? And what are the impediments for doing a transaction while you're accelerating those investments?

Yes. So I touched on, we are increasing expenses, so we could actually get through some of these priorities faster. I mean, my goal and I think our whole leadership team's goal is to actually finish off some of these objectives. We have a huge project that we'll finish in '25 around that commercial credit area. My finance modernization will probably get done towards the end of this year or early next year. We have built out our new colo data centers and put in systems up into cyber, making great progress on that space. So we got a lot of major projects that we're working on, but we're going to finish off some of those this year and early next year, which will be positive. As far as acquisitions goes, M&T has had a great history for acquisitions. I think, and I believe, I think René believes, that it starts with culture. It's got to be a good match from a culture perspective for our company. If the cultures don't really come together, ultimately, it takes a lot of time to really get it to be working the right way from that perspective. So I'd start from that perspective. Having a good sound credit framework and all that, similar to the M&T culture, People's was very similar to that. So that was a great blend there. I, as CFO, love looking at the other side of the balance sheet and having good strong deposits and knowing how to grow the operating accounts. All of our businesses go to market to grow the operating account. If we get the operating account, that leads to more revenue long term from our clients and customers from that perspective. So we're all really focused at getting that operating account, first and foremost, and that is really important. I think at the end of the day, René and the Board will have decisions to make, but it's probably going to be an end market-type transaction, if and when we do that. Once we get through some of these priorities, it could be contiguous or a combination thereof from that perspective. But M&T is a favorable acquirer, and I think we'll have a lot of choices when we think the time is right to do something like that.

And in the last regulatory regime, if you did a deal, it had to be of size because there wasn't the opportunity to do multiple. Is there a certain size threshold you'd like to keep it below? Is there a willingness to look at multiple transactions? How would you think about that?

So it really depends on -- if you just compare like a $20 billion bank versus a $70 billion bank to just -- to take. A $70 billion, obviously, would have more impact on that, but it's the location and the density. Our most success is when we have more density in our market share. So if we had really good, favorable transactions and market in the places where we need to actually build out and get more -- could speed up our build-out that we have there, that could be an opportunity from that perspective. All these investments that we're making is making the bank Category III eligible. So we want to be operating in Category III before we get to Category III, like we did in my prior life and all that. So that -- I think that's really key from that perspective. And we're making great progress from that on all fronts throughout the company.

We made it 35 minutes without asking a question on credit. It seems like things have really evolved over the last couple of quarters. You did make a comment that criticized have come down. I think they were at $13 billion, now they're below $11 billion. It sounds like you expect them to improve further. Maybe just talk broadly about how you were feeling on credit? How much more improvement could there be in the criticized? And how does that impact your thoughts on losses into '25?

Yes. I think we'll have a nice drop in criticized. Fourth quarter 2025, we have it going down a couple of more points as well. So we feel pretty good that we're on a good trajectory. It's not that people are refinancing away. Some of those are happening from that, but we're actually getting upgrades now. Health care sector is really strong. The reimbursement rates are coming back, which is positive. So we're actually having some nice upgrades in our books. So it's a combination thereof from that. I think if you look at a charge-off perspective, we're on our projection of charge-offs for this year. Next year, we'll probably have similar charge-offs. I think we expect to have commercial and CRE to continue to come down, but our consumer book is still normalizing. So if you blend those 2 together, we kind of get back to the same place that we were today. But more to come in January. We'll talk about that. But that's kind of expectations I would look for.

Great. Well, we are out of time. So please join me in thanking Daryl for his presentation.