M&T Bank Corporation ($MTB)

[Audio Gap] The next fireside chat. Many of you know Rene Jones, who's the CEO of M&T Bank Corporation, which has about $214 billion in total assets. It's always one of the premium priced stocks, always likes -- I know you always want a higher premium, but about 1.8x tangible when we did the pricing. I know things have changed in the last couple of days. But close to 1,000 branches, primarily in the Northeastern part of the United States, but also at the same time, have some national businesses as well. We were just chatting. Rene told me that he's going on his 34th year this year with M&T. M&T, again, is one of our premier banks. It has over 22,000 employees. And I believe you took over in -- you became the CFO in 2005. And then your CEO 10 years?

8 last December.

Okay. 8 last December. So with that, maybe what we can do, Rene, is 2025 was a solid year for M&T. And what were some of the main successes? And how does that position you more importantly, for 2026 and beyond?

So when you look at the results that we put out in our annual letter, we had a great year. We had a record year in terms of profits, record year in terms of earnings per share. But I think the thing that was probably different. And if you looked at our letter, we changed something in the letter a little bit. And it was typically we review the income statement and the balance sheet and what happens and so forth. And when you read it, it was a little boring. And so what you realized is like you asked the question, like why was the year so extraordinary. Our balance sheet didn't really grow that much. It grew modestly. Expenses were fine. But it was really -- was fine. It was really the fee income year where a lot of investment that we made over time actually came to bear the stuff that nobody really associates us with the capital markets, but a big chunk of our business is -- it moves and services the capital markets. We had talked about the commercial real estate shift over the years. We had and talk about taking things off balance sheet, but doing more for our customers. Last year was a year where I think in the first year where we did more off-balance sheet commercial real estate than the $6 billion that we originated in the space. And so you saw a lot of these capabilities that we've been working on over time sort of come to bear in a way that I think is very subtle and probably surprised people. Daryl was always talking about what's happening with loan growth and people are asking us, why is the CRE loan growth not yet come back. Well, the actual activity with the customers come back, where you see it in our income statement is just in a different place, right, because of the services we're providing. So that was probably what was unique about the year.

Yes. Very good. And when you look at your priorities at earnings in January, the fourth quarter earnings, you had a slide that outlined 2 new priorities for M&T, teaming for growth and operational excellence. Can you walk through those priorities and what you're focused on? And why do those priorities matter so much to you and M&T?

Yes. So let me tell you about how the process works. So we think of the calendar year. Typically, we allocate September and October and those particular Board meetings and our management meetings all around performance, how have the individual business units performed, what worked that we tried, what isn't working and so forth, all of which is used to set up going into November where we sort of talk about those successes and failures and then sort of carve out a path. And we -- that carving out of a path is November, December and then we approve our operating plan in January. So that's the cycle that we go through. And so the executive leadership team as they kind of went through that process, really felt that there were 2 areas of opportunity where we just -- we're not necessarily hitting on all cylinders here. We had some success. But like if we could actually expand it to the whole institution, from an organic perspective, we actually could really improve the profitability and strength of the firm. And those are the 2 areas. And so operational excellence is the idea. Think about the work that we've done in 2 areas. So for example, in our phone centers. After the acquisition, we found ourselves with 20 contact centers, all of which are serving different products, all of which had a different level of expertise, professionalism, performance right? A lot of duplication couldn't train from one place to the other. And so we implemented this end-to-end reengineering of that entire process and thinking about like what outcomes are we actually looking for, for our customers. So we did that. We did a very similar thing in our customer complaints area. In our customer complaints area, we have -- let's do these root cause analyses. And so again, mapping out using our engineers to actually re-envision the space. And then in that particular case, applying AI allowed us to get to root cause in literally like 7 minutes as opposed to the week-long process, it would be to figure out what actually went wrong with that customer. And so when they looked at that, those were great examples when you look at the statistics and the results, but we weren't applying them to the whole firm. And so the idea was how do we take this to the whole firm. And then the second one is teeming for growth is really simple. It's a very simple concept. We could be less siloed as we approach a customer. We have every capability that a large institution has. I mean we do airplane lending, we do yacht lending. We do all kinds of the suite of portfolio of products that you'd want, but we hadn't really consciously said, how do we bring that to bear all together for you, right, as opposed to showing up 4 different times. And so that's the essence of what we're trying to do in those spaces.

So I should be coming from my loan from my plane then to you?

You should. You should. Yes. Yes. I'm not sure if you make it.

We can figure that out, right? Paper plane. Anyway --

You could use it to fly down to the Red Sox games.

There you go. When you look at how you measure, you gave us a couple of things in terms of time lines on solving problems. But how do you measure the success of these priorities? And what are the implications for the longer-term financial results for M&T?

Well, you saw -- the reason that in our letter, we wrote the technology section, and we wrote going back was because we had long had this belief that it was really about changing behaviors in our firm. We thought we were kind of crappy in the outcomes that we were getting from tech. And so behaviors repeated over time become culture. And we essentially want to go down a path of really changing the way we think about technology as an integral part of the business. And so we laid that whole process out. And the reason for that is we started thinking about like, how are we going to actually compete with these institutions that have vastly more money than we do? And I think the answer that we've sort of come to is we're not going to focus on everything. We're going to focus on what I would call the fundamentals of banking, credit, what is your depositors' behavior, what's going on with fraud, maybe 5 to 8 categories. And if we do that and we lean into the tech in that space, it has a bunch of benefits. One is, as you get further away from home, your management systems are less effective, right, at going out there. So how can we actually reengineer all those particular processes in an effort to actually strengthen those management systems and get the results that we've gotten over the past 20 years, right? So it's always thinking about not just being better, but how can we be an enduring company.

Right. Yes. Very good. Taking a step back for a moment. I know it's early in the year, but how is the economy -- and I know there's a lot of changed geopolitical issues.

Like what?

That little skirmish in the Middle East. What are the macroeconomic risks or bright spots that you guys are monitoring from 20,000 feet and above?

So we -- from time to time, we step back and think about these things. I remember, I think it was probably 2019 we said we were worried about hospitals and nursing homes. We didn't know what was going to happen in the coming year. We didn't know there was going to be a pandemic. But we did know that the conditions were such that they were already having a difficult time. And if things got worse, right, that it might be some of the areas of first to go. And I think always, but particularly today, we're constantly looking at places for hidden leverage where you think it's one thing, and it actually has evolved into something else that you can't quite see. And we were just looking at the idea we're going to probably talk about capital, but of the risk transfer trades, right? And you look underneath like what do you have there? It helps your risk-weighted assets, but risk-weighted assets aren't a real thing, right? And it's a place where you can look at hidden leverage. So we're basically looking anywhere you can see that there might be more leverage than we originally thought and trying to make sure we're conservative enough as we move forward.

Got it. regulatory environment has changed -- is changing. Maybe your thoughts when you think about as we get into '26, the stress capital buffers, the stress test transparency. Obviously, the big one is the Basel III end game. We're hearing -- maybe we hear something in the next 2 weeks, 3 weeks on that. And just supervision overall.

Yes. I mean I'll start with overall. I think, I mean, I just couldn't agree more with the approach of trying to focus on the risks that matter. I write about the fundamentals all the time, and trying to not divert resources to places that in the scheme of things don't matter, documentation. You didn't document your model exactly right. So that's been a really positive shift. I think -- I'm not sure it results in us saving money. It results in us actually focusing on doubling down on places that matter most. The capital thing is fine. It's -- the transparency is a huge thing. We can all now sort of see the models. And when you think about M&T, go back to before the stress test, right? We carry this very thin capital level. And we said, look, we have low volatility. We can understand the process, whatever. The stress test sort of took all that away. And to the extent that you can not even change the process, but just see how we're getting to the models we're getting, you begin to either learn that they may not be correct or you learn how to modify your business right, in order to mitigate the risk that they're looking at. That's a pretty big deal. That's a pretty big deal. I think from what I would expect, I would expect the Basel stuff to be very rational, again, because of the more cooperation between all of us and the transparency that's out there.

Yes. yes, we are expecting some big news when it comes out. So we're all anxiously awaiting the Basel III end game, and it's far different than the summer of '23. Far different.

Yes, which had all kinds of negative consequences for everybody.

Correct. Correct. Correct. One of the outstanding characteristics of M&T is through the cycle, your credit underwriting has been better than all of your peers. And so when we ask you guys about credit, I think a lot of people really want to sink their teeth into what you have to say because you've been so good over the years. So when you look at credit today, what are the places that you're focused on that you mentioned a moment ago in 2019, the health care and stuff. 2026, what are you guys looking at going forward?

Well, I think the things that...

Aside from my airplane loans.

Yes. We'll work on that. Where I would start is that we're trying to look at just the environment, right? And we talked about this in the letter, asset prices are high. They just are, and they've been high for a very long time. Credit spreads are very low, right? And so we can't predict what would cause that to change, but we can actually -- as we make loans and do other financial -- make other financial decisions, we can actually take that into account in a way that wouldn't be the case if asset prices were softer and so forth. And so that's what we see. And then again, we do see the hidden leverage thing. We look at -- again, I love the risk transfer trade issue. I also love the NDFI thing, not in absolute sense, but if you take that whole thing where you're doing business with other financials, so financial to financial, like, is there a segment of that, right, that is less transparent that you really need to think about and ask about. But they change. That process changes over time. And if I said it really simply, it would be like you just -- I think our folks know you just can't be too ambitious, right, because you're going to end up sitting in workout for a couple of years, right? That's just no fun. We just had -- I don't know, it's been about a year. We have our third credit officer since 1984 right? So he's new. He's in 1 year. He fits the mold. And I think that's the same thing. He's very curious. He loves looking at deals. He loves discussing deals and he knows the clients.

Yes. Circling back to something you just said about NDFI. Again, because of M&T's reputation, we as outsiders don't really have a lot of transparency in those buckets that they use. If you want to steer us or guide us investors, you have the mortgage warehouse loans, you've got the loans to BDCs, private equity, then you've got the consumer lenders and then other, which is insurance and REITs. Where do you think we should be really paying attention to in terms of where some of these hidden risks could be?

Well, I'm paying -- and it's -- I think it's becoming more and more public now. Again, let me start by saying, look, I have no problem with private credit. When we grew up in the '90s in banking, we couldn't securitize middle market loans. We couldn't securitize commercial real estate. The liquidity factor of this is just an extraordinary gift that has been a great innovation in the space. But when you start looking at some of the things you saw yesterday in the Wall Street Journal, there were 2 articles. One of them I thought was just funny, we've been talking about pick and bad pick. And it just disclosed this write-down of loans on the sale of loans at $0.94 on the dollar and said, it was actually a good thing because those guys weren't paying us interest anyway. It's like if you don't see those loans, like there's all kinds of delinquency out there that you're not factoring into your math, right? And that stuff builds up over time. So anywhere like that, that you don't see transparency or that they're labeling something like delinquency something else, right? And I think the big risk that we have today, no matter how you look at it is there are too many of us looking at the U.S. as if there's more than one financial system. There's just one. Everything is interconnected. You can't have a bad day in private equity without having some impact on the banking system.

Right. Yes. No, very fair. Shifting over to capital. Obviously, your CET1 ratio, 10.8%, a little bit higher with the AOCI included in it. What are the priorities when you think about capital for you folks? And what are the trade-offs between using capital for share repurchases or investing in businesses organically? How do you guys look at that?

Yes, it's pretty simple. It's pretty simple. I mean we -- first and foremost is to make loans, to grow our business, to focus on our customers, right, and make sure we meet their needs. And that's not a small thing because the ultimate test is when everything hits the fan, are you still making loans to those customers? That is really important to think about being there in the moments that matter. And we've generated -- I think in the fourth quarter, we had like -- our ROA was like 1.49%, right? It's just -- it's very high. And so we're generating lots of capital. So we don't really have a big choice issue there. We've been repurchasing shares or distributing shares. But I think -- as you think about our numbers, over the last 20 years, we've averaged, I think, 17.2% ROTCE, okay? So it's gone here and there, but if you average it over that time, it's pretty significant. We were 16% and change in the fourth quarter. Once we get to our target of 17% like it's sort of set up in the way we get compensated that you go to 18%, nothing happens. And so you start saying yourself, okay, maybe I better be plowing much more of this back into our business, right? Because, again, we're trying to build an enduring business. There's lots of change going on, lots of investment that's needed. If 7 years ago, I had have sat on this stage and said, okay, what we're going to do is we're going to triple our investment in technology. You guys would have like tanked the stock. But 7 years ago, we spent $400 million. And this year, we spent $1.2 billion. And we're doing that by reallocating within the system and making sure that there was no need when we were at 17% to make an ROE 20%. What's the point if you actually have a long-term goal?

Yes. No, very good point. When you think about what you said a moment ago, you had thinner levels of capital prefinancial crisis. Now is it when you look out going forward, what's the appropriate level of CET1? Is it 10%, which you guys have kind of talked about? Could it come down a little less depending on maybe what we hear from Basel III end game? How do you think about that?

I can give you my own view. Daryl may have a different view on it. If we were just -- if it was just about M&T, yes, I think our capital levels could be meaningfully lower. The volatility we have, thinking about depending on how the advanced methods go, that could be valuable to us if our performance holds up, right? Because this idea that we've been lending in a certain way that's more conservative and less volatile doesn't get today credit. So we could come down on our own, I think. But then there's the world. And there are a lot of things moving out there. I guess, as we didn't have these private markets and other things as we -- in our history, the change amounts are really high. And then you look at the wars and the stuff that's going on. So probably today, you could see that you should be holding a little bit more than you otherwise would need, but we continue to say in the 10s where we are is too high. And again, the thing I would look at, nobody looks at it, but look at the tangible. You're a kid like in the math class, you had to have the same apples-and-apples denominator, right, right? Everybody goes from ROTCE to what kind of regulatory capital do you have? That's not real. You get in trouble if you say that. But the tangible -- and so for us, we probably -- we have -- our tangible relative to everybody else is very high. It's very high. And that's a great protection, but it's also an opportunity.

Yes. Do you think -- if we just digress on that for a second, one of the questions going forward is that the rating agencies may be the binding constraint for banks in general, this tangible. Do you think that could -- can we evolve into that as an industry? Or is that going down a path that may not happen?

I wish the rating agencies were more pure, okay? So they'll look at a lot of that same risk-weighted stuff in that space. If you grab a chart and you put it together and look at the risk transfer trades, right? You get 3 banks at the bottom in our peers that have 0. We are less than 1/2 of 1%. The average is 4. 1 bank is 15% to 16% of their loans are those risk transfer trades, right? You got to be looking at that, like -- but you can't treat that all the same. And so I worry a little bit. So we focus on tangible. I think the rating agencies are a constraint, but if we wanted to get around them the way they think you could, you're taking a little bit more risk, right? But what's really fascinating is nobody would say anything about it.

Right. Interesting. Yes. That's a very good point. Obviously, M&T has been built over the years on acquisitions. I think Daryl has reminded us you've done maybe 22 deals and -- around there over the last 30 years. There's been some sizable deals in your footprint recently. And what's M&T's approach on -- remind us on M&A? And what are your thoughts on some of these deals? And does it create opportunities for you to pick up business?

Yes. I mean they do. We love local density, local scale. We think it's a big deal. We're doubling down on it. I actually think one of the advantages of M&A is it helps with the scale thing, like this idea that you're at a disadvantage if you're not really large. Not a lot of people are talking about that. The initial investment might be tough, but the results could be really, really powerful. So we -- that's most important. And so if there are opportunities that come up that somebody wants to do something like-minded when there's not a problem, we've done that. That's what we did in People's. There was no real problem there. It was just more of an opportunity for both firms. And then obviously, when things get crazy, our models really tends to kick in, in that space and those are opportunities. But I think there'll be I would imagine it will be a fair amount of opportunities, but we don't spend a lot of time chasing them. As can I tell you about the just operate any -- I can tell you a quick story. Yes, I won't tell you the whole thing, but I was over in Europe. I was with Bob Wilmers, and he was showing me something and -- be showing me a second chateau or something. It was disaster. It was like a Roman [indiscernible]. And I was like, what I like you 78 years what are you doing? And he's like, I don't want to do this. I wanted to do this for the guys that run the winery needed something else to do. And then he stopped and staying on the steps and he looked at me and he goes, I never wanted to do any of those acquisitions. You guys just needed something to do. It's like a talent first thing. And so if you're constantly producing talent, like we hired 80 undergrads every year, we hire 80 tech undergrads every year. We hire 20 MBAs every year. We have to find something for them to do.

Yes. Yes, absolutely. That's good. Maybe some more comments about -- you mentioned about the tech spend going up as much as it has. Just walk us through the difference today on technology and how you're using it versus maybe 5, 7, 8 years ago when you first came on board as CEO.

It's dramatically different. First of all, I would say this, we have a single person with the title of engineer in our shop. When we hired Mike Wisler to brought them on, that sort of changed because he's a master engineer. But a series of folks that we actually brought on started changing things. We brought -- we started creating groups of data scientists. We created -- I remember the first group of 13 were user design engineers. So the entire process is not tech as we used to think about it back then. Back then, it was like we do these large projects. Tech was sitting in a place on its own. If you wanted to make a change, you had to get an appointment, right? And so we reshaped all of the behaviors. We changed -- if you're doing a tech project now, you are sitting right alongside the technologists with the data scientists, everybody's together, that's why we built the tech hub we did. And we essentially changed the behavior patterns. We probably had 15% of our stuff as end of life today at 7%. The industry average is 12%. We're down 80% in our outages because resiliency, redundancy is in that space. We had 50% -- less than 50% of our workforce was in-house working for M&T in the tech space. It's over 80%. We have a 300% increase in our releases to our systems right? And the way to think about that is if you were to walk into the tech hub -- if you haven't been, you got to come to [indiscernible] and come see it. And you can look at this wide open space and you look over and you see it there's the retail guys and you walk over, you said what you're doing, and they say, okay, Rene, today are on Fridays our release train. And it's in plain English. As a teller, I no longer have to pick up the phone and call someone to do this with the customer. Number two, as a lender, I no longer have to fill out all that paperwork when I first introduce myself to the client, right? And trying to put it in plain English so that we can come back and understand what we talk about when we talk about AI. I don't know how these 2 letters seem to explain everything in the world, right? But the plain English is like what are you trying to do? And so that has changed us. I mean, it's just remarkable. And the speed and the resiliency is really important, particularly in a world that's changing all the time.

Correct. Speaking of change, the competitive landscape that you are in, some of the -- your regional bank peers have decided to go more national and not just stay in their historical footprint. Can you talk about that and give us an idea of how you are going to compete against these banks that are spreading their wings into different areas?

Yes. It's just a fundamental belief that our mission and purpose is such that if we're an integral part of the community, if we're meaningful, if people listen to our voice, right, that makes a difference. And if you're spread too thin, it's hard to get that effect. And we know that, right? So we know that we don't have #1, 2 or 3 share in New Jersey, for example. There are places where we don't. And the performance is just very, very different. So I think that's one, and I sort of repeat myself, it'd be like you have kids, whatever and they say, hey, to your parents, could you maybe you can buy a place next door and let us stay there. Like, no, you're staying. It matters, right? And so you're going to spread your resources in my mind, thinner in a time when their resources are really scarce with the amount of infrastructure investment that's being made to change the world.

Sure. Speaking of change, financial innovation with digital assets, nonbank lenders coming to the forefront, does this change the competitive landscape for you guys? And how do you approach competing against this potential disruptive force that's out there?

Yes. I mean -- well, first of all, I think it's a real threat. I think it's kind of on us as bankers because there's really nothing all that unique about what we're talking about here. And again, I wrote about this. I mean we went from paper to digital, we were fine, right? We're now going from distributed -- from centralized ledgers to distributed ledgers. That should be fine. And we should have probably a long time ago thought about the tokenization. And even if it's simply as if all of our information becomes available, do we have another way to secure ourselves in that space. So -- but I think the banking industry is super healthy. It can attract a lot of talent. It's mobilizing, albeit a little bit late, but it's mobilizing. And my sense is, yes, innovation is going to be great. It's actually going to come back. Eventually, what's going to happen is there's going to be some event. And it's going to force us to realize that there's only one financial system. So we're going to come back together, and we're going to be fine.

Yes. No, very good point. Maybe we're running out of time here, Rene, but maybe you could give us an update on the full year '26 guidance you've given it in the past, how the quarter is going and how that reflects into that guidance as well?

I don't know whatever Daryl says what we're doing. I think we've had a -- if you take '25, right? I think that was a stellar year. I think we're running in. As we go to the fourth quarter, the momentum is there for us. The things are kind of soft. I mean there's nothing gangbusters going on the loan -- on either side of the balance sheet. So we'll have to watch. But the work that we're doing is fantastic. And as I said, we're able to invest in lots of things because of the capital generation that we have. And so I don't feel like we're short on investing in the future. But who knows what will happen next things stay the same. If credit spreads don't widen, right? Probably we're on the trend that we've been on.

Yes. With that, we've run out of time. Please join me in a round of applause thanking Rene.

Thank you.