This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk33: Please stand by, your program is about to begin. If you need audio assistance during your call today, please press star zero. Welcome to the M&T Bank second quarter 2024 earnings conference call. All lines have been placed on mute, 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 2. 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 0. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to Brian Klock, Head of Market of Investor Relations. Please go ahead.
spk20: Thank you, Ashley, and good morning. I'd like to thank everyone for participating in M&T's second quarter 2024 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 is M&T's Senior Executive Vice President and CFO, Darrell Bible. Now I'd like to turn the call over to Darrell.
spk16: Thank you, Brian, and good morning, everyone. As you will hear on today's call, the second quarter results continue M&T's strong momentum for 2024. Turning to slide four, this April we released our fourth annual sustainability report. We are proud of our continued progress towards our sustainability goals. our efforts are creating positive outcomes for our businesses, our customers, and our communities. Of note, in 2023, our total sustainability finance loans and investments totaled $3.1 billion. Turning to slide five, we continue to garner awards for our businesses, products, and employees, including the highest customer satisfaction for mobile banking apps among regional banks according to J.D. Power, and the Securitization Trustee of the Year for Wilmington Trust from Global Capital. Turn to slide seven, which shows the results for the second quarter. As noted in this morning's press release, we are pleased with the second quarter results and the performance through the first half of the year. We continue to grow loans while also shifting the composition of our loan portfolio and reducing CRE. Custom deposits increase sequentially while total deposit costs have leveled off. Net interest income and net interest margin both inflected off the first quarter cyclical low. Asset quality trends are performing as expected with reductions in non-accrual and criticized balances and net charge-offs in line with our full-year outlook. Capital continues to build. with a CET1 ratio increasing to over 11.4 percent. We continue to make progress on our capital return considerations, and our stress capital buffer decreased 20 basis points to 3.8 percent, reflecting the strength of our core earnings power and ongoing risk management work. Now let's look at the specifics for the second quarter. Diluted GAAP earnings per share were $3.73 for the second quarter, improved from $3.02 in the first quarter. Net income for the quarter was $655 million compared to $531 million in the linked quarter, an increase of 23%. M&T's second quarter results produced an ROA and ROCE of 1.24% and 9.95% respectively. The CET1 ratio remains strong. growing to 11.44 percent at the end of the second quarter, and tangible book value per share grew 3 percent. Included in our GAAP results for the recent quarter were pre-tax expenses of $5 million related to the FDIC special assessment. This amounts to $4 billion after tax, or two cents per share. As a reminder, results for this year's first quarter included $29 million related to the FDIC Special Assessment, amounting to $22 million after-tax effect, or 13 cents per share. My date includes supplemental reporting of M&T's results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of the amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the second quarter was $665 million, compared to $543 million in the linked quarter. Diluted net operating earnings per share were $3.79 for the recent quarter, up from $3.09 in the first quarter. Net operating income yielded an ROTA and an ROTCE of 1.31%, and 15.27 percent for the recent quarter. Next, let's look a little deeper into the underlying trends that generated our second quarter results. Please turn to slide nine. Taxable equivalent net interest income was 1.73 billion in the second quarter, an increase of 39 million, or 2 percent, from the linked quarter. Net interest margin was 3.59 percent, an increase of seven basis points from the first quarter. The primary drivers for the increase to the margin were a positive six basis points from fixed-rate asset repricing, primarily within the investment and consumer loan portfolios, positive five basis points from sequentially higher non-accrual interest, positive one basis point from lower interest-bearing deposit costs, partially offset by a negative three basis points from the impact of swaps, and a negative two basis points from higher borrowing costs and balances. The second quarter included non-accrual interest of $30 million compared to an average of $14 million in the prior five quarters. If non-accrual interest was at the average run rate, the second quarter NIM would have been 3.56%. In total, swaps reduced NIM by 23 basis points in the second quarter. Turn to slide 11 to talk about average loans. Average loans and leases increased 1 percent to $134.6 billion compared to the linked quarter. As have been the trend for the last several quarters, CNI and consumer growth outpaced the decline in CRE. CNI loans grew 2 percent to $58.1 billion, driven by increases in middle market, dealer commercial services, mortgage warehouse lending, and fund banking. The CNI growth reflects an increase in line utilization and higher origination activity. CRE loans declined 4% to $31.5 billion, reflecting continued low originations and elevated paydowns as we continue to manage our CRE concentration. Residential mortgage loans were relatively unchanged at $23 billion. Consumer loans grew 4% to $22 billion, reflecting growth in recreational finance and indirect auto loans. Loan yields increased six basis points to 6.38%, aided by sequentially higher non-accrual interest and fixed-rate loan repricing, partially offset by a higher drag on our cash flow hedges. Turning to slide 12, our liquidity remains strong. At the end of the second quarter, investment securities and cash, including cash held at the Fed, totaled $56.5 billion, representing 27% of total assets. Average investment securities increased by $1.1 billion. The yield on the investment securities increased 31 basis points to 3.61%, as the yield on new purchases exceeded the yield on maturing securities. During the second quarter, we purchased over $3 billion in securities with an average yield of 5.16% and a duration of 2.9 years. Over the remainder of the year, we expect an additional $2.8 billion in security maturities with an average yield of 2.5%, which we intend to reinvest at higher yields. The duration of the investment portfolio at the end of the quarter was 3.7 years, And the unrealized pre-tax loss on AFS portfolio was only $239 million, or 12 basis point drag on CET1. Turning to slide 13, we remain focused on growing customer deposits and are pleased with the stabilization of our yields. Average total deposits declined $0.6 billion, or less than 0.5%, to $163.5 billion, reflecting sequential growth in average customer deposits offset by a $1.2 billion decline in broker deposits. Average broker deposits of $12 billion reflects a decision to shrink non-customer funding sources. Consumer, mortgage, business banking, and institutional finance had stable to growing average deposits compared to the first quarter, while commercial deposits declined. Average non-interest-bearing deposits declined $0.9 billion to $47.7 billion with lower commercial and business banking balances as a result of seasonally and continued but moderating disintermediation. Non-interest-bearing deposits were relatively stable for all other business lines. Excluding broker deposits, The non-interest-bearing deposit mix in the second quarter was 31.5% compared to 32.2% in the first quarter. Interest-bearing deposit costs decreased three basis points to 2.9%, while the total deposit cost was unchanged at 2.06%. This reflects more rational pricing in our markets. Continuing on slide 14, Non-interest income was $584 million compared to $580 million in the linked quarter. Recall that the first quarter included $25 million Bayview distribution. Trust income increased $10 million to $170 million, reflecting approximately $4 million in seasonally tax preparation fees typically earned in the second quarter and strong sales performance across our institutional services business. Second quarter mortgage fees were $106 million compared to $104 million in the first quarter. Commercial mortgage fees increased $4 million from the linked quarter to $30 million, reflecting an uptick in origination activity, while residential mortgage fees decreased $2 million to $76 million, reflecting lower servicing fees. Service charges increased $3 million to $127 million from higher consumer debit interchange fees. Other revenues from operation were unchanged at $152 million, with increases in merchant discount, credit card, letter of credit, and other credit-related fees offsetting the $25 million first quarter BOG distribution. Security losses of $8 million primarily reflect realized losses on the sale of non-agency securities as we de-risked our portfolio. Turning to slide 15. non-interest expenses were $1.3 billion, a decrease of $99 million from the first quarter. As is typical for M&T's first quarter results, expenses in the quarter included approximately $99 million of seasonally higher compensation costs. Salaries and benefits decreased $69 million to $764 million, reflecting seasonally elevated expenses in the first quarter annual merit increases. The second quarter included $5 million related to the FDIC special assessment compared to $29 million in the prior quarter. Other costs of operations decreased $18 million to $116 million from lower supplemental executive retirement costs and lower losses on lease terminations. The adjusted efficiency ratio, excluding the impact of the FDIC special assessment, was 55.1% compared to 59.6% in the first quarter. Next, let's turn to slide 16 for credit. Net charge-offs for the quarter totaled 137 million or 41 basis points, down from 42 basis points in the linked quarter. The three largest charge-offs were 40 million combined and represent C&I loans that span industries including services, manufacturing, and retail. The CRE charge-offs, including charge-offs within the office portfolio, remain at manageable levels through the first half of the year. Non-accrual loans decreased $278 million to $2 billion. The non-accrual ratio decreased 21 basis points to 1.5%, driven largely by a decrease in CRE, reflecting favorable resolutions with borrowers, including payoffs and paydowns. In the second quarter, we recorded a provision of $150 million compared to net charge-offs of $137 million. The allowance-to-loan ratio increased one basis point to 1.63%. The provision for credit losses decreased $50 million compared to the first quarter, reflecting lower CRE loans, including criticized loans, and modest improvement in forecasted real estate prices, partially offset by growth in CNI and consumer portfolios. Please turn to slide 17. When we file our Form 10-Q in a few weeks, we estimate that the level of criticized loans will be $12.1 billion, compared to $12.9 billion at the end of March. The improvement for the link quarter was largely driven by 987 million decrease in CRE-criticized loans. Slide 18 provides additional detail on CNI-criticized balances. Total CNI-criticized balances increased 98 million. The majority of the increase is concentrated within vehicle and recreational finance dealers and healthcare sectors, offset by declines in most other industries. We saw additional migration to criticize within non-auto dealer portfolio. first quarter. However, there has been limited incremental migration within the portfolio since early in the second quarter. Turning to slide 19 includes a detail on CRE criticized balances. Total CRE criticized balances decreased 987 million from the last quarter. Upgrades and payoffs of criticized loans outpaced downgrades into criticized. The decline was across multifamily retail, health services, hotel, and construction, though we did see modest increases in office and industrial. The decrease reflects the effects to work with borrowers to find favorable resolutions. We are actively working through our criticized population for favorable outcomes. Turning to slide 20 for capital, M&T CET1 ratio at the end of the second quarter was an estimated 11.44% compared to 11.08% at the end of the first quarter. The increase was due in part to the continued pause in repurchasing shares and strong capital generation. At the end of the second quarter, the negative AOCI impact on the CET1 ratio from AFS securities and pension-related components would be approximately 19 basis points. Now turning to slide 20 for outlook. The economy is slowing a bit, but remains in good health. Job growth, wage growth, and spending have slowed to more sustainable levels. We see the so-called soft landing scenario as having the highest probability, but the possibility remains for a mild recession brought on by the lagged impact of rate hikes. Consumer spending has alleviating inflation pressure for many goods and services. The labor market remains positive but is clearly slowed, in turn keeping a lid on wage pressure and leading to longer spells of unemployment. We expect that to continue for the rest of 2024. Inflation figures remain above the Fed's target of 2% chiefly because of rent and home prices. We expect the weaknesses seen in rent listings to play through the official inflation data, helping bring the headline inflation figures down. Inflation in the second quarter slowed, encouraging development after higher readings in the first quarter. Shifting to 2024 outlook, we expect net interest income to be $6.85 billion to $6.9 billion. Our outlook incorporates the latest forward curve that has one rate cut in September and another in December. However, we expect the level of rates to have a limited direct effect on net interest income outlook as we have taken steps to reduce our asset sensitivity and are now more neutral. Higher for longer rates in the first half of the year allowed us to take additional actions to protect NII from lower interest rate environments. For example, in the first half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward-starting cash flow hedges, which became active in 2025. Further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts. For the remainder of the year, M&T's balance sheet will be smaller. with total average assets closer to $208 billion. We expect average cash to be approximately $25 billion and securities to be $30 billion, with modest growth in loans and deposits. Our outlook for fees and expenses is unchanged, with fees excluding any security gains or losses of $2.3 to $2.4 billion, and expenses excluding the amounts related to the FDIC special assessment are expected to be $5.25 billion to $5.3 billion. We continue to expect charge-offs for the full year to be near 40 basis points. The allowance level will be dependent on many factors, including changes in the macroeconomic outlook, portfolio mix, and underlying asset quality. Our outlook for the tax rate is 24% to 24.5% excludes the discrete tax benefit in the first quarter. Preferred dividends are expected to be approximately $47 million in the third quarter, and 36 in the fourth quarter, reflecting our Series J issuance in May and the upcoming Series E redemption in August. Finally, as it relates to capital, last quarter we laid out five factors for consideration as we assessed our capital return plans for the rest of the year. The macroeconomic environment remains healthy. M&T continues to generate significant capital with the bank growing We continue to manage our CRE concentration with CRE as a percent of Tier 1 capital and allowance of 151% as of the end of the second quarter. Asset quality continues to improve with declines in non-accrual and criticized loans and net charge-offs in line with expectations we laid out in the first quarter. M&T's preliminary stress capital buffer declined 20 basis points to 3.8%, reflecting many of the factors just mentioned. Given the improvements in these factors, we plan to begin our share repurchase in the third quarter at a pace of $200 million per quarter through the end of the year. We expect to maintain our capital ratios at least at the current levels for the remainder of the year. We will continue to monitor the previously discussed factors as well as the revised Basel III proposal once made public, and we'll adjust our capital return plan if necessary. Our capital will also be used to support organic growth and grow new customer relationships. Our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on slide 22, our results underscore an optimistic investment thesis. 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 while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholders older capital. Now let's open up the questions before which Ashley will briefly review the instructions.
spk33: Certainly. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star 2. Once again, that is star and 1 for your questions. We'll take our first question from Manan Ghazali with Morgan Stanley. Please go ahead.
spk18: Hey, good morning, Daryl.
spk17: Good morning, Manan.
spk19: So I wanted to ask on NII. So you beat on NII this quarter. And then your new guide for NII implies that quarterly NII will be relatively flat from 2Q levels. And you did see a noticeable increase quarter on quarter this quarter in NII. So can you just unpack the drivers in the back half? Is there some conservatism baked in there? Or is there some timing difference in being neutral to rates, but maybe perhaps being a little bit more asset sensitive with the first rate cuts, if you can just unpack those drivers there?
spk16: Yeah, thanks, Manan. Our position from rate sensitivity is really quite neutral. It's based on assumptions, but I feel we are really neutral there. If you look on the slide deck where we had net interest income, And one of the bullets there, we highlight that we had a five basis point positive impact on non-accrual interest. So let me explain that to you. So when our loans go into non-accrual, we basically, when we still receive payments, both principal interest, all that goes to principal. And then if the loan is basically resolved favorably and they pay us off, obviously we pay off the principal balance and then anything left over goes into net interest income. So what we saw in the second quarter was basically a large amount of loans that basically came out favorably out of our non-accrual portfolio. So what we put on there and what I talked about in the prepared remarks is that if you look at our average non-accrual interest for the last five quarters has been running around 15 million. This quarter we got double that. So I would basically say Our NEM this quarter was actually on track, because if you adjust the $15 million out, we were at 5.56 NEM, and I said that we would be mid-350s for the second quarter. So we're really on path to what I said, mid-350s second quarter, then high 350s for third and fourth quarter is really where we wanted to be and expect to be. So I think we're just on track, Manon.
spk19: Got it. And just to confirm that five basis points is where you are above normal, right? The five basis points isn't the total impact.
spk16: It's three is what I would say be normal to the run rate. Yeah. Go ahead.
spk19: And you are five basis points above that?
spk16: No, no, no. We were three. So we were 352. We said we'd be in the mid 350s. I say we really came in at 356 if you back out the extra above non-accrual interest that we normally get. I mean, we're going to get non-accrual interest every quarter. We've been averaging a couple basis point benefit every quarter because of that. That's going to continue for a long time.
spk19: Got it. All right. Perfect. And then maybe you can put this in the category of no good deed goes unpunished, but On the buyback resumption, your message in the deck is that capital levels should at least stay at current levels of around 11.5%. Just given that the SCB went lower, given the excess capital position, what do you need to see before you accelerate the pace of buybacks and bring that capital ratio lower?
spk16: Yeah, I think it's pretty simple. I think we are aggressively working down our asset quality, our criticized loans, not performing assets. I think we need to continue to make progress on that. As we make progress on that, you could see us decide to increase our repurchase shares potentially. Obviously, the economy is a factor in my prepared remarks. We said we don't think it's likely, but it's possible that maybe you go into recession. So if that were to happen, I think we'd have to view that and just be a little bit more defensive if that made sense or not. You know, I still want to see the impacts of Azlifer. I know, you know, we are hearing more favorable things, but until we actually see it in writing, you really don't know what's going on. But those are probably the primary things that we're working on. We continue to shrink our CRE concentration, make great progress there. I have no doubt we will continue to make great progress in the next couple of quarters as well there.
spk31: Great. Thank you.
spk33: Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank. Please go ahead.
spk25: Good morning. I was hoping you could elaborate on the big drop in the commercial real estate on a period-end basis. I think it's down about 9%. Obviously, great job bringing that down. And I know you touched on some of the opportunities to offload that, but it's just a bigger drop than I would have thought. And I didn't know if there was any reclass into CNI as you kind of improved some of those like guarantees and things like that. So just elaborate on all that in terms of how you're able to bring it down so much. Thank you.
spk16: Yeah, no, happy to answer that, Matt. So we are very focused and working really hard, both the first line and second line of working hard and made tremendous progress in bringing our CRE concentration numbers down. You know, we did see a lot more liquidity there. in the marketplace this quarter. And we were able to see some of our clients that we had actually in criticized multifamily be able to do government placements out into the marketplace for liquidity. So as we continue to have that liquidity, that helps us basically cure some of our criticized loan balances. The other thing that I would tell you is that we are doing a finance transformation. Finance transformation is basically putting in new general ledger systems, sub-ledgers, which we are doing really well in. We're about halfway through that process now. But it's also improving and changing processes. So as we improve and change processes, we are putting in better controls and more ways of actually how we put loans on the books. And that is causing some grading to go from what CRE would be into CNI owner-occupied. because it really comes down to the source of repayment. Source of repayment, you know, is from an operating entity. It's basically not a CRE loan. It is a CNI owner-occupied loan.
spk24: Okay, that makes sense. I think that's how others do that, too.
spk25: And then just separately on the all-other income line, you pointed to a couple of kind of positives there. Is that a sustainable level? Or I know it can be lumpy, but... How do you think about that, all other fees of like 152?
spk16: Thanks. You know, it is at a relatively high level. You know, I probably trim, you know, maybe, you know, 5 or 10% out of that potentially on a run rate. But it's, you know, a lot of that other revenue that we talked about is the merchant fees, and we had a good quarter there, more activity. That could continue as we continue to have activity. The other is on loan demand, and we're having loan syndication fees and all that, and that's going to be lumpy. We had a good quarter this past quarter in that area. You know, we are seeing maybe a little bit of softening in some of the commercial areas, so it might be a little light. But, yeah, I'd say, you know, at that same level to maybe down 5% or 10%. Okay. Thank you so much.
spk22: Thank you.
spk33: We'll take our next question from Erica Najarian with UBS, please go ahead.
spk23: Yes, hi. Two follow-up questions, please. Daryl, the company clearly did a great job in terms of interest-bearing deposit costs coming down. I know some of that is a mix of broker being actively taken down in terms of exposure. Could you give us a sense, before the rate cuts, and we appreciate the downside beta guide that you gave us, but If we don't have rate cuts, how do you feel like this level of progress is sustainable? And maybe break it down in terms of what you're observing with client deposit rates versus the continued runoff in brokered CDs.
spk16: Yeah, so brokered CDs will continue to run off. We have another big chunk coming off in third and fourth quarter. So we'll be pretty much out of brokered deposit CDs, at least, by the end of the year. As far as the betas go and rates, we continue to just see more rational pricing in the marketplace, and we're able to maybe offer specials, but the specials that we're offering just aren't as high as what they were before. So you're still seeing that. There is still some disintermediation. It is slowing down, but there's still continued disintermediation. The one that impacts NII the most is obviously the one that goes to DDA, to interest-bearing deposit balances. You know, we're capturing any disintermediation, but it's still seeing a little bit in the commercial area. The other thing is on the retail side, as long as rates are at this level, you know, you're going to see a little bit of attraction of, you know, money going out of the non-maturity bucket into the CD deposits. You know, but we feel pretty good that our deposit costs are, you know, flat, you know, and maybe down, you know, as the year progresses and into next year. I think... It's just more rational pricing in the marketplace right now.
spk23: Thank you. And my second question is a follow-up to Manon. So last quarter and during the quarter, I think you guys are telling us, oh, don't back into this 11% CET1 when, you know, thinking about buybacks, you know, listen to what we're saying on the total amount of what we're buying back. And then, of course, you had a pretty strong, you know, pretty strong progress in terms of CET1 this quarter and the floor went up even more. And I appreciate your response to Manon's question. And I know that's part of the, you know, conservatism of this company and why Long Only's value you guys so highly. I guess I'm wondering, you know, how should we think about the future? I get that there's still uncertainty. There's still a willingness, a desire to take down CRE concentration, a desire to see the economy play out. But at this level of earnings power with $200 million, you're going to continue to build capital, especially if the C&I loan growth is engulfed by CRE declines. So I guess as your long-term shareholders think about, forget buybacks for a second, returns and what that appropriate capital floor is, how would you help them frame that, Daryl?
spk16: You know, from a floor perspective, obviously, we are much higher than where we have to run the company long-term for M&T. You know, we do have elevated criticized loan balances, and we're really working hard. Our teams are working their butts off to basically bring those balances down. And we hope and plan that to continue through the rest of this year into next year. So that is definitely one of the key things that we're looking at. We are conservative. What I've said in prior quarters, the capital is not going anywhere, Erica. We will return it. We promise you that. We aren't going to be wasted or do anything stupid. It will come back to the shareholders at some point down there. We're just going to do it in a very conservative manner because that's just who we are.
spk23: So I guess, you know, to compare it to how Jamie says it, I guess the better way for your shareholders to think about it is earnings in store.
spk29: Yeah, I agree.
spk12: All right. Thanks, guys.
spk33: Thank you. We'll take our next question from John Pekary with Evercore ISI. Please go ahead.
spk27: Morning, Daryl. Morning, John.
spk02: On the, back to CRE, I know you mentioned the ongoing focus to reduce the concentration of CRE. Where do you see the CRE, the risk-based capital percentage going? I believe in the past you've indicated you wanted to see it into the 150% range. So I wanted to get that update. And then separately, in terms of the improvement that you saw in credit this quarter, in terms of the pass-through declines, non-accruals, and the criticized. Can you just talk about what specifically you saw that is driving that, and if broadly those trends can continue in that direction? Thanks.
spk16: Yeah, sure. So, you know, we've made tremendous progress over the last three-plus years on getting our CRE concentration down, the plans that we, you know, put into place at that point and continue to execute. And you saw the benefits in our stress capital buffer because of that, and that will hopefully continue when we continue to submit the stress capital CIFAR test. I would say we're getting close, John. We are at 151 now. I think we're in the neighborhood of being close to where CRE will be much more normal space for us. We're at a level that we think makes sense for the size company we are and serving our communities and clients. We're probably maybe a quarter or two away, but I think that's not too far off. As far as non-accruals go, I tell you, this quarter, everything kind of worked, came together really strong. Our first-line credit team was working with our clients. We have a process in place where we're looking at all the CRE loans that are maturing and trying to see where and how we can work with our clients to either get it right-sized to get it upgraded off of criticized. We are seeing, you know, some of our criticized loans getting refinanced by others in the industry. And I talked earlier that we're seeing, you know, some of our criticized loans getting placed in the agencies with our programs with the GSEs. So we're basically, you know, really focused on that. The teams are diligent and working hard. And, you know, we plan to have those numbers continue to drive down and and be really positive.
spk02: Great. Thanks, Charles. That helps. And then related to that, maybe could you just talk about the role that loan modifications have played here as you've addressed commercial real estate? Maybe help us with the trajectory of your financial difficulty modifications. Do they continue to rise? And maybe if you could just talk about the concerns out there that, you know, they're simply kicking the can down the road and a year from now we can see these These pressures rear the rug we had again.
spk16: When you look at loan modifications, when we are working with our clients, loan modifications, we are asking for more type of recourse or capital to be put into the transactions for them to get more time to work through the higher interest rates that we have. The modifications we are doing are actually enhancing our our position. So we're giving them more extension on time, and they're giving us more capital, liquidity, recourse for that time. So we're actually in a better spot. So yes, our modifications are going up. This is our history at M&T. We work with our clients. If our clients support us, we're going to support them. That's what we do, and that's what we're going to continue to do.
spk27: Great. Thanks, Daryl.
spk32: Thank you. We'll take our next question from Ibrahim Punawalla with Bank of America. Please go ahead.
spk36: Hey, Darryl. Good morning.
spk27: Good morning.
spk36: I just wanted to go back to the criticized CNI and CRE. So a lot of decision-making on capital revolves around how some of this plays out. If you don't mind, give us a sense of, when you think about criticized loans, if rates go lower, I think you mentioned soft landing base case probability most likely for you. Is there a point in time if rates are lower, you get the financials maybe in March of next year, we could see a meaningful reset lower from this 12 billion going down by a couple billion? I'm just wondering, could there be a step function decline in criticized loans at some point in the first half of next year based on rates and macro clarity?
spk16: Yeah, so Ibrahim, that's a great question. We saw a short window in the fourth quarter in December when a 10-year dropped 4% or a little bit under that. And we had huge volume that we were able to place our clients out with the agencies. Our RCC business was able to place a lot of loans out because of that. So I think our 10-year last time I looked was 418. So I think we're getting... closer to more of a pivot point where more volume will actually happen. So I think lower rates would definitely help us lower our credit size balances sooner and faster from that perspective. That would be even more liquidity in the marketplace than what we saw this past quarter.
spk36: That's helpful. And I guess the other question on theory, given all the work you've done over the past year, stress testing, et cetera, on the CRE book, Just give us your perspective on the loss content in these loans as maybe some of these go into non-accrual based on what you know today, what's already been deserved, and as we think about charge-offs relative to the 40 BIPs that you've guided for this year.
spk16: Yeah, we have a long-term history of our great, strong credit performance. So if you look at our LTVs that we have for the CRE portfolio, Even office, we're still under 60% LTV there. So a great thing to look at, if you look at our non-accruals, half of our non-accruals don't have a reserve against it. And typically, you'd have a specific reserve on non-accruals. That's because we have collateral value that's stronger than what the loan value is today. So it's really the strength of how we underwrite. And that credit performance is really what shows through in times of stress. So, yes, we have a higher level of criticize and non-approval. We're working those down, but we think the loss content is still a lot lower.
spk35: Got it. That's great, Carla. Thanks, Ed. Thank you.
spk33: Thank you. We'll take our next question from Ken Oosten with Jefferies. Please go ahead.
spk37: Thanks. Good morning. Hey, Daryl. You had a great amount of securities repricing this quarter, up 31 basis points on a bigger book. And I can imagine some of that was just a switch from cash. But I think you had talked about 15 to 20 going forward. So maybe can you just give us a little back color on what drove that 31 and then how you're looking at what securities yields could look like from an incremental perspective going forward? Thanks.
spk16: Yeah. So we are being very disciplined in how we're approaching our security purchases and You know, we're trying to keep our durations relatively short. We really don't want to have a negatively convex portfolio. So when we go to market and we buy securities, you know, we are basically balancing our securities between positively convex securities like treasuries and CMBS agency securities coupled with some negative convex securities, which could be some agency CMOs or MVFs. So we're being very balanced from there. So we're trying to keep our duration around three years. Because of that, our yields, if you look at where rates are today, are blended to be around 5%. The negatively convexed are over 5%. The positively convexed are under 5%, approximately. And we're living in three-year type duration type instruments overall is kind of what we're focused on. That said, though, we're still going to have a nice benefit. If you look at what's maturing, in the third and fourth quarter, the average yield of what's maturing is about 2.5%. So we'll, depending on where rates go, but right now we're going to get 250 basis points, still increase in that yield portfolio as that turns and turns over. So I think we feel really good. We're just being very disciplined. I'm not good at timing rates, so we kind of do dollar averaging every time we've done that. Now for the last year, we're going to continue to do that going forward, and we'll just do it over time and average in and hopefully continue to average up higher.
spk37: Okay. And then, obviously, for a long time, M&T has had a really healthy amount of cash. And I think cash and earning assets together is about, cash is like 30-something percent, still low 30s percent. And do you still anticipate, given that conservatism, keeping cash and securities at, you know, over 30 percent as you look forward? And what would change that, if anything?
spk16: Yeah, so on the prepared call notes, what I mentioned is that right now our investment portfolio is about $30 billion. We believe that the cash at the Fed is closer to mid-20s, so closer to $25 billion. We're basically just trying to get out of some wholesale funding and just shrinking the balance sheet a little bit, so our balance sheet size is coming down as well. So we'll have a smaller balance sheet. It shouldn't really impact NII funds, just because of the cost of the borrowings and what we earned on the Fed balance kind of canceled each other out. But, you know, we just feel mid-25 is good. We do have limits in place of how low we would go that would be in the mid to high teens. So we have well above that buffer that we're operating right now, but just want to be here again conservative. You know, if we could go into a recession, which we don't think will happen, but if we do, this will be a really conservative balance sheet.
spk26: Okay. Thanks, Daryl.
spk33: Thank you. We'll take our next question from Gerard Cassidy with RBC. Please go ahead.
spk27: Hi, Daryl. Hey, Gerard.
spk34: Daryl, you obviously did a good job with the DFAS and the stress capital buffer coming down. I guess a couple of questions. First is when you look at the improvement and you touched on it, what you've obviously done Do you think that improvement can be as large next year as you guys continue to reduce these risks to M&T as we look out into 2025?
spk16: Yeah, so our plans right now, Gerard, we were really pleased that we were down 20 basis points. In our peer group, we were one of three banks that had a lower SCB, so we were really excited to have that outcome. But by us really focusing on and pushing down our criticized, besides share repurchase maybe increasing, it's also going to help us in our stress capital buffer when we go through the stress test. So we're really focused in trying to bring down our criticized levels to as much as we can, working with our clients over the next couple quarters, so that when we do CCAR next year, if we decide to do it, which we may or may not, Probably will, though. We'll continue to try to get a lower stress capital buffer.
spk34: Got it. And then when you look at M&T's history, obviously the organic growth has always been complemented very successfully with acquisitions. And when you look out over the landscape over the next 12 to 24 months, Can you give us your views on, you know, depository acquisitions? Not to say that you're going to do anything, you know, near term, but just how are you guys thinking about depository acquisitions? And I know there's changes and we've got a presidential election coming up, which could influence as well. But what have you guys been thinking in that, you know, in that strategy?
spk16: So M&T has a long-term history of doing acquisitions, successful acquisitions, and that is one of the reasons how we grow here. But to be honest with you, we haven't really been talking about acquisitions. We're working on our four priorities that we have in the company right now. Our four priorities that we have are basically building out our markets from the people's acquisition in New England and Long Island. I think that's really important. continue to build out. That's a great opportunity for us. And we think the M&T Bank will be really good in the markets that we serve theirs. I think they need a bank like us in those markets, and we want to deliver to those clients. We're enhancing our risk areas throughout the company, making great progress in those areas. We will continue to focus on that. We're also improving resiliency. Some of the transformations that we're doing, we're putting in data centers, putting things up into the cyber or applications into the cloud. So all that is going forward. And then lastly, we're continuing to optimize revenue and expenses. We put some money into treasury management this past year, and we're now growing our treasury management revenues at double-digit paces, 13% right now. So they're doing really good and continue to gain more momentum there in that treasury management context. As we push more into CNI, that's a huge growth opportunity for us, and that's really what we're focused on in trying to grow and serve our clients.
spk27: Great. Thank you.
spk32: Thank you.
spk33: We'll take our next question from Chris Farr with Wells Fargo. Please go ahead.
spk21: Good morning. So my question is just a little bit on expenses. Just wondering about headcount, what you're thinking about it going forward. And since salaries expenses were up 4% year over year, which seems pretty good overall.
spk16: Yeah, I mean, we're right on track from our expense guidelines. Actually, we're doing a little bit better than what was in plan. So you might see a little bit of shift in the second half of the year. But we're right on track. We're going to hit our plan numbers on expenses. I have no doubt about that. FTEs, we are down a couple hundred million in FTEs. from the start of the year. So that's just being managed by all the leaders and their groups and all that. So I think from an expense perspective, we really have an owner's mindset at M&T. They really take to heart how we spend money and make sure how we're spending money in the right places and getting the right outcomes from that. So I'm really fortunate to have a really great company that really understands how to run a company both from a revenue and expense side basis. So it's all really good.
spk21: And just to clarify, down a couple hundred, not a couple hundred million, correct?
spk15: No, no, no, a couple hundred FTEs. Yeah, FTEs. All right. Sorry, sorry.
spk21: And then, yeah, no worries. And then just on the... Outside data processing, a big delta. And how much is that related to this upgrade that you've been talking about? And will some of that run off? Or are you kind of now at a higher operating plateau on tech expense?
spk16: You know, I would say second half of the year, you might see elevation in outside data processing and professional services. We have now seven projects in our investment council are ramped up. Those probably will be areas of increase. We'll still come into our target that we set on expenses. So I feel really good about that. You know, some of the projects are just larger and take time to ramp up. But, you know, as we get into 25, you know, you'll see some projects start to complete. And, you know, whether we reinvest in other areas or not, we'll talk to you at that time right now. But overall, the company is making tremendous progresses on many fronts. And we've got a lot of momentum going, and we're going to continue to press on that.
spk28: Thank you.
spk33: There are no further questions at this time. I'll turn the call back over to Brian Clark for any closing remarks.
spk20: Again, thank you all for participating today. And as always, if clarification of any of the items in the call or news release is necessary, please contact our Investor Relations Department at area code 716-842-5138. Thank you and have a great day.
spk33: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.
spk30: Thank you. you Bye. Thank you.
spk00: Thank you. Thank you.
spk33: Welcome to the M&T Bank second quarter 2024 earnings conference call. All lines have been placed on mute, 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, too. 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, and I would now like to hand the conference over to Brian Klock, Head of Market of Investor Relations. Please go ahead.
spk20: Thank you, Ashley, and good morning. I'd like to thank everyone for participating in M&T's second quarter 2024 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 is M&T's Senior Executive Vice President and CFO, Darrell Bible. Now I'd like to turn the call over to Darrell.
spk16: Thank you, Brian, and good morning, everyone. As you will hear on today's call, the second quarter results continue M&T's strong momentum for 2024. Turning to slide four, this April we released our fourth annual sustainability report. We are proud of our continued progress towards our sustainability goals. Our efforts are creating positive outcomes for our businesses, our customers, and our communities. Of note, in 2023, our total sustainability finance loans and investments totaled $3.1 billion. Turning to slide five, we continue to garner awards for our businesses, products, and employees, including the highest customer satisfaction for mobile banking apps among regional banks, according to J.D. Power, and the Securitization Trustee of the Year for Wilmington Trust from Global Capital. Turn to slide seven, which shows the results for the second quarter. As noted in this morning's press release, we are pleased with the second quarter results and the performance through the first half of the year. We continue to grow loans while also shifting the composition of our loan portfolio and reducing CRE. Custom deposits increase sequentially while total deposit costs have leveled off. Net interest income and net interest margin both inflected off the first quarter cyclical loan. Asset quality trends are performing as expected with reductions in non-accrual and criticized balances and net charge-offs in line with our full-year outlook. Capital continues to build with a CET1 ratio increasing to over 11.4%. We continue to make progress on our capital return considerations and our stress capital buffer decreased 20 basis points to 3.8% reflecting the strength of our core earnings power and ongoing risk management work. Now let's look at the specifics for the second quarter. Diluted GAAP earnings per share were $3.73 for the second quarter, improved from $3.02 in the first quarter. Net income for the quarter was $655 million compared to $531 million in the linked quarter, an increase of 23%. M&T's second quarter results produced an ROA and ROCE of 1.24% and 9.95% respectively. The CET1 ratio remained strong, growing to 11.44% at the end of the second quarter, and tangible book value per share grew 3%. Included in our GAAP results for the recent quarter were pre-tax expenses of $5 million related to the FDIC Special Assessment. This amounts to $4 billion after-tax, or $0.02 per share. As a reminder, results for this year's first quarter included $29 million related to the FDIC Special Assessment, amounting to $22 million after-tax effect, or $0.13 per share. My date includes supplemental reporting of M&T's results on a net operating or tangible basis. from which we have only ever excluded the after-tax effect of the amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the second quarter was $665 million, compared to $543 million in the linked quarter. Diluted net operating earnings per share were $3.79 for the recent quarter up from $3.09 in the first quarter. Net operating income yielded an ROTA and an ROTCE of 1.31% and 15.27% for the recent quarter. Next, let's look a little deeper into the underlying trends that generated our second quarter results. Please turn to slide nine. Taxable equivalent net interest income was $1.73 billion in the second quarter, an increase of $39 million, or 2%, from the linked quarter. Net interest margin was 3.59%, an increase of 7 basis points from the first quarter. The primary drivers for the increase to the margin were a positive 6 basis points from fixed-rate asset repricing, primarily within the investment and consumer loan portfolios. positive five basis points from sequentially higher non-accrual interest, positive one basis point from lower interest-bearing deposit costs, partially offset by a negative three basis points from the impact of swaps, and a negative two basis points from higher borrowing costs and balances. The second quarter included non-accrual interest of $30 million compared to an average of $14 million in the prior five quarters. If non-accrual interest was at the average run rate, the second quarter NIM would have been 3.56%. In total, swaps reduced NIM by 23 basis points in the second quarter. Turn to slide 11 to talk about average loans. Average loans and leases increased 1% to $134.6 billion compared to the linked quarter. As have been the trend for the last several quarters, CNI and consumer growth outpaced the decline in CRE. CNI loans grew 2% to $58.1 billion, driven by increases in middle market, dealer commercial services, mortgage warehouse lending, and fund banking. The CNI growth reflects an increase in line utilization and higher origination activity. CRE loans declined 4 percent to $31.5 billion, reflecting continued low originations and elevated paydowns as we continue to manage our CRE concentration. Residential mortgage loans were relatively unchanged at $23 billion. Consumer loans grew 4 percent to $22 billion, reflecting growth in recreational finance and indirect auto loans. Loan yields increased six basis points to 6.38%, aided by sequentially higher non-accrual interest and fixed-rate loan repricing, partially offset by a higher drag on our cash flow hedges. Turning to slide 12, our liquidity remains strong. At the end of the second quarter, investment securities and cash, including cash held at the Fed, totaled $56.5 billion, representing 27% of total assets. Average investment securities increased by $1.1 billion. The yield on the investment securities increased 31 basis points to 3.61% as the yield on new purchases exceeded the yield on maturing securities. During the second quarter, we purchased over 3 billion in securities with an average yield of 5.16% and a duration of 2.9 years. Over the remainder of the year, we expect an additional $2.8 billion in security maturities with an average yield of 2.5%, which we intend to reinvest at higher yields. The duration of the investment portfolio at the end of the quarter was 3.7 years, and the unrealized pre-tax loss on AFS portfolio was only $239 million, or 12 basis point drag on CET1. Turning to slide 13, we remain focused on growing customer deposits and are pleased with the stabilization of our yields. Average total deposits declined 0.6 billion, or less than a half a percent, to 163.5 billion, reflecting sequential growth in average customer deposits offset by a 1.2 billion decline in broker deposits. Average broker deposits of $12 billion reflects a decision to shrink non-customer funding sources. Consumer, mortgage, business banking, and institutional finance had stable to growing average deposits compared to the first quarter, while commercial deposits declined. Average non-interest-bearing deposits declined $0.9 billion to $47.7 billion, with lower commercial and business banking balances as a result of seasonally and continued but moderating disintermediation. Non-interest bearing deposits were relatively stable for all other business lines. Excluding broker deposits, the non-interest bearing deposit mix in the second quarter was 31.5% compared to 32.2% in the first quarter. Interest bearing deposit costs decreased three basis points to 2.9 percent, while the total deposit cost was unchanged at 2.06 percent. This reflects more rational pricing in our markets. Continuing on slide 14, non-interest income was $584 million compared to $580 million in the linked quarter. Recall that the first quarter included $25 million Bayview distribution. Trust income increased $10 million to $170 million, reflecting approximately $4 million in seasonally tax preparation fees, typically earned in the second quarter, and strong sales performance across our institutional services business. Second quarter mortgage fees were $106 million compared to $104 million in the first quarter. Commercial mortgage fees increased $4 million from the linked quarter to $30 million, reflecting an uptake in origination activity, while residential mortgage fees decreased 2 million to 76 million, reflecting lower servicing fees. Service charges increased 3 million to 127 million from higher consumer debit interchange fees. Other revenues from operation were unchanged at 152 million, with increases in merchant discount, credit card, letter of credit, and other credit-related fees offsetting the $25 million first quarter BLG distribution. Security losses of $8 million primarily reflect realized losses on the sale of non-agency securities as we de-risked our portfolio. Turning to slide 15, non-interest expenses were $1.3 billion, a decrease of $99 million from the first quarter. As is typical for M&T's first quarter results, Expenses in the quarter included approximately $99 million of seasonally higher compensation costs. Salaries and benefits decreased $69 million to $764 million, reflecting seasonally elevated expenses in the first quarter, offset by the full quarter impact of annual merit increases. The second quarter included $5 million related to the FDIC special assessment, compared to $29 million in the prior quarter. Other costs of operations decreased $18 million to $116 million from lower supplemental executive retirement costs and lower losses on lease terminations. The adjusted efficiency ratio, excluding the impact of the FDIC special assessment, was 55.1% compared to 59.6% in the first quarter. Next, let's turn to slide 16 for credit. Net charge-offs for the quarter ordered 137 million or 41 basis points, down from 42 basis points in the linked quarter. The three largest charge-offs were 40 million combined and represent C&I loans that span industries including services, manufacturing, and retail. The CRE charge-offs, including charge-offs within the office portfolio, remain at manageable levels through the first half of the year. Non-accrual loans decreased $278 million to $2 billion. The non-accrual ratio decreased 21 basis points to 1.5%, driven largely by a decrease in CRE, reflecting favorable resolutions with borrowers, including payoffs and paydowns. In the second quarter, we recorded a provision of $150 million compared to net charge-offs of $137 million. The allowance-to-loan ratio increased one basis point to 1.63 percent. The provision for credit losses decreased 50 million compared to the first quarter, reflecting lower CRE loans, including criticized loans, and modest improvement in forecasted real estate prices, partially offset by growth in CNI and consumer portfolios. Please turn to slide 17. When we file our Form 10-Q in a few weeks, we estimate that the level of criticized loans will be $12.1 billion, compared to $12.9 billion at the end of March. The improvement for the link quarter was largely driven by 987 million decrease in CRE-criticized loans. I-18 provides additional detail on C&I-criticized balances. Total CNI criticized balance has increased 98 million. The majority of the increase is concentrated within vehicle and recreational finance dealers and healthcare sectors, offset by declines in most other industries. We saw additional migration to criticize within non-auto dealer portfolio, continuation from trends we discussed in the first quarter. However, there has been limited incremental migration within the portfolio since early in the second quarter. Turning to slide 19 includes a detail on CRE-criticized balances. Total CRE-criticized balances decreased $987 million from the last quarter. Upgrades and payoffs of criticized loans outpaced downgrades into criticized. The decline was across multifamily, retail, house services, hotel, and construction. but we did see modest increases in office and industrial. The decrease reflects the effects to work with borrowers to find favorable resolutions. We are actively working through our criticized population for favorable outcomes. Turning to slide 20 for capital, M&T CET1 ratio at the end of the second quarter was an estimated 11.44%. compared to 11.08% at the end of the first quarter. The increase was due in part to the continued pause in repurchasing shares and strong capital generation. At the end of the second quarter, the negative AOCI impact on the CET1 ratio from AFS securities and pension-related components would be approximately 19 basis points. Now turning to slide 20 for outlook. economy is slowing a bit, but remains in good health. Job growth, wage growth, and spending have slowed to more sustainable levels. We see the so-called soft landing scenario as having the highest probability, but the possibility remains for a mild recession brought on by the lagged impact of rate hikes. Consumer spending has slowed alleviating inflation pressure for many goods and services. The labor market remains positive but is clearly slowed, in turn keeping a lid on wage pressure and leading to longer spells of unemployment. We expect that to continue for the rest of 2024. Inflation figures remain above the Fed's target of 2% chiefly because of rent and home prices. We expect the weaknesses seen in rent listings to play through the official inflation data, helping bring the headline inflation figures down. Inflation in the second quarter slowed, encouraging development after higher readings in the first quarter. Shifting to 2024 outlook, we expect net interest income to be $6.85 billion to $6.9 billion. Our outlook incorporates the latest forward curve that has one rate cut in September and another in December. However, we expect the level of rates to have a limited direct effect on net interest income outlook as we have taken steps to reduce our asset sensitivity and are now more neutral. Higher for longer rates in the first half of the year allowed us to take additional actions to protect NII from lower interest rate environments. For example, in the first half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward-starting cash flow hedges, which became active in 2025. Further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts. For the remainder of the year, M&T's balance sheet will be smaller. with total average assets closer to $208 billion. We expect average cash to be approximately $25 billion and securities to be $30 billion, with modest growth in loans and deposits. Our outlook for fees and expenses is unchanged, with fees excluding any security gains or losses of $2.3 to $2.4 billion, and expenses excluding the amounts related to the FDIC Special Assessment are expected to be $5.25 billion to $5.3 billion. We continue to expect charge-offs for the full year to be near 40 basis points. The allowance level will be dependent on many factors, including changes in the macroeconomic outlook, portfolio mix, and underlying asset quality. Our outlook for the tax rate is 24 to 24.5 percent, excluding the discrete tax benefit in the first quarter. Preferred dividends are expected to be approximately $47 million in the third quarter, and 36 in the fourth quarter, reflecting our Series J issuance in May and the upcoming Series E redemption in August. Finally, as it relates to capital, last quarter we laid out five factors for consideration as we assessed our capital return plans for the rest of the year. The macroeconomic environment remains healthy. M&T continues to generate significant capital second quarter. We continue to manage our CRE concentration with CRE as a percent of Tier 1 capital and allowance of 151% as of the end of the second quarter. Asset quality continues to improve with declines in non-accrual and criticized loans and net charge-offs in line with expectations we laid out in the first quarter. M&T's preliminary stress capital buffer declined 20 basis points to 3.8%, reflecting many of the factors just mentioned. Given the improvements in these factors, we plan to begin our share repurchase in the third quarter at a pace of $200 million per quarter through the end of the year. We expect to maintain our capital ratios at least at the current levels for the remainder of the year. We will continue to monitor the previously discussed factors as well as the revised Basel III proposal once made public, and we'll adjust our capital return plan if necessary. Our capital will also be used to support organic growth and grow new customer relationships. Our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on slide 22, our results underscore an optimistic investment thesis. 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 while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholders older capital. Now let's open up the questions before which Ashley will briefly review the instructions.
spk33: Certainly. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star 2. Once again, that is star and 1 for your questions. We'll take our first question from Manan Ghazali with Morgan Stanley. Please go ahead.
spk18: Hey, good morning, Daryl.
spk17: Good morning, Manan.
spk19: So I wanted to ask on NII. So you beat on NII this quarter, and then your new guide for NII implies that quarterly NII will be relatively flat from 2Q levels. And you did see a noticeable increase quarter on quarter this quarter in NII. So can you just unpack the drivers in the back half? Is there some conservatism baked in there? Or is there some timing difference in being neutral to rates, but maybe perhaps being a little bit more asset sensitive with the first rate cuts, if you can just unpack those drivers there?
spk16: Yeah, thanks, Manan. Our position from rate sensitivity is really quite neutral. It's based on assumptions, but I feel we are really neutral there. If you look on the slide deck where we had net interest income, And one of the bullets there, we highlight that we had a five basis point positive impact on non-accrual interest. So let me explain that to you. So when our loans go into non-accrual, we basically, when we still receive payments, both principal interest, all that goes to principal. And then if the loan is basically resolved favorably and they pay us off, obviously we pay off the principal balance and then anything left over goes into net interest income. So what we saw in the second quarter was basically a large amount of loans that basically came out favorably out of our non-accrual portfolio. So what we put on there and what I talked about in the prepared remarks is that if you look at our average non-accrual interest for the last five quarters has been running around 15 million. This quarter we got double that. So I would basically say Our NEM this quarter was actually on track, because if you adjust the $15 million out, we were at 5.56 NEM, and I said that we would be mid-350s for the second quarter. So we're really on path to what I said, mid-350s second quarter, then high 350s for third and fourth quarter is really where we wanted to be and expect to be. So I think we're just on track, Manon.
spk19: Got it. And just to confirm that five basis points is where you are above normal, right? The five basis points isn't the total impact.
spk16: It's three is what I would say would be normal to the run rate. Yeah. Go ahead.
spk19: And you are five basis points above that?
spk16: No, no, no. We were three. So we were 352. We said we'd be in the mid 350s. I say we really came in at 356 if you back out the extra above non-accrual interest that we normally get. I mean, we're going to get non-accrual interest every quarter. We've been averaging a couple basis point benefit every quarter because of that. That's going to continue for a long time.
spk19: Got it. All right. Perfect. And then maybe you can put this in the category of no good deed goes unpunished, but On the buyback resumption, your message in the deck is that capital levels should at least stay at current levels of around 11.5%. Just given that the SCB went lower, given the excess capital position, what do you need to see before you accelerate the pace of buybacks and bring that capital ratio lower?
spk16: Yeah, I think it's pretty simple. I think we are aggressively working down you know, our asset quality, our criticized loans, not performing assets. I think we need to continue to make progress on that. As we make progress on that, you could see us decide to increase our, you know, repurchase shares potentially. Obviously, the economy is a factor in my prepared remarks. You know, we said we don't think it's likely, but it's possible that maybe you go into recession. So if that were to happen, I think we'd have to view that and just be a little bit more defensive if that made sense or not. You know, I still want to see the impacts of Azlifer. I know, you know, we are hearing more favorable things, but until we actually see it in writing, you really don't know what's going on. But those are probably the primary things that we're working on. We continue to shrink our CRE concentration, make great progress there. I have no doubt we will continue to make great progress in the next couple of quarters as well there.
spk31: Great. Thank you.
spk33: Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank. Please go ahead.
spk25: Good morning. I was hoping you could elaborate on the big drop in the commercial real estate on a period-end basis. I think it's down about 9%. Obviously, you know, great job bringing that down. And I know you touched on some of the kind of opportunities to offload that, but it's just a bigger drop than I would have thought. And I didn't know if there was any reclass into CNI as you kind of improved some of those, like, guarantees and things like that. So just elaborate on all that in terms of how you're able to bring it down so much. Thank you.
spk16: Yeah, no, happy to answer that, Matt. So we are very focused and working really hard, both the first line and second line, of working hard and making tremendous progress in bringing our CRE concentration numbers down. You know, we did see a lot more liquidity there. in the marketplace this quarter. And we were able to see some of our clients that we had actually in criticized multifamily be able to do government placements out into the marketplace for liquidity. So as we continue to have that liquidity, that helps us basically cure some of our criticized loan balances. The other thing that I would tell you is that we are doing a finance transformation. Finance transformation is basically putting in new general ledger systems, sub-ledgers, which we are doing really well in. We're about halfway through that process now. But it's also improving and changing processes. So as we improve and change processes, we are putting in better controls and more ways of actually how we put loans on the books. And that is causing some grading to go from what CRE would be into CNI owner-occupied. Because it really comes down to the source of repayment. Source of repayment is from an operating entity. It's basically not a CRE loan. It is a CNI owner-occupied loan.
spk24: Okay, that makes sense. I think that's how others do that, too.
spk25: And then just separately on the all-other income line, you pointed to a couple of kind of positives there. Is that a sustainable level? Or I know it can be lumpy, but... How do you think about that, all other fees of like 152?
spk16: Thanks. You know, it is at a relatively high level. You know, I probably trim, you know, maybe, you know, 5 or 10% out of that potentially on a run rate. But it's, you know, a lot of that other revenue that we talked about is the merchant fees, and we had a good quarter there, more activity. That could continue as we continue to have activity. The other is on loan demand, and we're having loan syndication fees and all that, and that's going to be lumpy. We had a good quarter this past quarter in that area. You know, we are seeing maybe a little bit of softening in some of the commercial areas, so it might be a little light. But, yeah, I'd say, you know, at that same level to maybe down 5% or 10%. Okay. Thank you so much.
spk22: Thank you.
spk33: We'll take our next question from Erica Najarian with UBS, please go ahead.
spk23: Yes, hi. Two follow-up questions, please. Daryl, the company clearly did a great job in terms of interest-bearing deposit costs coming down. I know some of that is a mix of broker being actively taken down in terms of exposure. Could you give us a sense, before the rate cuts, and we appreciate the downside beta guide that you gave us, but If we don't have rate cuts, how do you feel like this level of progress is sustainable? And maybe break it down in terms of what you're observing with client deposit rates versus the continued runoff in brokered CDs.
spk16: Yeah, so brokered CDs will continue to run off. We have another big chunk coming off in third and fourth quarter. So we'll be pretty much out of brokered deposit CDs, at least, by the end of the year. As far as the betas go and rates, you know, we continue to just see more rational pricing in the marketplace, and we're able to maybe offer specials, but the specials that we're offering just aren't as high as what they were before. So you're still seeing that. There is still some disintermediation. You know, it is slowing down, but there's still continued disintermediation. The one that impacts NII the most is obviously the one that goes to DDA, to interest-bearing deposit balances, You know, we're capturing any disintermediation, but it's still seeing a little bit in the commercial area. The other thing is on the retail side, as long as rates are at this level, you know, you're going to see a little bit of attraction of, you know, money going out of the non-maturity bucket into the CD deposits. You know, but we feel pretty good that our deposit costs are, you know, flat, you know, and maybe down, you know, as the year progresses and into next year. I think It's just more rational pricing in the marketplace right now.
spk23: Thank you. And my second question is a follow-up to Manan. So last quarter and during the quarter, I think you guys are telling us, oh, don't back into this 11% CET1 when, you know, thinking about buybacks, you know, listen to what we're saying on the total amount of what we're buying back. And then, of course, you had a pretty strong, you know, pretty strong progress in terms of CET1 this quarter and the floor went up even more. And I appreciate your response to Manon's question and I know that's part of the, you know, conservatism of this company and why Long Only's value you guys so highly. I guess I'm wondering, you know, how should we think about the future? I get that there's still uncertainty, there's still a willingness, a desire to take down CRA concentration, a desire to see the economy play out. But at this level of earnings power with $200 million, you're going to continue to build capital, especially if the C&I loan growth is engulfed by CRE declines. So I guess as your long-term shareholders think about, forget buybacks for a second, returns and what that appropriate capital floor is, how would you help them frame that, Daryl?
spk16: You know, from a floor perspective, obviously, we are much higher than where we have to run the company long-term for M&T. You know, we do have elevated criticized loan balances, and we're really working hard. Our teams are working their butts off to basically bring those balances down, and we hope and plan that to continue through the rest of this year into next year. So that is definitely one of the key things that we're looking at. We are conservative. What I've said in prior quarters, the capital is not going anywhere, Erica. We will return it. We promise you that. We aren't going to be wasted or do anything stupid. It will come back to the shareholders at some point down there. We're just going to do it in a very conservative manner because that's just who we are.
spk23: So I guess, you know, to compare it to how Jamie says it, I guess the better way for your shareholders to think about it is earnings in store.
spk29: Yeah, I agree.
spk12: All right. Thanks, guys.
spk33: Thank you. We'll take our next question from John Pekary with Evercore ISI. Please go ahead.
spk27: Morning, Daryl. Morning, John.
spk02: On the, back to CRE, I know you mentioned the ongoing focus to reduce the concentration of CRE. Where do you see the CRE, the risk-based capital percentage going? I believe in the past you've indicated you wanted to see it into the 150% range. So I wanted to get that update. And then separately, in terms of the improvement that you saw in credit this quarter, in terms of the past due declines, non-accruals, and criticized. Can you just talk about what specifically you saw that is driving that, and if broadly those trends can continue in that direction? Thanks.
spk16: Yeah, sure. So, you know, we've made tremendous progress over the last three-plus years on getting our CRE concentration down, the plans that we, you know, put into place at that point and continue to execute. And you saw the benefits in our stress capital buffer because of that, and that will hopefully continue. when we continue to submit the stress capital CIFAR test. I would say we're getting close, John. We are at 151 now. I think we're in the neighborhood of being close to where CRE will be much more normal space for us. We're at a level that we think makes sense for the size company we are and serving our communities and clients. We're probably maybe a quarter or two away, but I think that's not too far off. As far as non-accruals go, I tell you, this quarter, everything kind of worked, came together really strong. Our first-line credit team was working with our clients. We have a process in place where we're looking at all the CRE loans that are maturing and trying to see where and how we can work with our clients to either get it right-sized to get it upgraded off of criticized. We are seeing, you know, some of our criticized loans getting refinanced by others in the industry. And I talked earlier that we're seeing, you know, some of our criticized loans getting placed in the agencies with our programs with the GSEs. So we're basically, you know, really focused on that. The teams are diligent and working hard. And, you know, we plan to have those numbers continue to drive down and and be really positive.
spk02: Great. Thanks, Charles. That helps. And then related to that, maybe could you just talk about the role that loan modifications have played here as you've addressed commercial real estate? Maybe help us with the trajectory of your financial difficulty modifications. Do they continue to rise? And maybe if you could just talk about the concerns out there that, you know, they're simply kicking the can down the road and a year from now we can see these These pressures rear the rug we had again.
spk16: When you look at loan modifications, when we are working with our clients, loan modifications, we are asking for more type of recourse or capital to be put into the transactions for them to get more time to work through the higher interest rates that we have. The modifications we are doing are actually enhancing our our position. So we're giving them more extension on time, and they're giving us more capital, liquidity, recourse for that time. So we're actually in a better spot. So yes, our modifications are going up. This is our history at M&T. We work with our clients. If our clients support us, we're going to support them. That's what we do, and that's what we're going to continue to do.
spk27: Great. Thanks, Daryl.
spk32: Thank you.
spk33: We'll take our next question from Ibrahim Punawalla with Bank of America. Please go ahead.
spk36: Hey, Darryl. Good morning.
spk27: Good morning.
spk36: I just wanted to go back to the criticized CNI and CRE. So a lot of decision-making on capital revolves around how some of this plays out. If you don't mind, give us a sense of, when you think about criticized loans, if rates go lower, I think you mentioned soft landing base case probability most likely for you. Is there a point in time if rates are lower, you get the financials maybe in March of next year, we could see a meaningful reset lower from this 12 billion going down by a couple billion? I'm just wondering, could there be a step function decline in criticized loans at some point in the first half of next year based on rates and macro clarity?
spk16: Yeah, so Ibrahim, that's a great question. We saw a short window in the fourth quarter in December when a 10-year dropped 4% or a little bit under that. And we had huge volume that we were able to place our clients out with the agencies. Our RCC business was able to place a lot of loans out because of that. So I think our 10-year last time I looked was 418. So I think we're getting... closer to more of a pivot point where more volume will actually happen. So I think lower rates would definitely help us lower our credit size balances sooner and faster from that perspective. That would be even more liquidity in the marketplace than what we saw this past quarter.
spk36: That's helpful. And I guess the other question on theory, given all the work you've done over the past year, stress testing, et cetera, on the CRE book, Just give us your perspective on the loss content in these loans as maybe some of these go into non-accrual based on what you know today, what's already been deserved, and as we think about charge-offs relative to the 40 BIPs that you've guided for this year.
spk16: Yeah, we have a long-term history of our great, strong credit performance. So if you look at our LTVs that we have for the CRE portfolio, Even office, we're still under 60% LTV there. So a great thing to look at, if you look at our non-accruals, half of our non-accruals don't have a reserve against it. And typically, you'd have a specific reserve on non-accruals. That's because we have collateral value that's stronger than what the loan value is today. So it's really the strength of how we underwrite. And that credit performance is really what shows through in times of stress. So, yes, we have a higher level of criticize and non-approval. We're working those down, but we think the loss content is still a lot lower.
spk35: Got it. That's great, Conor. Thanks, Ed. Thank you.
spk33: Thank you. We'll take our next question from Ken Oosten with Jefferies. Please go ahead.
spk37: Thanks. Good morning. Hey, Daryl. You had a great amount of securities repricing this quarter, up 31 basis points on a bigger book. And I can imagine some of that was just a switch from cash. But I think you had talked about 15 to 20 going forward. So maybe can you just give us a little back color on what drove that 31 and then how you're looking at what securities yields could look like from an incremental perspective going forward? Thanks.
spk16: Yeah. So we are being very disciplined in how we're approaching our security purchases and You know, we're trying to keep our durations relatively short. We really don't want to have a negatively convex portfolio. So when we go to market and we buy securities, you know, we are basically balancing our securities between positively convex securities like treasuries and CMBS agency securities coupled with some negative convex securities, which could be some agency CMOs or MVFs. So we're being very balanced from there. So we're trying to keep our duration around three years. Because of that, you know, our yields, if you look at where rates are today, are blended to be around 5%. The negatively convexed are over five. The positively convexed are under five, approximately. And we're living in, you know, three-year type duration type instruments overall is kind of what we're focused on. That said, though, we're still going to have a nice benefit. If you look at what's maturing, in the third and fourth quarter, the average yield of what's maturing is about 2.5%. So we'll, depending on where rates go, but right now we're going to get 250 basis points, still increase in that yield portfolio as that turns and turns over. So I think we feel really good. We're just being very disciplined. I'm not good at timing rates, so we kind of do dollar averaging every time we've done that. Now for the last year, we're going to continue to do that going forward, and we'll just do it over time and average in and hopefully continue to average up higher.
spk37: Okay. And then, obviously for a long time, M&T has had a really healthy amount of cash. And I think cash and earning assets together is about, cash is like 30-something percent, still low 30s percent. And do you still anticipate, given that conservatism, keeping cash and securities at, you know, over 30 percent as you look forward? And what would change that, if anything?
spk16: Yeah, so on the prepared call notes, what I mentioned is that right now our investment portfolio is about $30 billion. We believe that the cash at the Fed is closer to mid-20s, so closer to $25 billion. We're basically just trying to get out of some wholesale funding and just shrinking the balance sheet a little bit, so our balance sheet size is coming down as well. So we'll have a smaller balance sheet. It shouldn't really impact NII funds, just because of the cost of the borrowings and what we earned on the Fed balance kind of canceled each other out. But, you know, we just feel mid-25 is good. We do have limits in place of how low we would go that would be in the mid to high teens. So we have well above that buffer that we're operating right now, but just want to be here again conservative. You know, if we could go into a recession, which we don't think will happen, but if we do, this will be a really conservative balance sheet.
spk26: Okay, thanks, Daryl.
spk33: Thank you. We'll take our next question from Gerard Cassidy with RBC. Please go ahead.
spk27: Hey, Daryl. Hey, Gerard.
spk34: Daryl, you obviously did a good job with the DFAS and the stress capital buffer coming down. I guess a couple of questions. First is, when you look at the improvement And you touched on it, what you've obviously done. Do you think that improvement can be as large next year as you guys continue to reduce these risks to M&T as we look out into 2025?
spk16: Yeah, so our plans right now, Gerard, we are really pleased. that we were down 20 basis points. In our peer group, we were one of three banks that had a lower SCB, so we were really excited to have that outcome. But by us really focusing on and pushing down our criticized, besides share repurchase maybe increasing, it's also going to help us in our stress capital buffer when we go through the stress test. So we're really focused in trying to bring down our criticized levels to as much as we can working with our clients over the next couple quarters so that when we do CCAR next year, if we decide to do it, which we may or may not, probably will though, we'll continue to try to get a lower stress capital buffer.
spk34: Got it. And then when you look at M&T's history, obviously the organic growth has always been complemented very successfully with acquisitions. And when you look out over the landscape over the next 12 to 24 months, can you give us your views on, you know, depository acquisitions? Not to say that you're going to do anything, you know, near term, but just how are you guys thinking about depository acquisitions? And I know there's changes, and we've got a presidential election coming up, which could influence as well. But what have you guys been thinking in that, you know, in that strategy?
spk16: So M&T has a long-term history of doing acquisitions, successful acquisitions, and that is one of the reasons how we grow here. But to be honest with you, we haven't really been talking about acquisitions. We're working on our four priorities that we have in the company right now. Our four priorities that we have are basically building out our markets from the people's acquisition in New England and Long Island. I think that's really important. continue to build out. That's a great opportunity for us. And we think the M&T Bank will be really good in the markets that we serve theirs. I think they need a bank like us in those markets, and we want to deliver to those clients. We're enhancing our risk areas throughout the company, making great progress in those areas. We will continue to focus on that. We're also improving resiliency. Some of the transformations that we're doing, we're putting in data centers, you know, putting things up into the cyber or applications into the cloud. So all that is going forward. And then lastly, you know, we're continuing to optimize revenue and expenses. You know, we put some money into treasury management this past year, and we're now growing our treasury management revenues at double-digit paces, 13% right now. So they're doing really good and, you know, continue to gain more momentum there in that treasury management capacity. As we push more into CNI, that's a huge growth opportunity for us, and that's really what we're focused on in trying to grow and serve our clients.
spk27: Great. Thank you.
spk32: Thank you.
spk33: We'll take our next question from Chris Farr with Wells Fargo. Please go ahead.
spk21: Good morning. So my question is just a little bit on expenses. Just wondering about headcount, what you're thinking about it going forward. And since salaries expenses were up 4% year over year, which seems pretty good overall.
spk16: Yeah, I mean, we're right on track from our expense guidelines. Actually, we're doing a little bit better than what was in plan. So you might see a little bit of shift in that in the second half of the year. But we're right on track. We're going to hit our plan numbers on expenses. I have no doubt about that. FTEs, we are down a couple hundred million in FTEs. from the start of the year. So that's just being managed by all the leaders and their groups and all that. So I think from an expense perspective, we really have an owner's mindset at M&T. They really take to heart how we spend money and make sure how we're spending money in the right places and getting the right outcomes from that. So I'm really fortunate to have a really great company that really understands how to run a company both from a revenue and expense side basis. So it's all really good.
spk21: And just to clarify, down a couple hundred, not a couple hundred million, correct?
spk15: No, no, no, a couple hundred FTEs. Yeah, FTEs. All right. Sorry, sorry.
spk21: And then, yeah, no worries. And then just on the... outside data processing, a big delta, and how much is that related to this upgrade that you've been talking about, and will some of that run off, or are you kind of now at a higher operating plateau on tech expense?
spk16: You know, I would say second half of the year you might see elevations in outside data processing and professional services. We have now seven projects, and our investment accounts are ramped up. Those probably will be areas of increase. We'll still come into our target that we set on expenses. So I feel really good about that. You know, some of the projects are just larger and take time to ramp up. But, you know, as we get into 25, you know, you'll see some projects start to complete. And, you know, whether we reinvest in other areas or not, we'll talk to you at that time right now. But overall, the company is making tremendous progresses on many fronts. And we've got a lot of momentum going, and we're going to continue to press on that.
spk28: Thank you.
spk33: There are no further questions at this time. I'll turn the call back over to Brian Clark for any closing remarks.
spk20: Again, thank you all for participating today. And as always, if clarification of any of the items in the call or news release is necessary, please contact our Investor Relations Department at area code 716-842-5138. Thank you and have a great day.
spk33: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.
Disclaimer