M&T Bank Corporation

Welcome to the M&T Bank fourth quarter and full year 2022 earnings conference call. All lines have been placed on listen only mode and the floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press star then the number one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. When posing your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Thank you, Gretchen, and good morning. I'd like to thank everyone for participating in M&T's fourth quarter and full year 2022 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 by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP financial measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are also available on our investor relations webpage, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors. These statements speak only as of the date made, and M&T undertakes no obligation to update them. Now, I'd like to turn the call over to our Chief Financial Officer, Darren Kay.

Thank you, Brian, and good morning, everyone. As we reflect on 2022, we want to start by taking a moment to recognize the hard work and dedication of our more than 22,000 colleagues. Your tireless efforts to support our customers and communities during challenging times are the heartbeat of M&T. We also give a shout out to number three and the early responders who saved his life. You remind us all about the bigger game of life. A year ago, we outlined three key objectives for 2022. Complete our long-awaited merger with People's United, deploy excess liquidity to reduce asset sensitivity while protecting shareholder value, and to distribute capital that isn't required to support lending in our communities. Achieving those objectives, we believe, aligns with our goal to build a customer-focused bank and resultant balance sheet that produces consistent, predictable earnings over long periods of time. Against those objectives, here are a few key highlights of the work done in 2022. We closed the acquisition of People's United, the largest in our history. We also completed the systems conversion and continue the process of integrating this valuable franchise. The financial benefits of this combination are consistent than our expectations at announcement. We repositioned the balance sheet to deploy excess liquidity, reducing our interest-bearing deposits held at banks from $41.9 billion at the end of 2021 to under $25 billion at the end of 2022. In deploying that excess liquidity, we reduced costly wholesale funding. We organically, that is excluding the impact of peoples, grew loans by $4.1 billion and added $7 billion in net investment securities growth. These efforts, which also included the retention of most of the residential mortgage production, as well as the acquired People's United $12 billion longer duration securities portfolio, have led to a reduction in asset sensitivity, helping to protect our net interest margin from future rate shocks. In terms of capital, we resumed common share of purchases in last year's second quarter, now having repurchased $1.8 billion in common stock, representing 6% of outstanding shares, and our common dividend grew by 7% in 2022, representing the sixth year of consecutive increases. And despite the impact from the acquisition and the rapid rise in long bond yields, our CET1 ratio remains strong at 10.4%, which continues to exceed our median peer bank. our hard work translated into strong full-year financial results. Gap-based diluted earnings per common share, which include merger-related charges, were $11.53 compared to $13.80 in 2021, down 16%. Net income was $1.99 billion compared with $1.86 billion in the prior year, improved by 7%. These results produced returns on average assets of 1.05% and 8.67% compared to 1.22% and 11.4% respectively in 2021. We note that these results were impacted by merger related expenses associated with the People's United transaction. Such expenses amounted to $580 million in 2022 or $2.63 per share. Those same expenses were $44 million or 25 cents per share in 2021. In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results, including tangible assets and equity. 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. We believe this information provides investors with a better picture of the long-term earnings power of the combined institution. Nut operating income, which excludes the after-tax impact from the amortization of intangible assets, as well as merger-related expenses, was $2.47 billion during 2022, up 30% compared to what was $1.9 billion in the prior year. net operating income per diluted common share was $14.42 compared with $14.11 in 2021, up 2%. Net operating income for 2022 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.35% and 16.7%. This compares with 1.28% On a net operating basis, we generated 4% positive operating leverage and 43% growth in pre-tax, pre-provision net revenue. This was due in large part to the $2 billion, or 53% increase in taxable equivalent net interest income, as the net interest margin increased some 63 basis points year over year. We are pleased with the results we achieved in 2022. In the face of many challenges, monetary policy. But our work is not done. We will continue to recognize the value created by our merger while building a more capital-efficient, less asset-sensitive balance sheet that will produce stable and predictable revenue and earnings over the long term. Let's take a look at the results for the fourth quarter. Diluted gap earnings per common share were $4.29 That income for the quarter was $765 million, 18% higher than the $647 million in the linked quarter. On a GAAP basis, M&T's fourth quarter results produced an annualized rate of return on average assets of 1.53% and an annualized return on average common equity of 12.59%. This compares with rates of 1.28% and 10.43% respectively in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of a tangible asset amounting to $14 million in each of the two most recent quarters, representing $0.08 per common share in both quarters. Pre-tax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger charges translate to $33 million after-tax, or $0.20 per common share. M&T's net operating income for the fourth quarter, which excludes intangible amortization and the merger-related expenses, was $812 million, up 16% from the $700 million in the linked quarter. Diluted net operating earnings per common share were $4.57 for the recent quarter, compared to $3.83 in 2022's third quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.7% and 21.3% in the recent quarter. The comparable returns were 1.44% and 17.89% in the third quarter of 2022. Both GAAP and net operating earnings for the fourth quarter of 22 were impacted by certain noteworthy items. Fourth quarter results included a $136 million gain related to the sale of M&T Insurance Agency reported in other revenue from operations, as well as a $135 million contribution to M&T's charitable foundation reported in other costs of operations. These items collectively net and did not material impact net income. Let's take a deeper dive into the balance sheet and the net interest margin. Taxable equivalent net interest income was $1.84 billion in the fourth quarter of 2022, an increase of $150 million, or 9% from the linked quarter. The increase was driven largely by the $143 million impact from higher rates on interest earning assets, inclusive of the effect from interest rate hedges. An incremental $19 million from volume and mix of earning assets partially offset by a $12 million reduction in interest received on non-accrual loans. Net interest margin for the past quarter was 4.06%, up 38 basis points from the 3.68% in the linked quarter. The primary driver of the increase to the margin was higher interest rates, which we estimate boosted the margin by 32 basis points. In addition, the margin benefited from a reduced level of cash held on deposit at the Federal Reserve which we estimate added six basis points. Total average loans and leases were $129.4 billion during the fourth quarter of 2022, up 1.5% compared to the link quarter. Looking at the loans by category on an average basis compared with the third quarter, commercial and industrial loans and leases increased by $1.7 billion or 4.5% to $40 billion. with $1.2 billion, or 4% growth, being broad-based across our core commercial banking clients and $542 million, or 22% growth in average dealer floor plan balances. During the fourth quarter, average commercial real estate loans decreased by $592 million, or 1%, to $45.7 billion, driven largely by declines in average construction loans. On an end-of-period basis, slightly from the length quarter. Permanent average commercial mortgage balances were nearly flat quarter over quarter. Residential real estate loans increased $372 million, or about 2%, to $23.3 billion due to the continued retention of new mortgage originations retained for investments, partially offset by normal amortization. Average consumer loans were up $384 million, or about 2%, to $20.3 billion. Recreational finance loan growth continues to be the main driver. These average loans grew $325 million, or 4%. Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve, increased by $3.2 billion, or 2%, due to the $1.9 billion growth in average loans and $1.4 billion increase in average investment securities. Average interest-bearing cash balances decreased by $5.7 billion to $25.1 billion during the fourth quarter of this year, essentially in line with our projections. The sequential quarter decline was due to the drop in deposit balances and the cash deployed to fund loan growth and to purchase investment securities. Average deposits decreased $3.8 billion, or 2%, compared with the third quarter. Our efforts to grow and retain deposits has helped reduce the rate of decline compared to recent quarters. However, due to the rapidly rising rate environment and increased competition for deposits, there has been a mixed shift within the deposit base to higher cost deposits. Average demand deposits declined $2.6 billion. Savings and interest-bearing checking deposits declined by $2.3 billion, partially offset by a $1.1 billion increase in time deposits. Average commercial deposits declined $4.8 billion as business owners shifted money into both off and on-balance sheet sweep accounts, paid down debt, and made distributions. On-balance sheet sweep average balances increased $2.5 billion during the fourth quarter of 2022. Turning to non-interest income. Non-interest income, excluding the $136 million gain from the sale million in the linked quarter. Trust income was $195 million in the recent quarter, up 4% from the $187 million in the third quarter. The increase was due largely to the impact of better market valuations on assets under management and administration. Service charges on deposit accounts were $106 million compared with $115 million in the third quarter. The decline primarily reflects the waiver of service charges in October and November on acquired customer deposit accounts. These service charges were also waived in September. Mortgage banking revenues were $82 million in the recent quarter, down 2% from the linked quarter. Revenues from our residential mortgage business were $54 million in the fourth quarter, compared with $55 million in the prior quarter. Commercial mortgage banking revenues were $28 million in both the third and fourth quarters. That figure was $49 million in the year-ago quarter. Other revenue from operations, excluding the gain from the sale of the M&T Insurance Agency, were $131 million, down $22 million sequentially. The decrease was due to the impact of two fewer months of revenues related to the M&T Insurance Agency, which was sold in October. lower commercial loan fees reflecting lower capital markets activities, and a write-down on the underlying assets in certain bank-owned life insurance contracts.