M&T Bank Corporation

Good day and welcome to the M&T Bank second quarter 2023 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 would 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 questions, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need 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, Todd, and good morning, everyone. I'd like to thank everyone for participating in M&T's second quarter 2023 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 are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning are M&T's Senior Executive Vice President and CFO, Darrell Bible, and Senior Executive Vice President and former CFO, Darren King. Now I'd like to turn the call over to Darrell Bible.

Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. including my incredibly talented finance team. Like me, I'm sure all of you are extremely happy that we now have an earnings presentation. So thank you to investor relations, corporate communication, and corporate reporting teams for making this a reality. I'm very excited about the work we are doing, and the transition has gone even smoother than I could have anticipated. I am proud to be part of M&T's strong financial history, consistent operating philosophy, and conservative community-focused banking principles. I'm even prouder to be part of a company that is tied to its purpose, to make a difference in people's lives. I would like to thank our over 22,000 M&T colleagues for all their hard work each and every day. You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M&T continues to make a difference in our customers' lives and continues to produce strong results for our shareholders. Please turn to slide three. Let's start with our purpose, mission, and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve. Our purpose drives our operating principles. We believe in local scale. with 28 community-led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, top deposit share, and higher operating and capital efficiency. Our performance is fueled by a relentless focus on customers, talent, and communities. Moving to slide four, we deliver for customers. We have seasoned talent, diverse board, and new capabilities that provide solutions that make a meaningful difference to our customers. Please let's turn to slide five. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investments in enhancing customer experience and delivering impactful products have fueled organic growth, a significant milestone this year was a designation of over 119 multicultural banking branches across our footprint, with more to come in our expanded communities. These branches are community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities. Despite operating only in 12 states, we rank as the number six SBA lender in the country and rank highly in 10 of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects with over $2.3 billion in financing and over 2,600 home loans for low- and moderate-income residents. Additionally, M&T Bank and our Terrible Foundation granted over $47 million to support our communities in 22 loans. Please turn to slide 6. Here we highlight our commitment to the environment. We have invested over $230 million in renewable energy sector and significantly reduced our electricity consumption since 2019. Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights. Turning to slide eight, our second quarter results reflect the strength of our core earnings power, balance sheet, and liquidity position adjusted to exclude the $225 million pre-tax gain from the sale of the Collected Investment Trust or CIT business in April. Second quarter revenues have grown $395 million or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year over year. On the same basis, pre-provisioned net revenues have increased 35% since last year's second quarter to $1.1 billion. Credit remains stable. Net charges increased in the second quarter, but year-to-date still remain below our historical long-term average. Net income for the quarter was $867 million, up 24% from late quarter. Diluted gap earnings per share was $5.05 for the second quarter, up 26% sequentially. Now let's review our net operating results for the quarter on slide nine. M&T's net operating income for the second quarter, which excludes intangible amortization, was $879 million, up 23% from link quarter. Diluted net operating earnings per share, common share, were $5.12 for the recent quarter, compared to $4.09 in this year's first quarter. Tangible book value per share increased 3% to 91.58. On slide 10, produced an annualized return on average assets and return on average common equity of 1.7% and 14.27% respectively. Results for the second quarter of this year included an after-tax $170 million gain on the sale of the CIT business in April. Excluding this gain, adjusted GAAP earnings per share was $4.11. percent and 11.6 percent. Next, let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11. Taxable equivalent net interest income was $1.81 billion in the second quarter, slightly below link quarter. This decline was driven by higher volumes of non-core funds and one additional day. Net interest margin for the past quarter was 3.91%, down 13 basis points from link quarter. The primary driver was the decrease to the margin was partially impacted from the mixed change to the higher cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets, net of rates on deposit funding, benefited the margin by four basis points. Turning to slide 12, capital levels remain strong with a CET1 ratio to the end of the second quarter at 10.58%. Average earning assets increased 1.9 billion or 1% from the first quarter to the second quarter due largely to the 1.5 billion growth in average loans and 1 billion increase in average investment securities. Turning to slide 13, we talk about the drivers on the loan growth. The total average loans and leases were $133.5 billion during the second quarter, up $1.5 billion compared to the link quarter. Looking at the loans by category on an average basis compared to the first quarter, commercial and industrial loans increased 5% to $44.5 billion. We continue to see in our dealer and specialty businesses. Plus, we are adding new customers as we grow market share and legacy and new markets. During the second quarter, average commercial real estate loans decreased 1% to $44.9 billion. The decline was driven largely by lower construction loan balances. Average residential real estate loans were $23.8 billion, essentially flat compared to the first quarter of this year. Average consumer loans were down 1% to $20.3 billion, driven by lower activity due to rising interest rates. Turning to slide 14, average investment securities increased to $28.6 billion during the second quarter, due to large parts to purchases late at the end of the first quarter. The duration of the investment securities book at the end of June is 3.9 years, and the unrealized pre-tax loss on the available for sale was only $441 billion. At the end of June, cash and interest-bearing deposits According to slide 15, deposit outflows during the second quarter on an average basis accounted at 2.1 billion or 1.3% in line with industry trends. Consistent with our experience, prior to rising rates, the increased competition for deposits and customer behavior is leading to a mixed shift with the deposit base to higher cost deposits. Comparing the second to first quarters Average demand deposits declined $5.7 billion. Saving and interest-bearing checking deposits decreased $843 million, while time deposits increased $4.4 billion. Decline in average demand deposits resulted predominantly from a $1.1 billion decline in the corporate trust balances due in part to lower capital markets activities, the movement to sweep products, as customers seeking higher yields with $1.8 billion on balance sheet and $2.4 billion shifted off balance sheet sweep accounts during the second quarter. Average time deposit growth was driven by $2.3 billion in broker CDs and $2.1 billion growth consumer time deposits. We remain focused on growing and retaining deposits. Industry deposits grew $3 billion or 1.9% from the end of the first quarter. Their growth was largely driven by broker CD balances, which increased $4.1 billion compared to the end of the linked quarter. However, since the end of May, our customer base for wholesale deposit balances has stabilized and started to grow, with an increase of $523 million, driven largely by growth in commercial and consumer deposits. Now let's discuss non-interest income. Please turn to slide 16. Non-interest income totaled $803 million in the second quarter compared to that $587 million linked quarter. As noted earlier, the second quarter included a $225 million gain from the sale of our CIT business. Recall that M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $20 million in this year's first quarter. Excluding these two items, second quarter Non-interest income increased $11 million compared to the first quarter. Mortgage banking revenues were $107 million in the recent quarter, up 26% from late quarter, driven by $18 million in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March. Service charges on deposits were $119 million, or up 5% compared to the quarter declined from $194 million in the first quarter, due largely to $31 million in lower fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees. Our revenue from operations adjusting from the gain from the CIT sale and the distribution at Bayview Lending Group in this year's first quarter were $137 million, down $2 million sequentially. Turning to slide 17 for expenses. Operating expenses, which exclude the amortization of intangible assets, were $1.28 billion in the second quarter of this year, down $64 million from the linked quarter. As is typical for M&T's first quarter results, operating expenses in the first quarter included approximately $99 million of seasonally higher compensation costs. Excluding The seasonally higher compensation in the first quarter operating expenses increased $35 million sequentially. That increase was due to $31 million in higher compensation and benefit costs reflecting higher average headcount, the full impact of the annual merit increases, and severance costs. $20 million in higher other operating expenses related to the bulk of the MSR purchase. These increases were partially offset by lower CIT-related expenses, including $22 million of lower sub-advisor expenses and lower advertising and marketing and deposit insurance expenses. Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses. The efficiency ratio, which excludes the intangible amortization and merger-related expenses from the numerator, and the security gains and losses from the denominator was 48.9% in the recent quarter, compared to 55.5% in 2023's first quarter. Excluding the gain from the sale of the CIT business the second quarter, the efficiency ratio was 53.4%. Next, let's turn to slide 18 for credit. The allowance for credit losses amounted to $2 billion at the end of the second quarter, up $23 million from the end of linked quarter. In the second quarter, we recorded $150 million provision in credit losses, compared to $120 million in the first quarter. Net charge-offs were $127 million in the second quarter, compared to $70 million in this year's first quarter. The reserve bill was largely due to anticipation of declining commercial real estate values and loan growth. At the end of the second quarter, non-accrual loans were $2.4 billion, a decrease of $122 million compared to the prior quarter and represented 1.83% of loans down nine basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $127 million. The increase in net charge-offs was driven by four large credits, three office buildings in New York City and Washington, D.C., and one large healthcare company operating in New York State. Annualized net charge-offs as a percentage of total loans were 38 basis points for the second quarter compared to 22 basis points in the first quarter. This brings our year-to-date net charge-offs to 30 basis points, which is below our long-term average of 33 basis points. As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis. This is the result of the unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, tenant sensitivities on commercial real estate portfolios on a quarterly basis. This work is reflected in our criticized loan portfolio. Loans 90 days past due, on which we continue to accrue interest, were $380 million at the end of the first quarter, compared to $407 million sequentially. In total, 43% of these loans 90 days past due loans were guaranteed by the government or government-related entities. Turning to slide 19 for capital. M&T CET1 ratio at the end of June was estimated 10.58% compared to 10.16% at the end of the first quarter. The increase was due in part to higher net income and in part and repurchasing shares in the second quarter. In June, tangible common shareholder equity totaled $15.2 billion, up 3% from the end of the prior quarter. Tangible book value per share accounted at $91.58, up 3% from the end of the first quarter. In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category 4 banks, given the timing of the People's United acquisition, M&T participated in the stress test this year. Our preliminary stress test capital buffer, or SCB, is estimated to be 4%. Using the SCB, which is in effect from October 1, 2023 to September 30, 2024, we'll be subject to 8.5% to ET1 ratio. Now turning to slide 20 for the outlook. As we look forward to the second quarter of this year, we believe we are well-positioned to navigate through challenging economic conditions. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year of 2023. The 2023 outlook reflects the impact of the sale of the M&S IE. and the sale of the CIT business that closed in April of this year. First, let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7 to $7.2 billion range, which reflects a flat to modestly higher loan and deposit growth and incorporates 125 basis point hike in August of this year. We noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry-wide outflows. Full-year average deposit balances are expected to be up low single digits compared to 2022. We continue to expect the deposit mix to shift towards higher cost of in demand deposits and growth in time deposits on on-balance sheet sweeps. This is expected to translate through the cycle interest-bearing deposit beta through the fourth quarter of this year to the low to mid 40% range. This deposit beta excludes broker deposits. Next, let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full-year average loans and leases balances during 2023 to be relatively stable. The mix of CNI, CRE, and consumer loans, inclusive of consumer real estate loans, is almost one-third each as of the end of June. We expect this trend to shift slightly to CNI growth outpacing CRE. As we have seen over the past four quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan votes over the remainder of 2023. Turning to fees, we expect non-interest income to be in the range of 2.25 to 2.3 billion range. This outlook for non-interest bearing reflects lower trust revenues resulting from the sale of the CIT business in April, as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's first quarter. Remember, the outlook does not include the $225 million gains from the sale of the CIT business. Turning to expenses, we anticipate expenses excluding intangible amortization to trend near the higher end of $5 to $5.1 billion. In addition, this outlook for net operating expenses includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the 60 to 65 million range. Turning to credit, we expect loan losses to be near M&T's long-term average of 33 basis points. Although the quarterly cadence could be lumpy, provision expense over the year will follow the CECL methodology and be affected by changes in the macro outlook and loan balances. For 2023, we expect taxable equivalent rate to be in the 25% range. Finally, as it relates to capital, this is a very clear differentiator for M&T. Our capital, coupled with our limited investment security marks, has been a clear strength during these turbulent times. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary. We take our responsibilities to manage our shareholders' capital very seriously and will return more when it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth, along with buybacks in the future, which will always be part of our core capital distribution strategy. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on slide 21, Our results underscore an optimistic investment thesis. Our economic uncertainty remains high, and that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than two times growth relative to peers. Our strong shareholder returns include 15% to 20% return on average tangible common equity and robust dividend growth. Finally, we are a disciplined inquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in our ability to realize our potential post-merger. Now let's open up a call to questions, before which Todd will briefly review the instructions.