M&T Bank Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank second quarter 2020 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I will now turn the call over to Don McLeod, Director of Investor Relations.

Thank you, Lorraine. Good morning. I'd like to thank everyone for participating in M&T's second quarter 2020 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the investor relations link and then on the events and presentations link. Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, on Forms 8K, 10K, and 10Q for a complete discussion of forward-looking statements and risk factors. Now, I'd like to introduce our Chief Financial Officer, Darren Kaye.

Darren Kaye Thanks, Don, and good morning, everyone. As we noted in this morning's press release, M&T's results continue to be impacted by the economic slowdown brought on by the COVID-19 epidemic and the return to a zero interest rate policy by the Federal Reserve. Our clients, both consumer and commercial, have adjusted to the new economic reality, which is reflected on our balance sheet by a slowdown in some loan categories and notably higher levels of deposits. In light of the challenging economic environment, our focus has shifted somewhat from capital distribution to capital strength. As far as the impact on M&T goes, the low interest rate environment resulted in a decline in our net interest income. Payment related fees suffered from the reduced level of economic activity due to the pandemic related lockdowns. However, lower rates also led to a 13% improvement in mortgage banking revenue compared to the first quarter. Trust income remained solid and operating expenses were well controlled. The net result provided a solid foundation to support expected credit costs while also improving our capital ratios. In connection with the CECL loan loss accounting standard, which reflects our assessment of the future economic conditions as of the end of the quarter, we added $254 million to our allowance for credit losses. The common equity tier one ratio improved by 32 basis points to 9.51%, indicating that M&T is well positioned to meet the needs of our customers and our communities. Now let's review the results for the quarter. Diluted GAAP earnings per common share were $1.74 for the second quarter of 2020, compared with $1.93 in the first quarter of 2020 and $3.34 in the second quarter of 2019. Net income for the quarter was $241 million, compared with $269 million in the linked quarter and $473 million in the year-ago quarter. On a GAAP basis, M&T's second quarter results produced an annualized rate of return on average assets of 0.71% and an annualized return on average common equity of 6.13%. This compares with rates of 0.9% and 7% respectively in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $3 million or 2 cents per common share. little change from the prior quarter. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions when they occur. M&T's net operating income for the second quarter, which excludes intangible amortization, was $244 million compared with $272 million in the linked quarter and $477 million in last year's second quarter. Diluted net operating earnings per common share were $1.76 for the recent quarter compared with $1.95 in 2020's first quarter and $3.37 in the second quarter of 2019. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 0.74% and 9.04% for the recent quarter. The comparable returns were 0.94% and 10.39% in the first quarter of 2020. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $961 million in the second quarter of 2020, down by $20 million from the linked quarter. This primarily reflects the lower interest rate environment following the Federal Reserve's emergency reduction to its Fed funds target late in March. These cuts led in turn to a 105 basis point decline in average one month LIBOR compared to the first quarter. Overall, average interest earning assets increased by $15 billion to $123 billion, while the net interest margin declined by 52 basis points to 3.13% compared with 3.65% in the linked quarter. The government's fiscal and monetary policy actions were the primary drivers of our significant balance sheet growth in the quarter. First, loans made through the Paycheck Protection Program, or PPP, added $4.8 billion to average loans for the quarter. A significant portion of PPP funds currently sit in customer deposit accounts waiting to be deployed. Those PPP derived deposits in combination with other stimulus programs, led in turn to a $10 billion or 170% increase in our placement of cash at the Federal Reserve Bank of New York. Those large balance sheet movements had a similarly large impact on the net interest margin. Cash held at the Federal Reserve reduced the margin by an estimated 25 basis points, while having little effect on net interest income. The PPP loan portfolio was additive to net interest income during the quarter, but the combined impact of income and balances diluted the margin by about three basis points. The lower interest rate environment caused an estimated 22 basis points of pressure to the margin. The net impact of lower rates was somewhat mitigated by a 38 basis point decrease in the cost of interest-bearing deposits. All other factors amounted to another two basis points of margin pressure. Average total loans increased by $6 billion, or 7%, compared with the previous quarter. Looking at loans by category on an average basis compared with the linked quarter, commercial and industrial loans increased by $5.4 billion, or 22%, including the $4.8 billion of average PPP loans. CNI loans grew by nearly $600 million, excluding the PPP activity, largely the result of having line draws on the balance sheet for a full quarter net of repayments. We saw a somewhat unusual decline in dealer floor plan balances as customers returned to showrooms faster than manufacturer inventory could be shipped. Commercial real estate loans grew by 3% compared to the first quarter. Residential real estate loans declined by just over 2%, or $332 million, which primarily reflects the continuing measured rate of paydowns on acquired mortgages. Loans purchased from servicing pools, pending resolution, partially offset those paydowns. Consumer loans were up less than half a percent, reflecting higher indirect recreation finance loans partially offset by lower auto loans and home equity lines of credit. On an end-of-period basis, the PPP portfolio more than offset a net contraction of other commercial and industrial loans, reflecting paydowns of about half of the line draws that occurred late in the first quarter and a $1.3 billion decline in floor plan loans. CRE and consumer loans each grew a little over 1%, while consumer real estate loans declined slightly. Average core customer deposits, which exclude deposits received at M&T's Cayman Islands office and CD's over $250,000, grew 17% or over $15 billion compared with the first quarter. That figure includes $10 billion of non-interest-bearing deposits. The factors driving the change included cash from the government stimulus programs held in both commercial and consumer accounts and higher levels of mortgage servicing escrow deposits. These in turn led to the higher placement of cash at the Fed. On an end of period basis, core deposits were up $14 billion or 15% reflecting those same factors. Foreign office deposits decreased 39% on an average basis and 29% on an end of period basis as on-balance sheet sweep rates return to historic lows. Turning to non-interest income. Non-interest income totaled $487 million in the second quarter, compared with $529 million in the prior quarter. The recent quarter included $7 million of valuation gains on equity securities, largely on our remaining holdings of GSE preferred stock, while the first quarter included $21 million of losses. Also, recall that during the first quarter of 2020, M&T received cash distribution of $23 million from Bayview Lending Group. There was no such distribution in the second quarter. Mortgage banking revenues were $45 million in the recent quarter, compared with $128 million in the linked quarter. Residential mortgage loans originated for sale were $1.1 billion in the quarter, up 25% from $919 million in the first quarter. Total residential mortgage banking revenues, including origination and servicing activities, were $111 million in the second quarter, improved from $98 million in the prior quarter. The increase reflects the higher volume of loans originated for sale, combined with stronger gain on sale margin, partially offset by lower servicing income. Commercial mortgage banking revenues were $34 million in the second quarter, was $36 million. Trust income was $152 million in the recent quarter, up slightly from $149 million in the previous quarter. The rebound in equity markets from first quarter lows, good capital markets activity, and $5 million of seasonal tax preparation fees were all factors during the quarter, more than offsetting the emerging impact of money market fund fee waivers in the zero interest rate environment. Service charges on deposit accounts were $77 million compared with $106 million in the first quarter. COVID-19 related waivers of many of the consumer service charge categories and a slowdown in overall payments activity were the primary factors contributing to the decline. The $46 million linked quarter decline in other revenues from operations reflects the Bayview Lending Group distribution I mentioned earlier, as well as lower payments revenues that are not included in service charges, such as credit card interchange and merchant discount. Loan-related fees, including syndication fees, also declined given the reduced pace of non-PPP commercial loan origination activity. Operating expenses for the second quarter, which exclude the amortization of intangible assets, were $803 million, down some $100 million from $903 million in the first quarter. Recall that operating expenses for the first quarter included approximately $67 million of seasonally higher compensation and benefits costs, the largest of which related to accelerated recognition of equity compensation expense for certain retirement eligible employees. As usual, those seasonal factors declined during the second quarter. In addition, we reduced our level of incentive accruals to reflect lower levels of new business activity following the pandemic-related lockdowns. The impact of the pandemic also led to a noticeable decline in certain other expense categories. Advertising and marketing costs declined by $13 million compared with the prior quarter to under $10 million. Other costs of operations for the second quarter included a $10 million addition to the valuation allowance on our capitalized mortgage servicing rights. A similar sized addition was made during the first quarter. In addition, travel and entertainment expense of $12 million. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 55.7% in the recent quarter, compared with 58.9% in 2020's first quarter and 56% in the second quarter of 2019. Next, let's turn to credit. Net charge-offs for the recent quarter amounted to $71 million. Annualized net charge-offs as a percentage of total loans were 29 basis points for the second quarter compared to 22 basis points in the first quarter. The increased charge-off activity largely relates to problem loans identified at the end of 2019 but whose deterioration was likely accelerated by the pandemic-induced economic slowdown. The provision for credit losses in the second quarter amounted to $325 million exceeding net charge-offs by $254 million and increasing the allowance for credit losses to $1.6 billion or 1.68% of loans. The allowance currently reflects an updated series of assumptions reflecting a somewhat more adverse economic scenario than either of the scenarios used at January 1st or March 31st, 2020, as well as the impact of proactive risk rating changes within our portfolio to reflect the current economic environment. Our macroeconomic forecast uses a number of variables, with the largest drivers being the unemployment rate and GDP. Our forecast assumes the quarterly unemployment rate falls to 9% in the third quarter of this year from a peak at 13% in the second quarter, followed by a sustained high single-digit unemployment rate through 2022. The forecast assumes GDP contracts 6.7% during 2020 and recovers to pre-recession levels by the second quarter of 2022. Non-accrual loans as of June 30th amounted to $1.2 billion, an increase of $95 million from the end of March. At the end of the quarter, non-accrual loans as a percentage of loans was 1.18%. It's important to keep in mind that some of the usual credit metrics which are zero risk weighted and carry little or no credit risk. Excluding the impact of PPP loans, the ratio of allowance for credit losses to loans would be 1.79%. Similarly, the ratio of non-accrual loans to total loans would be 1.27%. Annualized net charge-offs as a percentage of total loans would be 31 basis points. Loans 90 days past due, on which we continue to accrue interest were $536 million at the end of the recent quarter, and of those loans, $454 million, or 85%, were guaranteed by government-related entities. Consistent with agency guidance, loans that have received some sort of relief, whether payment deferrals, covenant modifications, or other form of relief as a result of COVID-19-related stress, are not reflected in our non-accrual or delinquency numbers. As the virus spread in mid-March to early April, our customers reached out for relief actions and support from the bank. From that peak period, requests for relief from both commercial and consumer customers are down by about 95%. M&T's booked relief actions in the commercial portfolios have been heavily influenced by auto and recreation finance dealers. Those dealer relationships the vast majority of which are floor plan inventory, account for $4.4 billion of relief requests amounting to nearly 80% of total dealer balances. High levels of forbearance for dealers has been seen industry-wide, and given the strength in sales activity towards the end of the quarter, we expect further extensions of relief to be limited. Excluding dealer relationships, relief provided to commercial customers totaled $9.8 billion, comprising some 16% of balances. For the consumer portfolios, we provided assistance to approximately 30,000 accounts representing $3 billion in balances of our combined mortgage, home equity line of credit, and indirect recreation finance or auto portfolios, amounting to about 9% of total balances. Of interest, Approximately 30 percent of that population made a payment in the month of June. For mortgage loans that we don't own and that we service for others, relief was provided to approximately 70,000 accounts, totaling $13.2 billion. Turning to capital, M&T's common equity Tier 1 ratio was an estimated 9.51 percent as of June 30th, compared with 9.19 percent at the end of the first quarter. This reflects the impact of earnings in excess of dividends paid and lower risk-weighted assets. M&T did not repurchase shares during the second quarter and will not be doing so in the third quarter. Turning to the outlook. As we sit here today, our outlook is somewhat clearer than it was 90 days ago. However, there's still a fair amount of uncertainty. As far as the balance sheet goes, our liquidity assets, short-term investments, and deposits at the Fed rose somewhat beyond our expectations with both a rate and volume-driven impact on the net interest margin. This was driven by inflows of deposits from the PPP loans and other government stimulus programs. While the pace is uncertain, we believe that recipients will use these funds and excess reserves will trend downward somewhat as we go forward. Any additional on those assumptions. Excluding the impact from cash and PPP loans, the net interest margin experienced a 22 basis point rate-driven decline following a 105 basis point decline in LIBOR. We expect average LIBOR in the third quarter to fall a little further, as will deposit rates. Given all factors, we expect the printed margin will improve somewhat in the coming quarter. We expect average PPP loans will increase from the $4.8 billion average in the quarter toward the $6.5 billion outstanding at June 30th. Beyond that, the rate of prepayment and forgiveness will significantly impact the balance retained. As you know, forgiveness under the program is not currently automatic and is subject to review by the SBA. While we expect significant numbers of forgiveness requests before the end of the year, It's difficult to handicap how much will occur in the third quarter versus the fourth quarter. Commercial loan growth, which is to say excluding PPP loans, has slowed and we expect those balances to remain flat to slightly down over the remainder of 2020 compared to where we ended the quarter. In a normal environment, we'd expect to see a seasonal slowdown in inventories and a corresponding decline in our floor plan loan balances during the third quarter. Recent vehicle sales volumes might necessitate dealers adding inventory against a backdrop of constrained production that the manufacturers and the upcoming model year changes. Residential real estate loans should continue to experience a measured pace of runoff as the vast majority of our loans are originated for sale. However, as I touched on earlier, there are circumstances under which we can pursue buying delinquent loans or loans under forbearance out of the MBS pools we service. As a result, we have stepped up buyouts from the Ginnie Mae pools, which will lead to temporary growth in our residential mortgage loan portfolio. These are government-guaranteed loans, so our credit risk is extremely limited. We'd expect to see some improvement in the growth of consumer loans compared with the recent quarter, as recent indirect originations are on the balance sheet for a full quarter. Our outlook for net interest income is also somewhat dependent on the eventual resolution of the PPP loans. While we expect net interest income to improve in the third quarter from the second, the rate of improvement is also heavily dependent on the pace of forgiveness or prepayments on the PPP loans. Turning to fees, residential mortgage applications continue to be very strong with rates as low as they are and purchase activity has held up well. Waivers of money market mutual fund management fees. environment persists. We'll see a larger impact in the coming quarter than we did in the second quarter. Service charge income was impacted by lower levels of customer activity, higher balances, and state-mandated waivers of certain consumer fees. Payments activity recovered by the end of the quarter. However, certain categories of retail fees continue to be waived. In addition, higher commercial deposit balances have enabled those customers to offset the hard dollar fees arising from their treasury management obligations through the use of earnings credit. As we noted, the seasonal increase in salaries and benefits we experienced in the first quarter largely normalized during the second quarter. We have curtailed hiring and have been redeploying team members around the bank to address shifting business needs. We're in a similar situation to last year, as the first half, excluding the first quarter seasonal salaries and benefits figure. The third quarter is often higher than the fourth quarter from an expense perspective. In the CECL loan loss accounting environment, our allowance for credit losses at the end of the quarter reflects the macroeconomic variables I referenced earlier, the impact of the government stimulus, and the characteristics specific to our portfolio. As GAAP requires, we will reassess the allowance at the end of the third quarter based upon updated macroeconomic scenarios and M&T's specific credit data. Finally, regarding capital, as noted at the beginning of the call, we're focused on capital strength. Consistent with the CCAR results, we don't expect to repurchase any shares during the third quarter, and we continue to meet the Federal Reserve earnings threshold for dividend distributions. Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future. Now let's open up the call to questions before which Laurie will briefly review the instructions.