Operator:

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. [Operator Instructions] 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 and Investor Relations. Please go ahead.

Daryl Bible:

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 4, 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 5, 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 GlobalCapital. Turning to Slide 7, 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. Customer deposits increased 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 the CET1 ratio increasing to over 11.4%. We continue to make progress on our capital return considerations, and our stressed 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 remains 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. Slide 8 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 9. 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 5 basis points from sequentially higher non-accrual interest, positive 1 basis point from lower interest-bearing deposit costs, partially offset by a negative 3 basis points from the impact of swaps and a negative 2 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. Turning 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, C&I and consumer growth outpaced the decline in CRE. C&I loans grew 2% to $58.1 billion, driven by increases in middle market, dealer commercial services, mortgage warehouse lending and fund banking. The C&I 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 6 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 the 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 noninterest-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. Noninterest-bearing deposits were relatively stable for all other business lines. Excluding broker deposits, the noninterest-bearing deposit mix in the second quarter was 31.5% compared to 32.2% in the first quarter. Interest-bearing deposit costs decreased 3 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, noninterest 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 and $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 our 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 derisked our portfolio. Turning to Slide 15, noninterest 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 cost 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 1 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 C&I 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 linked quarter was largely driven by $987 million decrease in CRE criticized loans. Slide 18 provides additional detail on C&I criticized balances. Total C&I 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 criticized 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 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, 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 capital -- 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 slowed to a pace consistent with job and wage growth, alleviating inflation pressure for many goods and services. The labor market remains positive, but has 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 rents 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 and encouraging development after higher readings in the first quarter. Shifting to the 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 environment. 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. During -- or 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 billion 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%, exclude the discrete tax benefit in the first quarter. Preferred dividends are expected to be approximately $47 million in the third quarter and $36 million 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 assess 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 tangible common equity by over $500 million in the 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 will adjust our capital return plans 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 shareholder capital. Now, let's open up the questions before which Ashley will briefly review the instructions.

Manan Gosalia:

Hey, good morning, Daryl.

Manan Gosalia:

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?

Manan Gosalia:

Got it. And just to confirm that 5 basis points is where you are above normal, right? The 5 basis points isn't the total impact?

Manan Gosalia:

And you are 5 basis points above that?

Manan Gosalia:

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?

Manan Gosalia:

Great. Thank you.

Matt O'Connor:

Good morning. I was hoping if you could elaborate on...

Matt O'Connor:

...good morning, 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 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 C&I as you kind of improve 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.

Matt O'Connor:

Okay. That makes sense. I think that's how others do that, too. And then, just separately, on the all other income line, you pointed to a couple of kind of positives there. Is that on a sustainable level? Or I know it could be lumpy, but how do you think about that all other fees of like $152 million? Thanks.

Matt O'Connor:

Okay. Thank you so much.

Erika Najarian:

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 taking 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 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?

Erika Najarian:

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 thinking about buybacks, 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 progress in terms of CET1 this quarter and the floor went up even more. And I appreciate your response to Manan's question, and I know that's part of the conservatism of this company and why long-onlies value you guys so highly. I guess, I'm wondering, how should we think about the future. I get that there's still uncertainty. There's still a willing -- desire to take down CRE concentration, 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?

Erika Najarian:

So, I guess, to compare it to what -- how Jamie says it, I guess, the better way for your shareholders and to think about is earnings in store?

Erika Najarian:

All right. Thanks, guys.

John Pancari:

Good morning, Daryl.

John Pancari:

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 want 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 criticized, can you just talk about what specifically you saw that is driving that and broadly those trends can continue in that direction? Thanks.

John Pancari:

Great. Thanks, Daryl. 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 they're simply kicking the can down the road, and a year from now, we can see these pressures rear directly ahead again?

John Pancari:

Great. Thanks, Daryl.

Ebrahim Poonawala:

Hey, Daryl. Good morning.

Ebrahim Poonawala:

Just wanted to go back to the criticized C&I 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 of billion? Like, 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.

Ebrahim Poonawala:

That's helpful. And I guess the other question on CRE, 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 they maybe some of these go into non-accrual based on what you know today, what's already been reserved, and as we think about like charge-offs relative to the 40 bps that you guided for this year?

Ebrahim Poonawala:

Got it. That's great color. Thanks, Daryl.

Ken Usdin:

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 basis points to 20 basis points going forward. So, maybe can you just give us a little back color on what drove that 31 basis points, and then how you're looking at what securities yields could look like from an incremental perspective going forward? Thanks.

Ken Usdin:

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, still low-30%s. And do you still anticipate, given that conservatism, keeping cash and securities at -- over 30% as you look forward and what would change that if anything?

Ken Usdin:

Okay. Thanks, Daryl.

Gerard Cassidy:

Hi, Daryl.

Gerard Cassidy:

Daryl, you obviously did a good job with the DFAST 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?

Gerard Cassidy:

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 depository acquisitions? Not to say that you're going to do anything 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 strategy?

Gerard Cassidy:

Great. Thank you.

Chris Farr:

Good morning. So, my question is just a little bit on expenses. Just wondering about headcount. What you're thinking about it going forward, since salaries expenses were up 4% year-over-year, which seems pretty good overall?

Chris Farr:

And just to clarify, down a couple of hundred, not a couple of hundred million, correct?

Chris Farr:

I got you. All right.

Chris Farr:

And then -- 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?

Chris Farr:

All right. Thank you.

Brian Klock:

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.

Operator:

Good day, and welcome to the M&T Bank First Quarter 2024 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the hand -- the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Daryl Bible:

Thank you, Brian. And good morning, everyone. As you will hear today, our first quarter results were strong start for M&T Bank. Turning to Slide 3, we started the year with renewed and strengthened commitment to making a difference in people's lives. Along with helping our customers meet their financial goals, we've continued to launch programs to uplift our communities and partners. Let me share with you a few examples of how we put these words into action. Since the beginning of the year, M&T has provided $900,000 to 30 organizations across our footprint to address affordable housing and homelessness in underserved, low to middle-income communities. We launched a new Spanish language small business accelerator program in Prince George's County, Maryland, which will support many small business owners in the region. We continue to invest in New England and Long Island through the second phase of our Amplify Fund. We do this when our communities are successful, so is our business. Turning to Slide 4, we are excited to see how deeply we embedded sustainability across the bank and into our products and services. We have included several sustainability accomplishments from our upcoming 2023 Sustainability Report and look forward to sharing more when we release the complete report this quarter. Turning to Slide 6, which shows the results for the first quarter. The quarter was highlighted by strong C&I and consumer loan growth. PPNR was a solid $891 million. Expense control remains a key focus and was evident as adjusted expenses increased only 0.6% compared to the first quarter of 2023. Diluted GAAP earnings per share were $3.02 for the quarter. If we exclude the additional FDIC special assessment, adjusted diluted earnings per share were $3.15. On an adjusted basis, M&T's first quarter results produced an ROA and ROCE of 1.05% and 8.49%, respectively. The CET1 ratio remains strong, growing to 11.07% at the end of the first quarter and tangible book-value share grew 1% to $99.54. Next, we walk a little deeper into the underlying trends that generated our first-quarter results. Please turn to Slide 8. Taxable-equivalent net interest income was $1.7 billion in the first quarter, down 2% from linked quarter. The net interest margin was 3.52%, down 9 basis points from the linked quarter. The primary drivers for the decrease to the margin were a negative 6 basis points from lower non-accrual interest and the impact of interest rate swaps, a negative 3 basis points from higher liquidity and cash moving into securities, negative 3 basis points from our deposit mix and pricing, and a positive 3 basis points from all other items, including the benefit of asset repricing in the investment portfolio and consumer loans. Turning to Slide 9 to look at the average balance sheet trends. Average investment securities increased $1.1 billion to $28.6 billion, reflecting the reinvestment of maturing security balances and a measured shift of a portion of our cash balances into investment securities. Average interest-bearing deposits at the Fed increased approximately $0.5 billion to $30.7 billion as our decision to have more liquidity on the balance sheet was largely offset by the previously mentioned investment security purchases. Average loans increased $1 billion or 1% to $133.8 billion. Average deposits decreased $648 million or less than 1.5% to $164.1 billion. Turn to Slide 10 to talk about average loans. Average loans and leases increased 1% to $133.8 billion compared to the linked quarter. Solid growth in C&I and consumer loans outpaced declines in CRE and residential mortgages. The growth in C&I loans was driven by combination of increased line utilization in our middle market and dealer business lines, combined with new origination activity in equipment finance, corporate and institutional, and fund banking as we continued to grow existing and new clients. Loan yields decrease 1% to 6.32%, but increased 2 basis points sequentially when excluding the impact of the cash flow hedges on interest income in our CRE portfolio. Within our consumer portfolio, we continue to see the benefit of higher rates on new originations compared to maturing balances. With the consumer loans yielding increased 12 basis points to 6.54%. Turning to Slide 11, our liquidity remains strong. At the end of the first quarter, investment securities and cash, including cash held at the Fed totaled $62.3 billion, representing 29% of total assets. Average investment securities grew $1.1 billion, reflecting the reinvestment of maturing securities and a shift of a portion of our cash balances into securities. The yield on investment securities increased 17 basis points to 3.30% as the yield on new purchases exceeded the yield on maturing securities. The duration of the securities portfolio at the end of the quarter was 3.8 years and the unrealized pre-tax loss on the available for sale portfolio was only $263 million. Turning to Slide 12, we continue to focus on growing customer deposits and we're pleased with the stabilization of our deposit balances and pricing. Average total deposits declined $648 million, less than one-half of a percent to $164.1 billion, while the average customer deposits increased sequentially. We saw average deposit growth in institutional services and wealth management, relatively stable deposits within commercial, and a modest decline in the retail bank. This growth allowed us to roll off some of our brokered CDs. Average demand deposits declined $1.5 billion, partially impacted by seasonality deposit declines in commercial and business banking. The shift toward higher-yielding project -- products continued during the quarter, but at a much slowed meaningfully. The mixed average of noninterest-bearing deposit was 30% of total deposits, largely unchanged from last quarter. Excluding broker deposits, noninterest-bearing deposit mix in the first quarter was 32%. Encouragingly, we saw the pace of deposit cost increases slow through the quarter with the cost of interest-bearing deposits increasing 3 basis points to 2.93%. This represents the smallest quarterly increase since the start of the tightening in early 2022. Our core non-maturity deposit costs increased only 1 basis point sequentially. Continuing on Slide 13. Noninterest income was $580 million, up slightly from the linked quarter. M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $25 million in 2024 compared to $20 million last year. Excluding the Bayview distribution, noninterest income declined $23 million sequentially. The decrease was largely driven by lower commercial mortgage banking revenues and syndication fees reflected in our other revenues from operations. Both of these fee items posted strong fourth-quarter results. Recall that last year's first quarter included $45 million of fee income from CIT prior to the sale in April. Turning to Slide 14. We continue to focus on controlling expenses. Noninterest expenses were $1.4 billion. This year's first quarter and last year's fourth quarter, each had incremental FDIC special assessments amounting to $29 million and $197 million, respectively. Excluding the special assessment, adjusted noninterest expense increased by $8 million, or 0.6% compared to last year's first quarter. On a similar basis, adjusted noninterest expense increased $114 million, or 9% from the linked quarter. This increase was largely driven by an approximate $99 million of seasonal higher compensation costs included in the first quarter. This figure is unchanged from last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. The adjusted efficiency ratio was 59.6% compared to 53.6% in the fourth quarter. Next, let's turn to Slide 15 for credit. Net charge-offs for the quarter totaled $138 million, or 42 basis points, down from 44 basis points in the linked quarter. CRE net charge-offs declined meaningfully due to a resolution of three office-related credits in last year's fourth quarter. The two largest charge-offs were previously criticized C&I loans and amounted to approximately $31 million in total. One credit was a non-automotive dealer and the other was in the services industry. Nonaccrual loans increased by $136 million to $3.2 billion. The nonaccrual ratio increased 9 basis points to 1.71%. This was largely driven by an increase in C&I and CRE healthcare nonaccrual loans. Loans 30 to 89 days past due declined sequentially across each portfolio. In the first quarter, we recorded a provision of $200 million compared to the net charge-offs of $138 million. This resulted in an allowance build of $62 million and increased the allowance-to-loan ratio by 3 basis points to 1.62%. The current build primarily reflects a deterioration in the performance of loans to certain commercial borrowers, including non-automotive dealers and healthcare facilities, as well as growth in some sectors of M&T C&I and consumer loan portfolios. Please turn to Slide 16. When we file our form 10-Q in a few weeks, we estimate that the level of criticized loans will be $12.9 billion compared to $12.6 billion at the end of December. C&I criticized loans increased $641 million, while CRE criticized loans decreased $277 million with declines in both permanent and construction. Slide 17 provides additional detail on C&I criticized balances. Total C&I criticized balances increased $641 million. The majority of that increase is concentrated within dealer and manufacturing industries. We are seeing areas of pressure, particularly in certain businesses that may be more acutely impacted by the lag effects of higher rates for those impacted by reduced large-ticket consumer discretionary spending or a shift in spending on goods to services. For example, we saw an uptick in criticized loans to non-auto dealer industries as higher rates have impacted large ticket discretionary consumer spend and earlier COVID-driven buying saturated demand for these types of purchases. Slide 18 includes detail on CRE criticized balances. Total CRE criticized balances decreased $277 million from the last quarter. The decline is across most property types, though we did not see an increase in office and healthcare criticized. We are seeing improvements in occupancy and staffing within healthcare, but reimbursement rate improvement has been uneven, resulting in modest net increase in criticized balances within the portfolio. Last quarter, we noted an upcoming review of the construction portfolio. Over 80% of that review has been completed and I am pleased to note that that review resulted in limited incremental downgrades of construction loans into criticized. The remainder of the review generally consists of smaller balanced loans, but we would not expect the outcome of the remainder to -- of that review to be significantly different than the portion already completed. Turning to Slide 19 for capital. M&T's CET1 ratio at the end of the first quarter was an estimated [11.7%] [sic - 11.07%] compared to 10.98% at the end of the fourth quarter. The increase was due in part due to the continued pause in repurchasing shares combined with continued strong capital generation. At the end of the quarter, the negative AOCI impact on CET1 ratio from the AFS securities and pension-related components would be approximately 20 basis points. Now turning to Slide 20 for the outlook. The economy continues to perform well and the labor market remains strong despite the challenges faced by firms and consumers. The economic outlook that we discussed on the January earnings call remains unchanged. Shifting to 2024 earnings, the outlook is largely unchanged from our update in March with an upward bias to our NII outlook. For NII, recall that the outlook we provided in January considered a range of rate cut scenarios from six cuts to three cuts. As the forward curve has settled closer to two cuts, we expect NII to be $6.8 billion with possible upside. Our outlook for fees and expenses is unchanged. The expense outlook excludes incremental FDIC special assessment incurred in the first quarter. We continue to expect net charge-offs for the full year to be near the 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 of 24% to 24.5% excludes the discrete tax benefit in the first quarter. Finally, as it relates to capital. Our capital, coupled with our limited investment security marks has been a clear differentiator for M&T. We take our responsibility to manage our shareholders' capital very seriously and return more when it is appropriate to do that. Our businesses are performing well and we are growing new relationships each and every day. While the economic uncertainty is improving, our share repurchases remain on hold. We plan to reassess repurchases after the second quarter and we'll consider a range of factors including the macroeconomic environment, the bank's capital generation, results from the 2024 stress test, the level of commercial real estate loans, and overall asset quality. That said, we continue to use our capital for organic growth and growing new customer relationships. Buybacks has always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles, 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 shareholder capital. Now, let's open up the call.

Manan Gosalia:

Hi. Good morning.

Manan Gosalia:

Daryl, can you unpack the NII guidance for us in terms of the puts and takes in a higher for longer rate environment? I mean, it looks like NIB deposits are holding up well. You're moving some of the liquidity into high-yielding securities. So is the $6.8 billion an easy bar to hit if we only get two cuts? And what would that look like if we don't get any rate cuts this year?

Manan Gosalia:

Can you -- did you mention what duration you're putting on, on the securities book?

Manan Gosalia:

That's really helpful. And then maybe a quick follow-up on the liquidity side. Cash as a percentage of assets is up another 150 basis points or so this quarter. Can you talk about like the rationale for continuing to ratchet up that liquidity level? Is it the CRE exposure? Is it partly some of the stress we saw in the markets last quarter? So maybe if you can talk about what the right level of liquidity is, given the current credit environment?

Manan Gosalia:

Great. Thank you.

Operator:

Thank you. Our next question will come from John Pancari with Evercore. Please go ahead.

Daryl Bible:

Hey, John.

Daryl Bible:

Yes. So if you look at our growth, it was actually broad-based. We had really good growth in many sectors. So if you look at our dealer financial services area, just the auto floor planning, is funding up so we had increased utilization there. Our middle market business was strong and actually had increases in that space. Corporate and institutional was also up. Fund banking was up. Our equipment leasing was higher as well as mortgage warehouse. So those were the businesses that drove it. If you look at the regions, we operate in 28 community bank regions. Two-thirds of our community bank regions now are growing positively. The highlights were in Massachusetts, New Jersey, Philadelphia, and Western New York were kind of the drivers where the growth came from.

Daryl Bible:

Yes. So on the CRE front, I think we saw really good performance this quarter. One quarter doesn't make a trend yet, but it was a positive quarter. We had our criticized numbers come down, still had health care and office go up a little bit. But overall, I think we're seeing that stabilize. We did -- I talked about it in the prepared remarks, we did go through that construction review. We got through 80% of the construction review. We only had $200 million change in criticized. We have a little bit to go, and we'll have very nominal increase there. So getting through that construction book was huge. It was, I think, $8.6 billion in size we went through. So that was a really good review. We'll continue to monitor it. Obviously, office and healthcare are more the troubled sectors and those where we will work with over time. But our teams are working with our customers each and every day. We're trying to get out in front of working with them to make sure we can help them through any stress that we have and I think we feel pretty good just going forward with that. So, definitely not out of the woods with CRE, but I think we're feeling that we're having some positive trends. As far as C&I goes, to be honest with you, we had two really credits. One was a non-auto dealer and this non-auto dealer was stressed a little bit with higher interest rates. It was a marine dealers such that a lot of activity in the boats was coming down and didn't have as much demand there. And we just basically had to put a specific reserve on that and take a charge-off in that sector. And the other one that came through was a healthcare credit and those were the two largest C&I credits that came through that really impacted the numbers. So it wasn't for those, you probably wouldn't have noticed anything from a charge-off perspective or provision.

Daryl Bible:

Yes. So we have had a long history of running with a higher level of criticized. We do that intentionally because we want to work with our clients, because if we work with our clients and get them through these stress times, they're very loyal to our company. It's the right thing for our communities and all of that. So that's first and foremost. I would say we just tend to be a conservative company. I'm on the financial side, so I'm conservative with capital and liquidity. You have Mike Todaro and Bob, our Chief Credit Officer, they're conservative on the credit side. So it's just how we run and operate the bank. We're going to do the right things and try to work with our customers to get through issues. When we -- customers are not supportive in getting through issues, that's when we might try to sell some credits, but that's usually a few and far between. But our history is to work with them. We find that working with our clients over the long term produces less losses, better capital preservation and better for both shareholders as well as us as a company and all that. So that's how we're going to continue to operate.

Daryl Bible:

Yes.

Ebrahim Poonawala:

Hey, good morning, Daryl.

Ebrahim Poonawala:

So, I guess, a question on commercial real estate. You've done a lot of work over the last year, deep-diving on the portfolio. If we think about, I think, the stress in the market and it's been the wet blanket on your stock is around what higher rates could mean on commercial real estate risk. Give a sense of when you look at sensitivity, be it loan-to-value discounted sort of debt service coverage ratios. If we don't get any rate cuts for the next two years, does that -- and the economy -- and that's because the economy is doing fairly well, does that lead to worse outcomes just because rates are higher? Like give us a sense of no rate cuts, elevated yield curve, what's the sensitivity to that portfolio is in terms of credit losses?

Ebrahim Poonawala:

That is a good color. Thanks for talking through. And then one question. In terms of buybacks, you have a lot of excess capital. You called out four things, macro, overall asset quality, stress test results, and the level of CRE. If the first three are okay and fast forward to July, no issues on the first three, is there something around the level of CRE that we should be mindful of when we think about potential for buybacks getting started in the back half of the year?

Ebrahim Poonawala:

My apologies.

Ebrahim Poonawala:

Got it. Thanks for taking my questions.

Ken Usdin:

Thanks. Good morning.

Ken Usdin:

Daryl, I was wondering if you can elaborate a little bit more on deposits. So I think typically M&T see a little bit of a seasonal decline in the first Q. And I think quarter had like a weird ending date with a holiday and payroll, but really interesting to see your DDAs and interest-bearing up at period end versus the averages. Can you talk about your flows? What you're seeing? And how that dynamic is changing with the higher-for-longer environment?

Ken Usdin:

Got it. Great. And one question on the loan side. You talked about the benefit from securities yields grinding higher. Can you give us any color on your fixed rate loan repricing and what that looks like over the next year or two?

Ken Usdin:

It does. And are those the two books that are the majority of where you'll get that benefit over the next year or two?

Ken Usdin:

Great. Thanks, Daryl.

Steven Alexopoulos:

Hey, good morning, Daryl.

Steven Alexopoulos:

I wanted to start -- I appreciate all the comments on what the CRE portfolio could do under different stress scenarios looking forward. But if we stay with what actually happened this quarter, I know you guys have roughly $8.5 billion coming due this year. What came due in the first quarter and walk us through how did it play out? What percent of these refinanced, what paid off? What did you have to extend because they couldn't refinance? Could you just give us some color on what actually happened this quarter in the portfolio?

Steven Alexopoulos:

Got it. And when you say extended, do you mean refinanced or they weren't in a position to refinance so you gave them another year as an example?

Steven Alexopoulos:

Got it. Okay. Thanks. And then just on the margin, as I heard you earlier said you thought and it would be mid to high 3.50s for the rest of the year, but it's funny, when you look at deposit cost, it slowed materially. It seems you're fairly close to market. And when I look at the components of earning assets, right, loan yield 6.3%, C&Is coming in way above that. You've already outlined securities coming in higher. Why is the outlook not more robust for [indiscernible]. It just seems like you're there on the deposit side, you have a lot of room for earning assets to resize higher. Just curious what's on the other side of this. Thanks.

Steven Alexopoulos:

Got it. It sounds like you're being conservative. Okay. Thanks for taking my questions.

Operator:

Thank you. Our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.

Daryl Bible:

Yes. So Matt, we actively meet with all of our rating agencies, all four of them on a very frequent basis. S&P did put us on negative outlook. But I think we feel very comfortable that, that won't result in a downgrade. We think we have a good handle on both our CRE exposure and the amount of criticized that we have and what we're working towards right now. So I think we feel that where we've got strategies in place to, over time, get that to be less of a risk in the balance sheet from a credit perspective. But rating agencies are one constituency, it's an important constituency. We also have to deal with our other constituencies as well, too. But we're all doing the right things. We come to work every day, and I'm excited to be working with the professionals that we have in our commercial and credit teams. They were working their asses off each and every day. I answered the call, your question earlier about going through the 2.3 billion maturities we had in the first quarter. We really worked through almost all of those to fruition and had very minimal impact as we move forward. We're going to continue to just grind it out and do a good job, and we'll just see how things play out.

Daryl Bible:

Yes. I mean if you look at that business, and I think our disclosures are a lot easier to understand now as we move forward with our change in segments that come out on quarter end. You'll be able to track our business performances there. But the ICS business, specifically, they have a little over 20 different product services that they offer. Some of them are fee based, some of them are fees and funding-based oriented. Examples would be escrow, M&A activity from that. Some of it can be lumpy at times, it can go back and forth. But just getting in the flow in that business and just doing a good job and good reputation. Jen, who runs this business, her and her team, they've built a really great reputation and really have done a good job growing this space nicely over the last couple of years, and we're investing in this space. We think it's a good business, core business for us, and we're really happy to have it, and we'll continue to focus on it. And I think we'll see some of the benefits that you saw in the first quarter hopefully play out throughout future quarters for us.

Daryl Bible:

Yes.

Brian Foran:

Hi. I just wanted to follow-up on the 11%, likely staying at or above that even if you restart buybacks this year. Is there any thoughts you can give on framing it? Is that a moment in time given the five factors you cited versus is that maybe where the new normal is trending? Just kind of any thought on when we look at this 11.1%, I guess, ultimately how much of it is excess capital and how much is the new normal to running the business?

Brian Foran:

And then maybe I could ask the same question. I think you noted on cash, $26 billion at the end of the year as a potential landing spot. Again, is that still an excess cash position in your mind or is that kind of more of a normal cash position you see going forward? Any thoughts on the level of excess liquidity right now?

Brian Foran:

Thank you. Thank you for taking both.

Operator:

Thank you. Our next question comes from Peter Winter with D.A. Davidson. Please go ahead.

Daryl Bible:

Yes. So for us, it's really three primary industries are kind of at the bigger things that we see within our book right now. The non-auto dealer, so like RV and Marine, that has some specific items where some of those dealers built up inventory post-COVID in 2022 and had to flush that inventory at losses. So that hurt their operating performance, coupled with higher rates. They have lower discretionary spend in those spaces as well. So they had some issues there. Healthcare, we talked about. As far as healthcare goes, I think it's getting a little bit better from an occupancy perspective, I think -- and product, but still reimbursement rates are lumpy. Staffing might be getting a little bit better there, but that's still a stressful place from that perspective. And the other theme that we would have is more in trucking and freight. During COVID, we increased -- a lot of our clients increased capacity because there were a lot of things that needed to be shipped. Now they're stuck with that excess capacity, they're just moving a lot less freight. So their operating performance is just a little bit lower. So those -- besides the one-offs that I talked about earlier, those are probably the three underlying themes I would say within the C&I book that I would be willing to discuss.

Daryl Bible:

It's one of the five themes. It's important, but we -- I mean you have to remember, we started when we were, what, in the 220 -- 260? Yes. Four years ago, we started -- we were at 260. So I mean the tremendous progress we've made over the last three to last four years. I pretty much expect that we're going to be in the mid to low 160s by the end of the year on the pace that we're going now.

Operator:

Thank you. Our next question will come from Frank Schiraldi with Piper Sandler. Please go ahead.

Daryl Bible:

Good morning.

Daryl Bible:

Yes. I mean the CRE portfolio with the exception of office and healthcare, the operating performance of the CRE businesses are performing well. Some of them are stressed just because of higher rates. But as we continue to work with our clients going through, we feel very good that we're going to work through these issues. It's what that we said earlier in other calls, Frank, but our customers work with us and put capital in, and we're definitely seeing all of our customers, our sponsors really support these projects. I think it really starts with client selection. And we have really good client selection that really helps win the day for us. So I think you're just seeing that commitment come through and we're working really closely with them and I think that's really important as we move forward. So I think we will continue to work through this, but definitely feel that CRE is very manageable, and we'll continue to address that.

Daryl Bible:

Yes. I would tell you, sometimes you can only do so much in a company at once. We got six major projects we're working on right now in the company. We're all making really good progress in these six major projects. And they're going as fast as they can go, to be honest with you, with what we're doing. I can't imagine that we would push them to go faster or if we try to start up another project. There's just a lot of change going on in the company, and I think we're just going to be conservative, get these things across the finish line and then start up other ones as we move forward.

Daryl Bible:

Thanks, Frank.

Thomas Leddy:

Hi, good morning. This is Thomas Leddy calling on behalf of Gerard. Given the jump in criticized loans in the quarter and the fact that you guys tend to historically carry a little bit more than peers. Just curious how does the criticized levels today compare to where they were in the 2008, 2009 and then 2020 peaks?

Thomas Leddy:

Okay.

John Taylor:

I'll just say that, obviously, 2008, 2009 was more of a residential mortgage-type issue. So we don't criticize per se, we won't monitor delinquencies on the residential side. There were pockets of criticized. So they did rise. I don't have those numbers at my disposal, but these numbers on the commercial side are higher than what they would have been back then.

John Taylor:

Yes, I think we do. We have a long-term history of performing in good times and stress times, and I think we will continue to do really well and perform, and all that will come to fruition. I mean, I couldn't be more pleased with how hard everybody is working and the success that we're making. We have a ways to go. But you kind of see that we have a path and how we're going to get through that. And I have no doubt in my mind that we will get through this positively and still have really good credit performance.

Daryl Bible:

Yes.

Christopher Spahr:

Hi, good morning. So two questions. First is just reconciling your outlook for the NIM and the increase in long-term borrowings that we saw both at end of period on an average basis this quarter?

Christopher Spahr:

Okay. So -- thanks. And then so my follow-up is just when I look at the schedule on Slide 17, the criticized loans and see that motor vehicle and RVs kind of had a huge spike in criticized? And then in response to Ken's question, though, you talked about the increase in yields and highlighting the increase in yield. So how do you reconcile the issue of just some of these portfolios under more weakness and yet you're kind of also highlighting you're getting greater yields. I mean, I would think to kind of fight against each other. Thank you.

Christopher Spahr:

Thank you.

Brian Klock:

And thanks, Todd. And again, thank you all for participating today. And as always, the clarification of any of the items in the call or news release if necessary, please contact our Investor Relations department. The area code is (716) 842-5138. Thank you, and have a great day.

Operator:

Welcome to the M&T Bank Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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 and Investor Relations. Please go ahead.

Daryl Bible:

Thank you, Brian and good morning everyone. As you will hear today on the call, 2023 mark a banner year for M&T Bank. On Slide 3, I want to acknowledge that the keys to our success to what continues to drive performance, remains our purpose, mission and operating principles. Our focus on making a difference in people’s lives and creating a positive impact in the communities we serve is core to how we operate. It is evident in how we show up for our communities in the moments of need like in Vermont and Lewiston, Maine, where we continue to help those impacted by tragedies. It is why we are committed to supporting small businesses that are the backbone of local economies. And it dictates how our charitable foundation which celebrated its 30th anniversary last year continues to uplift our partners. It is all done alongside our daily work of helping our customers achieve their financial goals. Turning to Slide 4. We are excited to see how deeply we’ve embedded sustainability across the bank and into our products and services. I look forward to sharing more information on the impact of our businesses when we release our 2023 sustainability report in the spring. Now, let’s turn to Slide 6. As we reflect on 2023, there are several successes to highlight. We continue to realize the benefits from the People’s United franchise and are pleased with the growth in New England with M&T finishing as top SBA lender in Connecticut. C&I loans grew by over $5 billion or 11% in 2023, aided by the growth in several specialty businesses brought over by People’s United. This C&I growth outpaced the reduction in CRE as we continue to optimize the way we serve these customers in the most capital-efficient manner possible. At the end of 2023, CRE loans represented approximately 25% of total loans. Our capital remains strong with a CET1 ratio near 11%. We continue to leverage our strong capital and liquidity levels to grow new customer accounts and relationships. We also reduced asset sensitivity in 2023 while protecting shareholder capital and value. However, our work is not done. We continue to recognize the value created by the merger with People’s United, while also bringing more capital efficient, neutral balance sheet that will produce stable and predictable revenue and earnings over the long term. Now, let’s review the highlights for the full year. Results for the full year 2023 were strong. We generated positive operating leverage, solid loan growth, improved expense control through the year and growth in EPS and strong returns. Our pre-tax pre-provision revenue, or PPNR, was $4.2 billion, up 22% from 2022 and we generated 3.9% positive operating leverage. Net charge-offs were 33 basis points, in line with our expectations and long-term average. GAAP net income was $2.7 billion. Diluted earnings per share were $15.79, up 37% from the prior year. As a reminder, ‘22 results included merger charges, gain on sale of our insurance business, and a sizable contribution to our charitable foundation, while 2023 included gain on the sale of the CIT business and the FDIC special assessment. If you exclude these items, adjusted diluted earnings per share were $15.72 during 2023, up 11% compared to 2022. Our adjusted returns were also very strong with return on assets of 1.33% and return on common equity of 11%. Turning to Slide 7, which shows the results of the fourth quarter were also strong. PPNR declined modestly from the linked quarter to just over $1 billion. C&I and consumer loan growth was strong. Expense control was evident as adjusted expenses declined 2% from the linked quarter and were down each consecutive quarter in 2023. Diluted GAAP earnings per common share were $2.74 for the fourth quarter. If we exclude the FDIC special assessment, adjusted diluted earnings per common share were $3.62. On an adjusted basis, M&T’s fourth quarter results produced an ROA and ROCE of 1.19% and 9.8%, respectively. Next, we will look a little deeper into the underlying trends that generated our fourth quarter results. Please turn to Slide 8. Taxable equivalent net interest income was $1.7 billion in the fourth quarter, down 3% from linked quarter. This decline was driven by higher interest rates on customer deposit funding and changing deposit mix, partially offset by higher interest rates on earning assets. Net interest margin was 3.61%, down 18 basis points from the linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift contributing a negative 7 basis points, the impact of higher rates on customer deposit funding, net of the benefit from higher rates on earning assets contributing a negative 5 basis points and a negative 6 basis points for carrying additional liquidity on the balance sheet. Turning to Slide 9 to look at the average balance sheet trends. Average investment securities were $27.5 billion, decreasing modestly during the fourth quarter. Average interest-bearing deposits at the Fed increased $3.5 billion to $30.2 billion. Due to our decision to have more liquidity on the balance sheet, this was mainly funded with strong deposit growth. Average loans increased slightly to $132.8 billion and average deposits grew $2 billion to $164.7 billion. Turning to Slide 10 to talk about average loans. Average loans and leases increased slightly. Growth in C&I and consumer loans outpaced declines in CRE and residential mortgage loans. Growth in C&I loans were driven largely by dealer, fund banking and corporate and institutional businesses. Loan yields increased 14 basis points to 6.33% with higher yields across all loan categories. Of note, the consumer loan yield increased 26 basis points as we continue to benefit from higher yields on new originations compared to yields on runoff balances. Turning to Slide 11. Our liquidity remains strong. At the end of the fourth quarter, investment securities and cash, including cash out at the Fed totaled $56.7 billion, representing 27% of total assets. The duration of the investment securities portfolio at the end of 2023 was about 3.7 years and the unrealized pretax loss and available-for-sale portfolio was only $251 million. Turning to Slide 12. We continue to focus on growing customer deposits, and we’re pleased with our growth in average deposits. Average deposits totaled grew $2 billion. Approximately 3/4 of that quarterly growth was from customer deposits. Average demand deposits declined $3.8 billion, reflecting a continued shift toward higher-yielding products such as sweeps, on market savings and time to profits. The mix of average non-interest-bearing deposits was 30% of total deposits compared to 33% sequentially. Excluding broker deposits, the non-interest-bearing deposit mix in the fourth quarter was 33%. Encouragingly, we saw the pace of deposit cost increases slow through the quarter. Continue on Slide 13. Non-interest income was $578 million, up 3% sequentially. The increase was largely driven by a strong quarter for commercial mortgage banking revenues, growth and trust income and a small unrealized gain on certain equity securities. Other income also benefited from higher loan syndication fees. The decrease in rates towards the end of the quarter drove the increase in commercial mortgage banking revenues. Turning to Slide 14. We continue to focus on controlling expenses. Non-interest expenses were $1.45 billion. Excluding the $197 million FDIC special assessment, non-interest expense were $1.25 billion, down 2% from linked quarter, and the adjusted efficiency ratio was 53.6%, largely unchanged from the third quarter. The decrease was driven by reductions in other expenses as a result of losses associated with certain retail banking activities in the linked quarter and lower merchant discount and credit card fees. The decrease in other expenses was partially offset by higher professional and other services. Salary and benefits decreased modestly from the third quarter as a result of lower average head count and seasonally lower benefit costs, partially offset by higher severance expenses. Next, let’s turn to Slide 15 for credit. Full year net charge-offs totaled 33 basis points in line with our long-term historical average and expectations were set out earlier in 2023. Net charge-offs for the quarter totaled $148 million or 44 basis points, up 15 basis points over the linked quarter. This quarter’s increase was largely driven by 3 office-related charge-offs located in New York City, Boston and Washington, D.C. and 2 C&I charge-offs related to an online retailer and to an RV dealer. Non-accrual loans have trended down each consecutive quarter since the first quarter of 2023. That trend continued in the fourth quarter with non-accrual loans declining $176 million from linked quarter to $2.2 billion. The non-accrual ratio declined 15 basis points from the third quarter to 1.62%. The decline was primarily driven by the transfer of certain loans to accrual, commercial payoffs and charge-offs on loans previously deemed non-accrual. Since the end of 2022, we have increased the allowance over $200 million, and the allowance to loan ratio was 13 basis points, ending 2023 at 1.59%. In the fourth quarter, we recorded a provision of $225 million compared to net charge-offs of $148 million. This resulted in an allowance build of $77 million this quarter and increased the allowance to loan ratio by 4 basis points. The current quarter build was primarily reflective of the commercial real estate values and higher interest rates contributing to modest deterioration in the performance of loans to commercial borrowers as well as loan growth in the C&I and consumer portfolios. Turning to Slide 16. When we file our Form 10-K in a few weeks, we estimate that the level of criticized loans will be $12.6 billion compared to $11.1 billion at the end of September. We completed thorough reviews, covering more than 60% of all CRB loans, including maturities in the next 12 months, construction loans, watch loans and all criticized loans. The increase in criticized CRE loans was tied to these reviews and to 2024 maturities were the prospect of continued higher rates could negatively impact performance of the portfolios or create shortfalls in debt service coverage or require interest reserves for construction loans. The growth in criticized C&I loans was not tied to any specific review, but rather completion of an annual review cycle and our ongoing quarterly update upon receipt of interim financials. Generally, our reviews do not incorporate any benefit of the forward curve at potentially lower interest rates. The 10 largest downgrades accounted for half of the total C&I downgrades and represented a range of industries. Common themes include pressures from higher interest rates and labor costs. During the fourth quarter, criticized non-owner-occupied C&I loans increased $663 million, accounting for 44% of the total increase in criticized loans. Criticized permanent CRE loans increased $441 million, representing 29% of the increase and criticized construction loans increased $375 million. Turn to Slide 17 and 18 for more details on the criticized loan portfolio. About 18% of the increase in criticized loans was driven by healthcare, 13% by multifamily and 9% are retail CRE loans. Loan to values remain strong for these loan types ranging from low 50% range for retail, mid-50% range for multifamily and high 50% range for healthcare. To date, modifications at maturity have had sponsors generally support their loans through replenishment of reserves, loan pay-downs and enhanced recourse. That is why our credit size has not led to growth in non-accruals. Our conservative underwriting and strong client selection has been supportive of these assets. Reflective of the financial strength of the portfolio diversification of our CRE borrowers, 96% of criticized accrual loan balances and 53% of non-accruals loans are paying as agreed. Turning to Slide 19 for capital. M&T’s CET1 ratio at the end of 2023 was an estimated 10.98% compared to 10.95% at the end of the third quarter. The increase was due in part to continued pause in repurchase in shares, combined with continued strong capital generation. At the end of December, the negative AOCI impact on CET1 ratio for available-for-sale securities and pension-related components would be approximately 20 basis points. Now turning to Slide 20 for outlook. First, let’s talk about the economic outlook. We see so-called soft landing scenario as having the highest probability, but the possibility remains for mild recession brought down by lagged impact of rate hikes from last year. We are encouraged to be continued strong performance by the consumer as continued drag gains as well as wage growth above inflation helped drive consumer spending. Consumer spending has slowed enough to alleviate inflation pressure for many goods and services. We expect that to continue in 2024. Inflation figures remain above the Fed target of 2%, chiefly because of rents and home prices. While the prices of many consumer goods have fallen and inflation for consumer services has slowed. We expect weakness seen in rent listings to play through to the official inflation data in 2024 and helping to bring the headline inflation figures down. Our outlook incorporates the forward curve that has multiple 25 basis point Fed cuts in 2024. With that backdrop, let’s review our net interest income outlook. We expect taxable net interest income to be in the $6.7 billion to $6.8 billion range and net interest margin in the 350. This outlook reflects the impact of higher deposit funding costs and the impact of different interest rate scenarios. As we have discussed, we continue to carry a high level of liquidity. Our current level of HQLA is about $46 billion, which is 2/3 in the cash and 1/3 in investment securities. In 2024, we started to shift some cash into securities. This, combined with other potential hedging actions can help protect the downside risk for NII from lower rates, but may reduce NII in 2024. We expect full year average loan and lease balances to be in the $135 billion to $136 billion range. We expect growth in C&I and consumer but anticipate declines in CRE and residential mortgages. Average deposits are expected to be in the $163 billion to $165 billion range. We are focused on growing customer deposits at a reasonable cost. The level of broker deposits is expected to decline through the year. Turning to fees. We expect non-interest income to be in the $2.3 billion to $2.4 billion range. We expect solid fee income across many business lines. Lower rates will help drive stronger residential and commercial mortgage banking revenue Trust income is expected to grow from current levels from higher valuations and increasing clients. Turning to expenses. We anticipate non-interest expenses, including intangible amortization to be in the $5.25 billion to $5.3 billion range. This outlook includes our typical first quarter seasonal salary and benefit increase, which is estimated to be $110 million. We also included the outlook to be approximately $53 million for intangible amortization. Our business lines are focused on holding their expenses flat while allowing us to continue to invest in the franchise and our key priorities. These priorities include growing the New England and Long Island markets, optimizing resources in both expense savings and revenue generation transferring our systems and processes, making them more resilient and scalable and continuing to build out our risk management. Turning to credit. We expect net charge-offs for the full year to be near 40 basis points due to the ongoing credit cost normalization in the loan portfolio and resolution of some stress credits. We expect that the taxable equivalent rate to be 24.5%, plus or minus 50 basis points. Finally, as it relates to capital, our capital, coupled with limited investment security works has been a clear differentiator for M&T. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders’ capital very seriously and will return more when it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and everyday. While every economic uncertainty is improving, our share repurchase remains on hold. Our decision to resume share repurchases will consider the results of the 2024 internal and supervisory stress test, including the stress test capital buffer. Additional clarity on Basel III end game regulations and continued stabilization and economic conditions as it relates to the probability of a mild recession. That said, we continue to use our capital for organic growth and growing new customer relationships. Buybacks have always been part of our core capital distribution strategy and well again in the future. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies. On Slide 21, there is a summary of three enhancements we made to our financial reporting. First, we reclassified the substantial majority of owner-occupied loans and related interest income from CRE to C&I loans. This better aligns with the classification with the underlying management and repayment source of the loans. Second, in the upcoming 10-K we are changing our operating segments to reflect how management organizes its businesses to make operating decisions, allocate capital resources and assess performance. Third, as certain categories have started to attribute more or less to our expense base, we opted to include printing, postage and supplies and other costs and operations and break out professional and other services as a distinct line item in the income statement. To conclude, on Slide 22, our results underscore an optimistic investment thesis. Why the economic uncertainty remains high, that is when M&T has historically outperformed peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperformance through all economic cycles while growing in the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are disciplined, inquirer and prudent steward of shareholder capital. Our integration of People’s United is complete, and we are confident in the ability to realize our potential post merger. Now let’s open up the call to questions before which Michael will briefly review the instructions.

Gerard Cassidy:

Hi Daryl, how are you?

Gerard Cassidy:

Good. Can you give us a flavor for when you guys look at the capital structure of M&T as you’re putting out, it’s quite strong, and we get beyond Basel III end game and you see what your new stress capital buffer will potentially be. What do you see a comfortable level of CET1 on a longer-term basis once those two unknowns are known and you can factor that into your thinking?

Gerard Cassidy:

Okay. Very good. And then based on the experience of M&T, obviously, over a long period of time, you’ve guys put out in your investor deck that your credit losses generally are below peers. With the increases in your criticized loans that you’ve shown today, the C&I and CRE. Do you still feel comfortable that you guys can maintain that kind of long-term track record of being better than the peers on the credit losses?

Gerard Cassidy:

Just quickly to follow-up on that. Is it safe to assume that the criticized loans more a reflection of market conditions rather than a change in underwriting stand as 2 or 3 years ago that have led to these types of increases?

Gerard Cassidy:

Very good. Thank you for the color.

Manan Gosalia:

Hi. Good morning. Can you talk about the puts and takes on the NII guide? I know you’re asset sensitive with the buildup in liquidity and the skew to commercial. So if we get more or fewer rate cuts and what’s in the forward curve, what happens with NII? And then I think you mentioned your – you started the year, putting some more – or deploy some more of your cash into securities. Can you talk about what duration you’re taking on there and what that would mean for the asset sensitivity?

Manan Gosalia:

Got it. And maybe just a couple of short questions on credit. I mean I think you mentioned that the reviews on commercial real estate do not take in the forward curve. So does that mean that if the forward curve plays through that criticized assets should come down? Or as you scrubbed through the remaining 40% of the book that, that could put some upward pressure there. And then I’m sorry if I missed it, but did you give what your updated office reserves were? Because I know you built some reserves during this quarter.

Manan Gosalia:

Great. Did you say the office reserve was 4.4%?

Manan Gosalia:

Okay. So did the reserve build come somewhere else in the portfolio because I know you built reserves this quarter?

Manan Gosalia:

Got it. Thank you.

Operator:

And we have our next question from John Pancari with Evercore ISI.

Daryl Bible:

Yes. So when we have done these reviews, I would say we have about 60% of the CRE portfolio. That’s been a very thorough review. Obviously, we’re picking the larger one to ones that are in larger cities that might have more risk from a valuation decline. We’re being probably on average about a 20% decrease in valuations. Our valuations are probably current within the last year or so. So we feel really good with that. We continue to have reviews every quarter. And continue to be very thorough on how we’re looking at that. But I think the reserves we have today, I feel pretty good about it.

Daryl Bible:

John, I would love to tell you that this is the peak of our criticized. We have to finish up what we did. The majority of our construction loans, we have a little bit more construction loans to do this next quarter. And we’re always subject to getting more information in as we get new financials and new vacancy information and all that. But I feel pretty good that we did a very thorough review of what we have out there. We really looked at all the spots that we thought. We’d have the most risk and really took that into account. But I can’t here tell you today that we’re at the top at some point, hopefully, we will be able to say that.

Operator:

And we have our next question from Ebrahim Poonawala with Bank of America.

Daryl Bible:

Good morning.

Daryl Bible:

I think the increase that we have today was basically a review of looking at everything that we have out there. And I would tell you that interest rates probably was the biggest one. Labor cost was probably the next biggest increase. There was a little bit of increase in C&I as well. And then C&I, there was nothing idiosyncratic there. There was a mixture of – if you look at it, the largest 13 credits, seven different industries. So it’s pretty diverse from that perspective. So we feel pretty good overall with where we stand. Only 6% of our criticized has gone into non-accrual, at kind of what our historical numbers have been. And when I talked when – Gerard asked the question, we really feel good about our client selection. We’re seeing our sponsors and clients really stand up and really support these credits. And we think that what we haven’t classified is the right direction. That doesn’t mean a few may not flip into non-accrual. But I think for the most part, we don’t really see a large period of losses. If we did, we would have had to put more in the reserves, and that’s – that what we’re seeing we’re projecting.

Daryl Bible:

M&T has always done acquisitions and have grown over the years. Our business model is really to stick to the regions that we’re in and to really meet the needs of those communities. And we like to grow share in those markets. So whether you need scale or not, I’ve been on both sides of that right now. And I would tell you that it’s not something you have to have, it’s something if it makes sense. I mean when you acquire somebody, you got to make sure it’s a good cultural fit, first and foremost, that is critical. You have to really make sure that if you get synergies that those come through, both on the expense and revenue side. So we closed on Peoples. We’re starting to get – got all the cost synergies. We’re in the midst of investing now more into New England and Long Island. So we’re going to continue to grow that. It usually takes, I would say, 3 to 5 years to really get the total performance from these acquisitions. So we still have a lot of work to do from that. I’m sure down the road, M&T is a favorite acquirer, somebody might want to sell to us at some point. But right now, we got a lot of work in front of us. And we’re focused on really making that. It’s one of our top four priorities right now, and we’re going to do that and deliver that.

Operator:

And we have our next question from Frank Schiraldi with Piper Sandler.

Daryl Bible:

Good morning.

Daryl Bible:

Frank, I would love to be buying shares back, especially at the level that we’re trading at right now. I think it’s a really good value. Right now, we just want to make sure that we go through the stress test, we find out where our limits are. We got to make sure there is a lot of uncertainty out there, and we just don’t want to go into a recession and if we do that, probably would hold back for those purposes. But – we’re in the midst of really making a really strong bank. We’re really changing it to be less relying on balance sheet, commercial real estate and really more driven through off-balance sheet products and services, and we’re growing our other businesses, both on the balance sheet and in fees, and we’re really excited about that. I promise you we will do share repurchases. I can’t tell you when that’s going to happen, but it is core to our strategy, and we will definitely do that when we think it’s appropriate.

Daryl Bible:

Yes. No, that’s good questions. So we did see through the quarter – in the fourth quarter that our DDA balances were starting to stabilize. That’s one of the biggest components of what’s impacting net interest income is that migration from DDA into sweeps. Hopefully, that will kind of play out in the next quarter or two as that kind of stabilizes. I think when you look at the retail side of the chain, we still grow our CD book, that will probably continue as to rates really start to fall. You didn’t really see growth in CDs till we got over 3%. So we will probably have to go down a little bit before that growth following slows down a bit. But it’s important that we price that correctly. In our disclosures, we combine our retail CDs with our broker CDs and I did say in the prepared remarks that we probably plan to shrink our broker CDs over time. So that category will probably fall throughout the year, but it’s probably driven more by non-clients. From a trust perspective, it had a modest impact on it. I would say it wasn’t that big of an impact from that. It was really just drop in more in the commercial space for the most part.

Daryl Bible:

You are welcome.

Erika Najarian:

Hi. Daryl, just a few follow-up questions, please. On the non line of questioning, I am wondering, what is your current assumption for downside beta for the first 100 basis points of cuts? And is there anything about this cycle where we can’t look at historical precedents in terms of volume reaction or cumulative beta reaction to the Fed easing?

Erika Najarian:

Got it. And a follow-up question on credit. How should we think about the progression of your ACL ratio from here? I know you mentioned in the prepared remarks, you had already built up your reserve pretty significantly. As we think about normalization and whatever maturity walls you have in the CRE, should we expect that your ACL ratios to continue to build from here? I mean this is sort of our first go at CECL with charge-offs actually going up.

Erika Najarian:

Thanks Daryl.

Bill Carcache:

Thank you. Good morning Daryl. Can you take us inside some of the discussions that you are having with your commercial clients? And how confident are you that the ingredients are in place for a reacceleration in loan growth, if indeed, the soft landing scenario plays out?

Bill Carcache:

That’s really helpful. Thank you. And then following up on Erika’s question, on the reserve rate trajectory within CRE, some have indicated that in this environment, they would be more likely to maintain reserve rates in office CRE as charge-offs occur. Is it reasonable to expect that there would be a lag between when we see peak losses in CRE and when you actually start to release reserves?

Bill Carcache:

Very helpful. Thanks Daryl.

Operator:

And our next question comes from Brian Foran with Autonomous.

Daryl Bible:

Yes. I would say – I think it was Erika’s question for when I was saying as rates fall, as the beta will start to come down just because the consumer side did not go up as much. So, I think we will start off at a higher pace. But as that comes down, that will be less from that. If you look at it, I actually like the level of interest rates where we are today. I mean we are in the low-5s is where the Fed is. If we stay, let’s say, in the 4% range or maybe even as low as 3%. As long as we price our assets and deposits appropriately, to getting back to basic business and we get good spreads on that. There is no reason we can will have very healthy net interest margins for a very long period of time. It’s all about pricing your assets and deposits frankly making sure you are putting prepayment language in on your fixed loans and making sure you are pricing deposits appropriately. But it’s a great environment for banking and margins. I feel really good from that. Would we trend higher than where we are today, probably over time, but it really comes down to discipline. You really work on the asset mix change at that time. In times like that, when rates tend to be in that time period, economy seems to be going pretty well. So, you probably have good loan growth out there and pretty decent deposit growth. So, I actually get excited once rates come down a little bit, and we can really operate the bank. Historically, I think we will have good, really good returns.

Daryl Bible:

I think that’s pretty much spot on, Brian. But I would say. Darren did a great job in this role, and he also called exactly what our charge-offs were going to be in the beginning of the year, and they came in pretty much spot on. So, he did a great job in this role. But when I look at it and see what’s happening, if I call it right, maybe we bottom in the next quarter or two quarters and then it just margin then we can start growing from there. So, I am pretty much in that camp as well.

Operator:

And our next question comes from Steven Alexopoulos with JPMorgan.

Daryl Bible:

Good morning.

Daryl Bible:

Steve, I don’t know, I suspect.

Daryl Bible:

I feel really good at the way we are positioned. What makes us so strong is we are really good at how we price our assets. But what really makes it is that we are great at growing operating accounts. And that funding source is really starting to come back on and growing nicely. So, we always have and probably will have a top quartile net interest margin. So, I feel really good about that. We may operate a little bit lower just because we are going to carry a little bit more liquidity. Right now, we are carrying about $4 billion more liquidity just because we increased our internal stress liquidity scenarios based upon some of the learnings that we had from earlier in the year from that perspective. So, that cost us 6 basis points this quarter, it doesn’t really impact NII a whole lot, but it impacts your margin just because you were sending water on assets and liabilities, they don’t make anything. But I feel really good in this rate environment, managing a balance sheet and doing the right thing for our customers and for our communities is really what banking is all about, and I think we will be able to execute and perform really well in that environment.

Daryl Bible:

Yes. I mean the 4.4 is really a general amount. There could be a little bit of specific embedded in that. But it’s – the bulk of it is more of a general reserve from what we are seeing from that perspective. We are seeing our clients or sponsors really step up and really support these credits. We think that with charge-offs that we had this past year were really more financial and institutional oriented. But our sponsors because they are long-term real estate owners of the property, I mean they basically own properties where they want to own them in a certain block and city of where they have it. So, it’s really long-term oriented. They tend to have really low tax basis in these properties, and they are going to support these credits over time. So, that’s really what we are seeing there. When we go through and look at whether we should grade it as criticized or not, you are seeing some pressure on the debt service coverage ratio. Once it falls under 1.1, it goes into the 11, which is a criticized camp. But the vast majority of what we have in criticized is between 1 and 1.1. Yes, we had 1s under 1 in that level, but the vast majority we have there. So, over time I think those will cure and won’t result in loss for the most part. We did raise losses up a little bit for ‘24. Some of that was really normalization on the consumer portfolio. And then some of it is maybe working out a few more credits off. But for the most part, what we have in criticized is not materializing into losses.

Daryl Bible:

Yes.

Ken Usdin:

Thanks. Good morning Daryl. First question on the securities book, trunk a little bit, but also the yield was flattish, let’s call it. I am just wondering how you could tell us through how you are thinking about both the size of the securities book going forward and also, what are you picking up on maturities as they are going back in if we are starting to see this kind of flattish type of yield situation. Thanks.

Ken Usdin:

Yes, that’s great. Actually, it was going to be my follow-up on the loans side is, do you have a broader way of helping us think through either the proportion of that book that’s fixed and re-prices over the next year or 2 years?

Ken Usdin:

And sorry, one more final one just, you mentioned earlier the ongoing thought process of getting more of the production off balance sheet and kind of switching NII into fees. I am just wondering where you are in that process and build out and infrastructure? And within that, do you have an idea of where you think that the right commercial real estate on balance sheet concentration of the loan book should be versus the current 25%? Thanks.

Ken Usdin:

Got it. Thanks Daryl.

Operator:

And we have our next question from Chris Spahr with Wells Fargo Securities.

Daryl Bible:

Yes. So, when you look at efficiency ratio, it’s all about growing revenues faster than expenses. That’s really what I kind of look at from that perspective. We really have a challenging time in ‘24 growing revenue so much just because we got net interest margin coming down some. So, my hope is that it levels off ‘24 and starts to grow later in ‘24. So, we can start in ‘25 and start to have positive operating leverage from that perspective. I would tell you I am very pleased with working with the leadership team that we have here at M&T. We all agreed to come in and all business lines came in with flat expenses and basically finding cost cuts to cover their merit increases, and they kind of did that in their own businesses. So, I think that was really well done from that perspective. We are guiding up a couple of percent just because we are making some investments and some really key projects like digital, like data. We have two transformations going on right now, one in finance, the other in commercial. We are investing in our treasury management businesses. So, we have got a lot of investments. But given our leadership team, I feel good that we will be able to contain what growth we need there and that we won’t have – the goal would be to have revenue real faster than expenses is really what we try to shoot for, and that will kind of drive good positive operating leverage.

Daryl Bible:

Yes. I mean when I look at the levers that we have on the expense side, there is a lot of opportunities. If you look at it, our procurement and sourcing areas are continuing to improve and get better in that area, I think we still have opportunities in our corporate real estate area to get more square feet down over time. We are really working with workforce management and really how to do our operations the most efficiently possible I think our call centers have a lot of opportunity from an automation perspective. One of our themes that we have in 2024 is simplification, really trying to simplify what we are doing today. So, on the transformations that are going on, how we do this, we will have less processes and much more simple way, getting things done in a much more efficient way of getting them done from that perspective. For me, it always comes down to how we prioritize, we are going to prioritize in the priorities that we have in this company, and I talked about those projects. If we can focus on those and really not have any other of the other investments kind of play out, we can control expenses really well and to continue to generate positive operating leverage as we get revenues to start to grow again.

Daryl Bible:

Yes. We aren’t 100% sure, but I would say 20 plus or minus would be our best estimate right now.

Operator:

And that does conclude today’s question-and-answer session. I will now turn the call back over to Brian Klock for closing remarks.

Operator:

This does conclude today’s program. Thank you for your participation. You may now disconnect.

Operator:

Welcome to the M&T Bank’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Daryl Bible:

Thank you, Brian and good morning everyone. Let’s start with our purpose, mission and operating principles on Slide 3. I would like to thank our more than 22,000 M&T colleagues for all their hard work, whether serving our customers or our communities, our employees continue to deliver on our purpose, making a difference in people’s lives. This purpose drives our operating principles. We believe in local scale, that is combining local knowledge and hands-on customer service of Community Bank with the resources of a large financial institution. Our 28 communities are led by on-the-ground regional presidents. Their knowledge allows us to better understand and meet the needs of our customers and communities. And importantly, this approach continues to produce strong results for our shareholders. Our local scale has led to superior credit performance, top deposit share and high operating and capital efficiency over the long-term. Moving to Slide 4. Our seasoned, talent and diverse board are keys to gaining in-depth understanding of our customers’ needs and expectations. We have sound technology solutions, coupled with caring employees, which provide a differentiated client experience. Please turn to Slide 5. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investment in enhancing the customer experience and delivering impactful products, have fueled organic growth. We also believe in supporting small business owners who play a vital role in our communities. Despite operating in only 12 states, we are ranked as #6 SBA lender in the country, the 15th consecutive year M&T is ranked in the nation’s top 10 SBA lenders. And for the first time, we have finished as the top SBA lender in Connecticut, an important milestone following our acquisitions of Peoples United. Our commitment to supporting the communities we serve extends to affordable housing projects, with almost $2.3 billion in financing and over 2,600 home loans for low and moderate income residents. Additionally, M&T Bank and our Charitable Foundation granted over $47 million in support of our communities in 2022 and approximately $30 million so far in 2023. Please turn to Slide 6. Here we highlight our ongoing commitment to the environment. Last year, we invested over $230 million in renewable energy sector and have significantly reduced our Scope 1 and Scope 2 emissions since 2019. Our ESG report was published in July, but I encourage you to review this slide for some of the highlights. M&T’s ESG ratings have improved at Moody’s, MSCI and Sustainalytics. Turning to Slide 8. There are several successes to highlight this quarter. We continue to see growth in auto dealerships as well as specialty businesses. We continue to grow customer deposits despite increasing competition and building on the strong liquidity position and comparative strength of our financial position in the industry allows us to continue lending in support of communities and local businesses. We remain focused on diligently managing expenses. Our third quarter results continue to reflect the strength of our core earnings power. Third quarter revenues have grown 4% compared to last year’s third quarter. Pre-provision net revenues have increased 4% to $1.1 billion. Credit remained stable. Net charge-offs decreased in the third quarter and year-to-date, we still remain below the historical long-term average. GAAP net income for the quarter was $690 million, up 7% versus like quarter in 2022. Diluted GAAP earnings per share was $3.98 for the third quarter, up 13% from last year’s similar quarter. Now, let’s review our net operating results for the quarter on Slide 9. M&T’s net operating income for the third quarter, which excludes intangible amortization was $702 million and diluted net operating earnings per share, was $4.05. Net operating return on tangible common equity was 17.41% and tangible book value per share increased 3% compared to the end of June. On Slide 10, you will see that diluted GAAP earnings per share, was down 21% from linked quarter. Recall our results from the second quarter of last year indicated an after-tax $157 million gain from the sales of CIT business in April. Excluding this gain, GAAP net income and diluted earnings per share were down 3% compared to the linked quarter. On a GAAP basis, M&T’s third quarter results produced an ROA and ROE of 1.33% and 10.99% respectively. Next, we will look a little deeper into the underlying trends that generated the third quarter results. Please turn to Slide 11. Taxable equivalent net interest income was $1.79 billion in the third quarter, down $23 million from linked quarter. This decline was driven largely by higher interest rates on consumer deposit funding. An unfavorable funding mix change partially offset by higher interest rates on earning assets and 1 additional day. The net interest margin for the past quarter was 3.79%, down 12 basis points from linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift, which reduced margin by 7 basis points; the net impact from higher interest rates on customer deposits, net benefit from higher rates on earning assets which we estimate reduced the margin by 6 basis points. The remaining 1 basis point was due to higher non-accrual interest, net of the impact of 1 additional day. Turning to Slide 12. Average earning assets increased $1.5 billion from the linked quarter, due largely to the strong deposit growth that drove the $3 billion growth at the Fed. Average loans declined $928 million and average investment securities declined $630 million. Turning to Slide 13 to talk about average loans. Total loans and leases averaged $132.6 million for the third quarter of 2023, down 1% compared to the linked quarter. Looking at loans by category, on average basis compared to the second quarter, C&I loans increased slightly to $44.6 billion. We continue to see growth in dealer and specialty businesses. During the third quarter, average CRE loans decreased by 2% to $44.2 billion. This decline was driven largely by our continued strategy to reduce on-balance sheet exposure to this asset class. We have chosen to modernize our suite of products and services to offer more alternatives to better serve customers and to do so in a more capital-efficient manner possible. Average residential real estate was $23.6 billion, down 1%, largely due to portfolio pay-downs. Average customer loans were down slightly to $20.2 billion. The decline was driven by lower auto loan and HELOC balances, partially offset by the growth in recreational finance and credit card loans. Turning to Slide 14. Average investment securities decreased to $28 billion during the third quarter. The duration of the investment securities book at the end of September was 3.9 years and the unrealized pre-tax available-for-sale portfolio was only $447 million. At the end of the third quarter, cash held at the Fed and investment securities totaled $59.2 billion, representing 28% of total assets. Turning to Slide 15. We continue to focus on growing deposits with our customers and we are pleased with the growth in both average and end-of-period customer deposits. Average total deposits grew $3.3 billion. However, consistent with our experience in prior rising rate environments, increased competition for deposits and customer behavior continues to mix shift within the deposit base to higher cost deposits. Average customer deposits increased $1 billion. The customer deposit mix to migrate to average demand deposits declined $2.3 billion in favor of commercial sweeps and customer money market savings and time deposits. Average broker deposits increased $3.2 billion, while federal home loan bank advances decreased $2.2 billion. On average, brokered money market had now increased $800 million. Brokered time increased $1.5 billion. Broker deposits represent just one of the several funding vehicles that we can employ in our management of the balance sheet. At September 30 of this year, broker deposits represented 8% of our outstanding deposits and short-term borrowings. The pace and reduction in demand deposits seem to have decreased during the quarter. Our determined focus on retaining and growing customer deposits yielded positive results during the quarter. Next, let’s discuss non-interest income. Please turn to Slide 16. Non-interest income totaled $560 million in the third quarter compared to $803 million in the linked quarter. As noted earlier, the second quarter included $225 million from the sale of the CIT business. Excluding this gain, third quarter non-interest income decreased $18 million compared to the second quarter driven predominantly by $15 million related to one month of the CIT trust revenues included in the previous quarter. Other revenues categories were largely unchanged from the linked quarter. Turning to Slide 17 for expenses. Non-interest expenses were $1.28 billion in the third quarter of this year, down $15 million from the linked quarter. That decrease in expense was due to $11 million in lower compensation and benefit costs, reflecting lower average headcount, lower expenses for contracted resources and over time. $6 million lower in other cost of operations, largely reflecting lower sub-advisory fees as a result of the sale of the CIT business, lower legal-related expenses partially offset by losses associated with certain retail banking activities. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and security gains or losses from a denominator, was 53.7% in the recent quarter compared to 53.4% in the linked quarter after excluding the gain from the sale of the CIT business. Next, let’s turn to Slide 18 for credit. The allowance for credit losses amounted to $2.1 billion at the end of the third quarter, up $54 million from the end of the linked quarter. In the third quarter, we recorded a $150 million provision in credit losses, which was equal to the second quarter. Net charge-offs were $96 million in the third quarter compared to $127 million in the linked quarter. The reserve build was primarily reflective of softening CRE values and the variability in the timing and the amount of CRE charge-offs. At the end of the third quarter, non-accrual loans were $2.3 billion, a decrease of $94 million compared to the prior quarter and represent 1.77% of loans, down 6 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $96 million, significant charge-offs were tied in 4 large credits, 3 large office buildings in Washington, D.C., Boston and Connecticut and one large healthcare provider operating in multiple properties in Western New York and Pennsylvania. Annualized net charge-offs as a percentage of total loans were 29 basis points for the third quarter compared to 38 basis points in the second quarter. This brings our year-to-date net charge-off rate to 30 basis points, which is below our long-term average of 33 basis points. We continue to assess the impact on future maturities and our investor real estate portfolio due to the level of interest rates, the impact of value declines and emerging tenancy issues. Continued targeted deep portfolio values in office, healthcare and multifamily portfolios are being done to identify any new emerging issues. When we file our upcoming Form 10-Q in the few weeks, we will estimate the level of criticized loans will be up to mid to high single-digit percent as compared to the end of June largely due to increases in investor real estate. Reflective of the financial strength and portfolio diversification of the CRE borrowers, almost 90% of the criticized loans are paying as agreed. Loans 90 days past due on which we continue to accrue interest were $354 million at the end of this quarter compared to $380 million sequentially and total of 76% of these 90 days past due loans were guaranteed by government-related entities. Turning to Slide 19 for capital. M&T’s CIT ratio at the end of September was an estimated 10.94% compared to 10.59% at the end of the second quarter. The increase was due in part to the continuation of the pause of repurchasing shares. At the end of September, based upon the proposed capital rules, the negative AOCI impact on the CET1 ratio from variable-for-sale securities and pension-related components would be approximately 36 basis points. Now turning to Slide 20 for outlook. With three quarters in the books, we will focus on the outlook for the fourth quarter. First, let’s talk about the economic outlook. The economic environment was supportive in the third quarter, and we were cautiously optimistic heading into the last quarter of this year. In the third quarter, the overall economy continued to expand, thanks to the strong consumer spending and steady capital expenditures by businesses, though the housing market continues to struggle in the high-rate environment. Encouragingly, inflation continued to slow in label markets, while still tight improved substantially with steady hiring while age pressures dissipated. Looking ahead to the fourth quarter, we are cautiously optimistic that the economy will continue to grow, but at a slower rate. We expect that, that slower growth will continue reducing inflation pressures. The Federal Reserve has probably reached the end of its hike cycle, given slower inflation and recent run-up in long-term rates. With that economic backdrop, let’s review our net interest income outlook. We expect taxable equivalent net interest income to be in the $1.71 billion to $1.74 billion range. As we noted on the previous calls, a key driver to net interest income continues to be the ability to efficiently fund earning asset growth. We expect the continued intense competition for deposits in the face of industry-wide outflows. We remain focused on growing customer deposits. For the fourth quarter, we expect average deposits to be about the same level with growth of interest-bearing customer deposits but continue to decline in demand deposit balances. This is expected to translate into a through-the-cycle interest-bearing customer deposit beta through the fourth quarter this year to be in the mid-40% range. This deposit beta excludes broker deposits, including broker deposits, would add 6% to the beta. While the percent of the cumulative beta is slowing, we anticipate it will continue rising into the first half of next year. Next, let’s discuss the outlook for the average loan growth, which should be the main driver of earning asset growth. We expect average loans and lease balances to be slightly higher than the third quarter of $1.33 billion level. We expect the growth in C&I, but anticipate declines in CRE and residential mortgages for our consumer loan balances should be relatively flat. Turning to fees. We expect non-interest income to be essentially flat compared to the third quarter. Turning to expenses. We anticipate expenses, excluding intangible amortization and the FDIC special assessment to be in the $1.245 billion to the $1.265 billion range in the fourth quarter. Intangible amortization is expected to be in the $15 million range and the FDIC special assessment is anticipated to be $183 million. Given the prospects of slowing revenue growth we remain focused on diligently managing expenses. Turning to credit. We continue to expect loan losses for the full year to be near M&T’s long-term average of 33 basis points. which implies fourth quarter charge-offs could be higher than the third quarter. For the fourth quarter, we expect tax flow equipment tax rate to be in the 25% range. Finally, as it relates to capital, our capital, coupled with limited investment security marks have been a clear differentiator for M&T. M&T has proven to be a safe haven for clients and communities. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders’ capital very seriously and return capital loan it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. We are still evaluating the proposed capital rules so that we believe that now is not the time to be purchasing shares. That said, we are positioned to use our capital for organic growth. Buybacks have always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us from our clients, communities, regulators, investors and rating agencies. To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with growth about 2x that of peers. Our strong shareholder returns include 15% to 20% return on tangible common equity and robust dividend growth. Finally, our disciplined acquirer and prudent steward of capital – shareholder capital and our integrated – our integration of Peoples merger is completed. We are confident in our ability to realize our potential post-merger. Now with that, I’ll turn it back to our caller briefly review the instructions.

Manan Gosalia:

Hi. Good morning.

Manan Gosalia:

You spoke about a mid to high single-digit increase in criticized loans this quarter. I was wondering how is the mix changing between hotel healthcare and office. And it also looks like non-accrual loans take lower this quarter. So can you talk about what the drivers are there? Whether there is loan sales or any other underlying drivers? And if that had any benefit to net interest income this quarter?

Manan Gosalia:

Got it. Thank you. And then maybe just on the buybacks. What is the criteria to resume the buybacks from here? Because it seems like we have more clarity on regulation at this point. Is it a function of M&T issuing more in the debt markets and then starting buybacks? Is it to do with the credit rating agencies? Any color you can throw there would be helpful, especially given how much excess capital you have at this point?

Manan Gosalia:

Great. Thank you.

Operator:

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Daryl Bible:

Good morning.

Daryl Bible:

Yes. Manan, it’s really the biggest driver for the net interest margin for us right now is really what happens to our non-interest-bearing deposits. We were down $2.3 billion that was better than what we thought it would be. And we think that it’s slowing down. We will see how that plays out in the fourth quarter. But that is probably the biggest determining factor. When you look at our balance sheet, though, I’m actually pretty pleased with how the assets are repricing. If you look at the reactivity rate of some of our fixed portfolios, if you look at this quarter, like our consumer loan portfolio was up 22 basis points. We have home equity in there that is prime related, but that’s a smaller percentage. We have really good repricing and other consumer portfolios like auto was up approximately 300 basis points in what was rolling off versus what was rolling on. If you look at our RV and loan portfolio, that was up approximately 250 basis points of what was rolling off from on, so I think once we get more stability in the disintermediation of deposits, I’m more favorable and the margins stabilizing. I think the asset side is actually performing pretty well.

Daryl Bible:

Yes. So on the office side, I would tell you, our credit team, we feel really on top of what’s going on there. I think we are actively looking at any credit that could be and have any issues whatsoever. We’re looking at it. I’m trying to put the right valuation in there. We traditionally run with a higher level of criticized assets because we have a lot of long-term clients that have been with M&T for a long time period. They have other sources of cash flow to help carry the loans and are willing to put in equity to help support the loans. When we do find loans that there is not support around, we will probably move to exit those. As far as the valuations go, there is still not a whole lot of specifics out there. We did have that one sale for us that actually was a little bit better than what we had at mark there, but that was one – one big loan. So I wouldn’t say that’s a trend by any stretch right now. But I think we feel pretty good on where we are. As far as the other asset classes, I think we – just with rates higher for longer, just puts more just tougher for some of our – the customers. And multifamily is an area that we are looking at as well. Nothing really is popping out of anything very superior there yet. But we’re just trying to stay ahead of what potentially could happen and kind of be preemptive if we see anything. So we’re just preparing our credit team is very experienced. We’ve been very good with commercial real estate for a long time, and we are on top of where we are.

Operator:

The next question comes from Erika Najarian with UBS. Please go ahead.

Daryl Bible:

Yes. From a framework perspective, it’s really when the intermediation slows down. And when distribution slows down, I think on the asset side, is performing well and will continue to reprice higher because I think we’re going to have a steeper curve for a longer period of time. And hopefully, that will happen in the next couple of quarters, but it’s really hard to know right now we think it’s slowing but I think we will just see how that plays out. I’ll give you guidance next earnings call on the fourth quarter on that. But conditions could be slowing down with what we’re seeing right now, but one quarter is not a trend. I just want to get a couple of quarters under our belt before we really say net interest margin is going to stabilize.

Daryl Bible:

I think we have the strong position at the Fed that’s intentional for us right now. We want to be really conservative with our cash and liquidity position. Like I said earlier, the economy is – do it okay, but slowing down and maybe hopefully not get into a recession, but we just want to be really careful and cautious from that perspective. So I think it’s an intentional where we’re staying there. will we invest some of that obviously into loans, we would love to do that to support our customers, but we are not widening our credit box whatsoever. We’re going to grow what the market will give us, but we do think there is opportunities to grow relationships and to potentially grow balances in some of our loan categories. So we will see how that plays out. As far as deploying some of it the cash into the securities portfolio, I would just say that over the next year, you might see us move a little bit to the investment portfolio, but it will be on a gradual basis.

Operator:

The next question comes from Matt O’Connor with Deutsche Bank. Please go ahead.

Daryl Bible:

We haven’t made that probably, Matt, but it continues to increase where we are right now. So we had an increase in our allowance, we had a little over $50 million. I’d say about half of it went to the CRE portfolio, and half of it went to the C&I portfolio. So I think we were adding it where we think it’s appropriate based upon our models and performance.

Daryl Bible:

I mean this past quarter we had growth in our dealership businesses. As the strike was starting to happen, I think a lot of dealers actually stocked up on used cars, and that actually drove an increase in utilization in that one sector or a little bit earlier than normal there. That will probably continue to play out, I think into the fourth quarter, while would be one. Our large corporate banking, I think has some growth opportunities where we are positioned there. Specifically on fund banking, I think we are growing there nicely. It’s a very conservative portfolio, very short-term oriented, lower risk areas. So, I would say most of the growth that we are seeing is in the C&I space. Those are the highlights right now. It is very competitive in middle market C&I. We are trying to be competitive there. But right now, the higher interest rates are just putting a lot of our commercial clients to be a little bit more cautious. But when they are willing to borrow, we are trying to help them when that’s – when we are able to do that, so.

Operator:

The next question comes from Bill Carcache with Wolfe Research. Please go ahead.

Daryl Bible:

Yes. I think obviously, Bill, I mean people that did swaps 3 years ago are really fortunate that they did, but it depends on the maturities when they roll off. And when they do roll off, it does put pressure on some clients that basically just have higher interest payments there. So, that is impacting much broader than just office, broader than just CRE. It’s impacting, I think all of America right now, to be honest with you. I mean just higher rates for longer. I think the Fed wants to slow the economy down and we are definitely having that impact to do that, and they are accomplishing what they are achieving there. But we – like I said earlier, we are on top of the portfolios where we see maturities coming up. We are looking at what we have to do, if anything, do they have other support on it. So, we are trying to stay ahead of what’s coming down the pipe. Most of the maturities and swap are lined together so that they are pretty much in balance. So, when things come close to mature on loans is when we see if there is anything that needs to happen from a lending perspective. But I think the Fed is accomplishing what they are trying to do is slow the economy down, bring inflation down, and it’s definitely having that impact.

Daryl Bible:

Yes. I think as the new rules play out and as we get comfortable working within the rules, we obviously start with a higher cushion at first. And then as you get used to managing the book and everything, I think we will tighten it up over time. But my guess is that we probably have a higher buffer coming out of the blocks. You have to really adjust your investment portfolio since the AFS is going to now go through the regulatory capital ratios to probably run with shorter durations either outright or invest longer with hedges that bring in the durations one way or the other, just so you have less volatility there. So, it’s really just getting used to how we manage all that process. But our teams are working on that now and we will start operating that way probably well before we get the roles actually implement it from that perspective.

Daryl Bible:

Thanks Bill.

Brent Erensel:

I was going to follow-up on that stock buyback question. Thank you and good morning.

Brent Erensel:

If you were to like incrementally invest the capital that you are generating at 7% you would generate half the returns that you could by buying back stock. So, you need double-digit returns to equate that, if that question makes sense. So, the question I guess is when – at what point will the corporate finance math drive you to resume buybacks?

Brent Erensel:

Just is there a bell that’s going to go off when you guys are going to change your mind, or how should we – do we just wait and see?

Brent Erensel:

Thank you.

Gerard Cassidy:

Hi Daryl.

Gerard Cassidy:

Daryl, over the years, M&T has been very effective in making acquisitions, obviously, the People’s dealers the more recent acquisition that is now completely integrated. And we understand in talking to your peers and others that the interest rate marks make it very difficult for M&A today. So, I got a two-part question for you. First, just what is your view on M&A for M&T over the next 12 months to 24 months of traditional depositories? And then second, some of the P&C, in particular, was recently bought some assets from the FDA, I see some loans. Are you guys looking at any assets that might be for sale from the FDIC from the failed banks that we had earlier in this year?

Gerard Cassidy:

Very good. And then the second part, a different question as a follow-up. When M&T, of course has developed a reputation as being a very strong underwriter, you got the numbers to prove it. And so we are not necessarily concerned about what you guys are doing specifically, but we just worry about the competitors doing foolish and stupid things that then end up having a second derivative effect on your sound underwriting decisions. Can you frame out for us granted, I know it’s not in 2005 and 2006 craziness out there. But are there any concerns that you see non-bank lenders or other bank lenders doing or have done things in the last 18 months to 24 months on the lending side and make it a little nervous, or are we just in a new playing field. Everybody is very rational, and we are not going to see anything really implode because of what some foolish lenders are doing.

Gerard Cassidy:

Very good. I appreciate the color. Thank you.

John Pancari:

Good morning Daryl.

John Pancari:

Just a follow-up around the loan loss reserves, I know you had talked about the – that the reserve addition was 50% for CRE and half going to C&I. And I am just trying to frame out like what about the developments in the quarter drove the need for additional reserve additions beyond what would have already been baked into there under CECL? And then separately, can you maybe talk about the likelihood of further reserve build here just as you continue to dig through the CRE portfolio, I know you said a couple of times that there is ongoing efforts to sift through the exposures in that book.

John Pancari:

And is that soft is surprising you negatively? And is that life not already in the CECL reserve?

John Pancari:

Okay. That’s helpful. Thanks. And I have one last follow-up, if I could, also on credit. Your – I know your charge-off guidance for the fourth quarter, you expect it to be a low – above the 29 basis point level for the third quarter and then full year ‘23 near the long-term 33 bps. Can you maybe help us think about what that would imply in terms of as you look into 2024? Maybe help us, I know you are not giving formal guidance yet on ‘24, but how should we think about where the loss trajectory could be versus that longer term 33? How much above that could it be?

John Pancari:

Got it. Alright. Thanks. I appreciate it.

Brian Klock:

Again, thank you all for participating today. And as always, the clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at area code 716-842-5138. Thank you and have a good day.

Operator:

Good day and welcome to the M&T Bank Second Quarter 2023 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Daryl Bible:

Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. I'm also grateful for everyone across the bank that has welcomed me and helped me get up to speed quickly, including my incredibly talented finance team. Like me, I'm sure all of you are extremely happy that we now have an earnings presentation. So thank you to investor relations, corporate communication and corporate reporting teams for making this a reality. I'm very excited about the work we are doing and the transition has gone even smoother than I could have anticipated. I'm proud to be part of M&T's strong financial history, consistent operating philosophy, and conservative community focused banking principles. I'm even prouder to be part of a company that is tied to its purpose to make a difference in people's lives. I would like to thank our over 22,000 M&T colleagues for all their hard work each and every day. You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M&T continues to make a difference in our customers' lives and continue to produce strong results for our shareholders. Please turn to slide three. Let's start with our purpose, mission and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve. Our purpose drives our operating principles. We believe in local scale with 28 community-led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, top deposit share and higher operating and capital efficiency. Our performance is fueled by a relentless focus on customers, talent and communities. Moving to slide four. We deliver for customers. We have seasoned talent, diverse board and new capabilities that provide solutions that make a meaningful difference to our customers. Please let's turn to slide five. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investments in enhancing customer experience and delivering impactful products have fueled organic growth. A significant milestone this year was a designation of over 119 multicultural banking branches across our footprint, with more to come in our expanded communities. These branches are a community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities. Despite operating only in 12 states, we rank as the number six SBA lender in the country and ranked highly in ten of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects with over $2.3 billion in financing and over 2600 home loans for low and moderate income residents. Additionally, M&T Bank and our charitable foundation granted over $47 million to support our communities in '22 alone. Please turn to slide six. Here we highlight our commitment to the environment. We have invested over $230 million in renewable energy sector and significantly reduced our electricity consumption since 2019. Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights. Turning to slide eight. Our second quarter results reflect the strength of our core earnings power balance sheet and liquidity position. Adjusted to exclude the $225 million pre-tax gain from the sale of the Collective Investment Trust or CIT business in April. Second quarter revenues have grown $395 million or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year-over-year. On the same basis, pre-provision net revenues have increased 35% since last year's second quarter to $1.1 billion. Credit remained stable. Net charge-offs increased in the second quarter, but year-to-date still remain below our historical long-term average. Net income for the quarter was $867 million, up 24% from linked-quarter. Diluted GAAP earnings per share was $5.05 for the second quarter, up 26% sequentially. Now let's review our net operating results for the quarter on slide nine. M&T's net operating income for the second quarter, which excludes intangible amortization, was $879 million, up 23% from linked-quarter. Diluted net operating earnings per share common share were $5.12 for the recent quarter compared to $4.09 in this year's first quarter. Tangible book value per share increased 3% to $91.58. On slide ten, you will see that, on a GAAP basis, M&T's second quarter results produced an annualized return on average assets and return on average common equity of 1.7% and 14.27% respectively. Results for the second quarter of this year included an after tax $170 million gain on the sale of the CIT business in April. Excluding this gain, adjusted GAAP earnings per share was $4.11 and adjusted return on average assets and average common shareholder equity was 1.39% and 11.6%. Next, let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11. Taxable equivalent net interest income was $1.81 billion in the second quarter, slightly below linked-quarter. This decline was driven by higher volumes of non-core funding and unfavorable mix change caused by disintermediation partially offset by higher interest rates and one additional day. Net interest margin for the past quarter was 3.91%, down 13 basis points from linked-quarter. The primary driver was the decrease to the margin was partially impacted from the mix change to the higher cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets, net of rates on deposit funding benefited the margin by four basis points. Turning to slide 12. Capital levels remained strong with the CET1 ratio to the end of the second quarter at 10.58%. Average earning assets increased $1.9 billion or 1% from the first quarter to the second quarter due largely to the $1.5 billion growth in average loans and $1 billion increase in average investment securities. Turning to slide 13, we talk about the drivers on the loan growth. The total average loans and leases were $133.5 billion during the second quarter, up $1.5 billion compared to the linked-quarter. Looking at the loans by category on an average basis compared to the first quarter. Commercial and industrial loans increased 5% to $44.5 billion. We continue to see in our dealer and specialty businesses. Plus, we are adding new customers as we grow market share in legacy and new markets. During the second quarter, average commercial real estate loans decreased 1% to $44.9 billion. The decline was driven largely by lower construction loan balances. Average residential real estate loans were $23.8 billion, essentially flat compared to the first quarter of this year. Average consumer loans were down 1% to $20.3 billion, driven by lower activity due to rising interest rates. Turning to slide 14. Average investment securities increased to $28.6 billion during the second quarter due to the large part to purchases late at the end of the first quarter. The duration of the investment securities book at the end of June is 3.9 years and the unrealized pre-tax loss on the available for sale was only $441 million. At the end of June, cash and interest-bearing deposits at bank and the investment securities totaled $56.9 billion. Turning to slide 15. Deposit outflows during the second quarter on an average basis accounted for $2.1 billion or 1.3% in line with industry trends. Consistent with our experience prior to rising rates, the increased competition for deposits and customer behavior is leading to a mix shift with the deposit base to higher cost deposits. Comparing the second to first quarters, average demand deposits declined $5.7 billion. Savings and interest-bearing checking deposits decreased $843 million while deposits while time deposits increased $4.4 billion. The decline in average demand deposits resulted predominantly from a $1.1 billion decline in the corporate trust balances due in part to a large to lower capital markets activities. The movement to sweep products as customers seeking higher yields with $1.8 billion on balance sheet and $2.4 billion shifted off balance sheet sweep accounts during the second quarter. Average time deposit growth was driven by $2.3 billion in brokered CDs and $2.1 billion growth consumer time deposits. We remain focused on growing and retaining deposits. In the period, deposits grew $3 billion or 1.9% from the end of the first quarter. The growth was largely driven by broker CD balances, which increased $4.1 billion compared to the end of the linked-quarter. However, since the end of May, our customer base for wholesale deposit balances have stabilized and started to grow with an increase of $523 million, driven largely by growth in commercial and consumer deposits. Now let's discuss non-interest income. Please turn to slide 16. Non-interest income totaled $803 million in the second quarter compared to $587 million linked-quarter. As noted earlier, the second quarter included a $225 million gain from the sale of our CIT business. Recall that M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $20 million in this year's first quarter. Excluding these two items, second quarter non-interest income increased $11 million compared to the first quarter. Mortgage banking revenues were $107 million in the recent quarter, up 26% from linked-quarter, driven by $18 million in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March. Service charges on deposits were $119 million or up 5% compared to the first quarter. Trust income of $172 million in the recent quarter declined from $194 million in the first quarter, due largely to a $31 million in lower fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees. Our revenue from operations adjusted from the gain from the CIT sale and the distribution at Bayview Lending Group in this year's first quarter were $137 million, down $2 million sequentially. Turning to slide 17 for expenses. Operating expenses, which exclude the amortization of intangible assets were $1.28 billion in the second quarter of this year, down $64 million from the linked-quarter. As is typical for M&T's first quarter results, operating expenses in the first quarter included approximately $99 million of seasonally higher compensation costs. Excluding the seasonally higher compensation in the first quarter, operating expenses increased $35 million sequentially. That increase was due to a $31 million in higher compensation and benefit costs reflecting higher average headcount. The full impact of the annual merit increases and severance costs $20 million in higher other operating expenses related to the bulk of the MSR purchase. These increases were partially offset by lower CIT related expenses, including $22 million of lower sub adviser expenses and lower advertising and marketing and deposit insurance expenses. Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses. The efficiency ratio, which excludes the intangible amortization and merger related expenses from the numerator and the security gains and losses from the denominator was 48.9% in the recent quarter compared to 55.5% in 2023's first quarter, excluding the gain from the sale of the CIT business, in the second quarter, the efficiency ratio was 53.4%. Next, let's turn to slide 18 for credit. The allowance for credit losses amounted to $2 billion at the end of the second quarter, up $23 million from the end of linked-quarter. In the second quarter, we recorded $150 million provision and credit losses compared to $120 million in the first quarter. Net charge-offs were $127 million in the second quarter compared to $70 million in this year's first quarter. The reserve build was largely due to anticipation of declining commercial real estate values and loan growth. At the end of the second quarter, non-accrual loans were $2.4 billion, a decrease of $122 million compared to the prior quarter and represent a 1.83% of loans down nine basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $127 million. The increase in net charge-offs was driven by four large credits, three office buildings in New York City and Washington, D.C., and one large health care company operating in New York State. Annualized net charge-offs as a percentage of total loans were 38 basis points for the second quarter, compared to 22 basis points in the first quarter. This brings our year-to-date net charge-offs to 30 basis points, which is below our long-term average of 33 basis points. As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis. This is the result of a unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, tenant sensitivities on commercial real estate portfolios on a quarterly basis. This work is reflected in our criticized loan portfolio. Loans 90 days past due on which we continue to accrue interest or $380 million at the end of the first quarter compared to $407 million sequentially and total 43% of these loans 90 days past due loans were guaranteed by the government or government related entities. Turning to slide 19 for capital. M&T Cet1 ratio at the end of June was an estimated 10.58% compared to 10.16% at the end of the first quarter. The increase was due in part to higher net income and in repurchasing shares in the second quarter. In June, tangible common shareholder equity totaled $15.2 billion, up 3% from the end of the prior quarter. Tangible book value per share accounted at $91.58, up 3% from the end of the first quarter. In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category IV banks, given the timing of the People's United acquisition, M&T participated in the stress test this year. Our preliminary stress test capital buffer or SCB is estimated to be 4%. Using the SCB, which is in effect from October 1st, 2023 to September 30th of 2024 will be subject to 8.5% CET1 ratio. Now turning to slide 20 for the outlook. As we look forward to the second quarter of this year, we believe we are well positioned to navigate through a challenging economic conditions. However, the rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year 2023. The 2023 outlook reflects the impact of the sale of the M&T insurance agency that closed in October of last year and the sale of the CIT business that closed in April of this year. First, let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7 billion to $7.2 billion range, which reflects a flat to modestly higher loan and deposit growth and incorporates 125 basis point hike in August of this year. We noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry-wide outflows. Full year average deposit balances are expected to be up low single-digits compared to 2022. We continue to expect the deposit mix to shift towards higher cost of deposits, with declines expected in demand deposits and growth in time deposits and on balance sheet sweeps. This is expected to translate through the cycle interest-bearing deposit beta through the fourth quarter of this year to the low to mid 40% range. This deposit beta excludes broker deposits. Next, let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full year average loans and leases balances during 2023 to be relatively stable. The mix of C&I, CRE consumer loans inclusive of consumer real estate loans is almost one-third each as of the end of June. We expect this trend to shift slightly to C&I growth outpacing CRE. As we have seen over the past four quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan book over the remainder of 2023. Turning to fees. We expect noninterest income to be in the range of $2.25 billion to $2.3 billion range. This outlook for noninterest-bearing reflects lower trust revenues resulting from the sale of the CIT business in April as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's first quarter. Remember, the outlook does not include the $225 million gain from the sale of the CIT business. Turning to expenses. We anticipate expenses excluding intangible amortization to trend near the higher end of $5 billion to $5.1 billion. In addition, this outlook for net operating expenses includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the $60 million to $65 million range. Turning to credit. We expect loan losses to be near M&T's long-term average of 33 basis points. Although the quarterly cadence could be lumpy, provision expense over the year will follow the CECL methodology and be affected by changes in the macro outlook and loan balances. For 2023, we expect taxable equivalent rate to be in the 25% range. Finally, as it relates to capital, this is a very clear differentiator for M&T. Our capital, coupled with our limited investment security market has been a clear strength during these turbulent times. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary. We take our responsibilities to manage our shareholders' capital very seriously and will return more when it's appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth along with buybacks in the future, which will always be part of our core capital distribution strategy. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors and rating agencies. To conclude on slide 21. Our results underscore and optimistic investment thesis. Our economic uncertainty remains high, and that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than two times growth relative to peers. Our strong shareholder returns include 15% to 20% return on average tangible common equity and robust dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital. Our integration of People's United is complete, and we are confident in our ability to realize our potential post-merger. Now let's open up the call to questions before which Todd will briefly review the instructions.

Manan Gosalia:

Hey, good morning.

Manan Gosalia:

I had a question on NII. I noticed you took your deposit balance guide up along with the deposit beta guide but kept the NII guide the same. So can you talk about the puts and takes there? I guess the question is why hold more liquidity and hold more in interest-bearing deposits in an environment where you're not growing loans that much? Is it more a function of any upcoming LCR rules or anything the regulators are asking you to do?

Manan Gosalia:

So you took cash up this quarter, and it sounds like you're going to keep it at a high level for some time?

Manan Gosalia:

Got it. Okay. And then just as a follow-up, the debt markets seem to be opening up. Can you talk about how you're thinking about issuance for the remainder of the year? Just keeping in mind the possibility that TLAC rules could apply to banks of your asset size?

Manan Gosalia:

Great. Thanks so much.

Operator:

Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank.

Daryl Bible:

Yes. So let me start with capital deployment question. First and foremost, we want to make sure we serve our clients and our communities. So organic growth is number one, on how we deploy capital. And during turbulent time like this, we want to make sure that all of our customers and potential new customers that we want and want to join M&T that we have the capital there to serve and that's first and foremost when we start. Dividends, obviously, the second, second is dividend growth. And we have a long history of our dividend policy and keeping really strong dividends at M&T, really, really value a strong dividend from that perspective. And share buyback has always been part of our history of repurchasing shares. And from time to time, we might do any acquisitions, if that makes sense, and it's a good shareholder value from that perspective. But long-term, there's really not a change. Just right now in these turbulent times, we're keeping extra capital, and we think it's prudent to do that. And as we get more information from the rules that come out from the regulators. But right now, we are doing really well. Our business is performing well. We're getting new clients in, in the commercial area, business banking, wealth, corporate trust, I mean, our businesses are growing because we are strong. So I think it's an advantage right now to have a lot of capital.

Daryl Bible:

Yes. So I want to give Darren a lot of credit. He was definitely ahead of the industry. And talking about margin and the impact of the margin and he saw it coming and I think he was a leader in telling people where everything was going. So it was really, really good guidance from that perspective. I would say that we will continue to have margin pressure just because of the cost of what we're seeing on the funding side. We have in disintermediation. And if you look at it, our DDA was down $5.7 billion. We retained all the clients. Some of the balances went to on-balance sheet sweeps. Some of them went into off-balance sheet sweeps. If you look at our consumer book, we are moving balances from nonmaturity buckets to CDs. But if you go back 20 plus years and you look at the deposit that we had back then, CDs were 20% plus of our funding base. Right now, we're at 10%, and we're probably going to be in the mid-teens before it's all said and done, it really depends on how long rates stay higher. And that's just the normal mix of how we run our retail bank. I mean it's the right thing to do. It's the right thing for our clients. It's the right thing for our bank. We can adjust our rate sensitivities with CDs on the books and manage that really well. So it's just basically learning things that when you ran banks 20 years ago, we're doing the same thing right now and doing it the same way. But we feel really good about our businesses. Our margin pressure is going to continue to come down, and I think we've given you some guidance for this year don't really want to get into '24 right now until we get working on our plan, which would be later this quarter.

Daryl Bible:

Yeah. Thanks, Matt.

Steven Alexopoulos:

Hey, good morning, everybody.

Steven Alexopoulos:

And thank you for the earning slide deck.

Steven Alexopoulos:

Appreciate it.

Steven Alexopoulos:

I want to start on the noninterest-bearing deposits. So when I look at the decline this quarter, it's still perplexing to me that this mix shift is not basically done by now, right? If you're a commercial customer, you have a treasury function. I'd imagine you've done the analysis and you've already moved those balances, but you guys are now guiding you expect more decline in DDA. When you look at your client base, can you walk us through why is this taking so long? I mean, it's been quite a few quarters, right, the two years has been above 3% or 4%. And what's still to happen to cause this mix shift?

Steven Alexopoulos:

Okay. That's helpful. And then just a question on the reserve. What's the unemployment rate you're assuming in the total reserve? And then I know you increased the reserve a bit. You called out commercial real estate. What's the reserve on the commercial real estate portfolio? Thanks.

Steven Alexopoulos:

Got it. I'm sorry, I missed it. What was the specific reserve now on commercial real estate loans?

Steven Alexopoulos:

Got it. I'm still not following what the specific reserve is on CRE, but I could follow up with Brian after. Thanks.

Operator:

We'll take our next question from Gerard Cassidy with RBC.

Daryl Bible:

Hey, Gerard.

Daryl Bible:

Yes. Thanks for the question, Gerard. Obviously, we are very eager to get these new roles and see what's out there and make comments that's going to go through those normal process there. So it's going to take time, probably get most of these things implemented. On your specific question of RWA and mortgages, we'll wait and see how that comes out. We are in the residential mortgage space. We exited the correspondent space last quarter. So we're really just focusing on meeting the needs of our clients of the company. And we're basically selling all the conforming into the marketplace and we're balance sheeting all of our wealth clients and clients that are low and moderate income are the ones that really are going on the balance sheet. So we're going to stay in our core businesses because we're serving our clients. If it's a little bit higher capital, the market will probably adjust and just raise pricing to accommodate for that would be my best guess from that. As far as the other changes out there, there's a lot of proposals there. If it's like long-term debt or TLAC, we're waiting to see what that happens. M&T really, we don't have a whole lot of debt outstanding. So it's something that we will have to just manage. It's probably going to be holding company. If it's not holding company and allow bank will probably end up with a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there, but we'll just optimize it. But with us using now Federal Home Loan Bank advances, broker deposits, I think we have, right now, ability where we can pay those off, issue unsecured debt and really not blow the balance sheet from that and still have a really strong liquidity position from that. So we're waiting to see. I think you know our AOCI comes in, looks like that's coming in were 55 basis points, that's 55 basis points negative adjustment at the end of this quarter includes all three pieces. It's the AFS securities, cash flow hedges as well as pension. That's probably one of the lowest that we have in the industry. So it's not a real big impact for us. So that's the strength as well.

Daryl Bible:

Yes. Thank you for the question. So on your first question, CRE is really just you have to look at it on a case-by-case basis just because of the unique quality and pieces of how it is each borrower has different implications. You have tenant things, you have to market conditions, interest rate. So that is a case-by-case basis. So you really go through the deep dives there. On your question on portfolio review. Yes. So we are 50%, 60% plus through it. All the loans that we have in the criticized bucket is reviewed every quarter. We stress test those really well. And if I look at what we're doing versus my prior places, I would say, we're doing as much if not more. What I've seen done in our credit process. So we're staying on top of this. Our teams are doing really well. Valuations are coming in, and we're doing the best we can with the information we have. But I would say we feel good at where we are and we're just continuing to monitor where everything is.

Daryl Bible:

Thanks, Gerard.

Brent Erensel:

Good morning and, Daryl, welcome to Western New York.

Brent Erensel:

So specifically on the CRE drilling down to the Manhattan real estate or New York City real estate, I was wondering, could you walk us through what you do? You said you were taking charge-offs there. So you take possession, do you restructure? What happens when you have a CRE Manhattan, I guess it's an office building. What do you do here in that situation?

Brent Erensel:

To follow-up on that, you're seeing strong-handed borrowers, some of these big names, just mailing in the keys. Are you experiencing that as well? Where your long-term strong-handed CRE borrower is actually not so strong-handed after all.

Brent Erensel:

Thank you.

Kenneth Usdin:

Thanks. Good morning, everyone.

Daryl Bible:

Yes. I think that's right. And it does exclude broker because we may pay off some of the broker deposits to really dependently access the unsecured market or not. So I would say, if you look at core, I think that's the right assumption to use, Ken.

Daryl Bible:

Yes. So if you look this quarter, our beta on total interest-bearing deposits was 40% and we issued $4 billion of broker deposits during the quarter. If we back out those broker deposits, we were at 34% deposit beta. Our decision to issue broker deposits was one versus looking at it from issuing doing Federal Home Loan Bank Advances or doing unsecured debt, we chose that. As we move forward, the treasury team will basically do what's best for the company and what we need to do. And we'll probably use all three pieces. And when it actually goes into deposits, it impacts the deposit beta. So we tried to give you, excluding the broker piece, what deposit beta is, what Darren said the last several quarters on deposit betas, if you back out the book or he's spot on still where we're performing. So I mean the guide there, we just kind of mixed it up by issuing these broker deposits.

Daryl Bible:

I think our broker deposits are about $10 billion in total. And I would say $8 billion of it is CDs and $2 billion of it money market.

Daryl Bible:

You're welcome.

Ebrahim Poonawala:

Hey, Daryl, good morning.

Ebrahim Poonawala:

Good morning. Just a follow-up on Ken's question around broker to $10 billion at the end of the quarter. Is there a target that the MAX that we should think about how much brokered deposits can get either on a dollar basis or as a percentage of total deposits that we should keep in mind when we're thinking about betas and the outlook there?

Ebrahim Poonawala:

Got it. And just one follow-up on the CRE appraisals. I think if I heard you correctly, you said you had to 50% to 60% of the portfolio. How hard is it to get a true appraisal on a CRE property right now and what I'm trying to get to is what's the risk of being blindsided on reserve levels two or three quarters from now where you need to take a lot more because of fair values. And I'm just wondering the visibility on the appraisal, how conservative are you being as a bank in kind of trying to put this -- getting ahead of this issue?

Ebrahim Poonawala:

Got it. And welcome to the new role. Good to hear you -- call again. Thanks.

Frank Schiraldi:

Thanks. Good morning.

Frank Schiraldi:

Just, Daryl, I missed the -- I know you talked about the back to sort of the noninterest-bearing mix shift. You talked about maybe a more normalized, I guess, sort of balance sheet, getting CD balances ultimately back into the mid-teens. Is the best way to think about noninterest-bearing shift from here is basically that all comes at the cost of noninterest-bearing so that we could continue to see pretty significant shift adding noninterest bearing because it seems like you could have some offsetting tailwinds from the trust business as well, right, as sort of that transactional volume maybe picks up or normalized. So I'm just wondering the best way to think about where noninterest-bearing balances could kind of migrate?

Frank Schiraldi:

Okay. Great. And then just on the other side of the balance sheet, back to the loan growth outlook and I guess, consumers continuing to slow and 4Q balances maybe being down overall. Just on the C&I side, should that growth decelerate here as the floor deal planning stabilizes? And ultimately, where do you think CRE kind of flushes out or stabilizes in terms of the total loans?

Frank Schiraldi:

Okay. All right. Great. Thank you.

Michael Mayo:

Hey, Daryl.

Michael Mayo:

Welcome to the North. Just a big picture question. I mean, you've been in the Midwest, U.S. Bancorp and you've been in the South, BB&T and Truist and now you're at M&T. And just how do you view M&T when you pull the lens back, having been on the inside at so many different firms and so much perspective over a few decades. Why did you choose to go to M&T, what do you see as the potential that's not unrealized? And what do you think that you can bring extra to the table, which you probably brought up when you spoke to management?

Michael Mayo:

And just one follow-up. Qualitatively, I think that makes sense, helping a bank manage through becoming bigger and all the regulatory and complexity that involves, but if there was one quantitative metric where you say, you know what, three years from now or maybe five years from now, this financial measure should be better and I'm going to take ownership of that. What would that one financial metric be or maybe a couple?

Michael Mayo:

All right. Thank you.

Erika Najarian:

Hey, just one last question. I'm sure everybody is hopping on their 9 o'clock call. But Daryl, could you give us a sense of how you think if you are going to do $7 billion in NII, how is the cadence unfurls for the second half of the year. More importantly, what fourth quarter looks like? And is the $183 million impact on a down 100 basis point scenario, from your last Q still sort of in the ballpark of your rate sensitivity to the downside?

Erika Najarian:

That really helps. Thanks, Daryl, and look forward to working with you again.

Operator:

Thank you. We'll take our last question from John Pancari with Evercore.

Daryl Bible:

Yes. I said earlier on another question, John, you may have missed it, but we -- because of the broker deposits that we put on, just putting those broker deposits on dilutes our percentages. So you aren't comparing apples-to-apples from that perspective. But I would say we're going to go down probably 2% or 3%. The rest of this year will be our best guess. So it's really serving clients to have higher rates. But what I said earlier, we started from a really high place because we've got a lot of surplus deposits, and we really have a huge focus on getting primacy on the operating accounts. And that basically gives us a lot to deal with. And I think at the end of the day, M&T will still have one of the highest percentages of noninterest-bearing to total deposits of our peer group. So I think it's just playing out with just a higher rate environment, and that will change if rates start to go down at some point.

Daryl Bible:

Yes. It's not broker. We really saw this quarter in the middle of the quarter start to stabilize and start to grow. So we're hopeful that we'll be able to get some growth out of our core businesses, whether it's retail, business banking and commercial and maybe towards the end of the year, maybe we'll get higher activity out of the capital markets area in our corporate trust space as well and wealth areas. So I'm hoping that all those business lines will continue to modestly grow throughout the year as we compete for deposits.

Daryl Bible:

Yes. Thanks, John.

Brian Klock:

Again, thank you all for participating today. And as always, clarification of any items on 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.

Operator:

Welcome to the M&T Bank First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Markets and Investor Relations. Please go ahead.

Darren King:

Thank you, Brian, and good morning, everyone. Our first quarter results reflect the strength of our balance sheet and liquidity position as well as the impact of our merger with People's United Bank. Compared to last year's first quarter, revenues have grown over $970 million or 67%, translating into 24% positive operating leverage year-over-year. Pre-provision net revenues have more than doubled since last year to $1.1 billion. Credit remained solid with net charge-offs still below our long-term average. Capital levels remained strong with the CET1 ratio estimated to end the first quarter at 10.15%. During the quarter, we repurchased $600 million in common shares which represented 2% of our outstanding common stock, and the Board approved an 8% or $0.10 per share increase in the quarterly common dividend to $1.30 per share. Tangible common equity per share increased 3% to $88.81 per share. In addition, April 1 marked the one-year anniversary of the closing of the People's United acquisition. We're pleased with the results of the largest acquisition in our company's history. The tangible book value dilution was only 4% and has been earned back already. Merger costs were less than anticipated at the time of announcement. Targeted expense synergies have largely been realized and are now in the run rate. As a result of these, the above, the return on investment and EPS accretion have exceeded those expected at the time the deal was announced. Let's take a look at the first quarter results. Diluted GAAP earnings per common share were $4.01 for the first quarter of 2023, down 7% compared with $4.29 in the fourth quarter of 2022. Net income for the quarter was $702 million, 8% lower than the $765 million in the linked quarter. On a GAAP basis, M&T's first quarter results produced an annualized rate of return on average assets of 1.4%, and an annualized rate of return on average common equity of 11.74%. This compares with rates of 1.53% and 12.59%, respectively, in the previous quarter. Included in GAAP results were after-tax expenses from the amortization of intangible assets amounting to $13 million in the first quarter and $14 million in the sequential quarter, representing $0.08 per common share in both quarters. Pretax merger-related expenses of $45 million related to the People's United acquisition were included in the fourth quarter's GAAP results. These merger-related charges translate to $33 million after tax or $0.20 per common share. There were no merger-related expenses in this year's first quarter. In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results including tangible assets and equity. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. We believe this information provides investors with a better picture of the long-term earnings power of the institution. M&T's net operating income for the first quarter, which excludes intangible amortization and the merger-related expenses, was $715 million, down 12% from the $812 million in the linked quarter. Diluted net operating earnings per common share were $4.09 for the recent quarter compared with $4.57 in 2022's fourth quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.49% and 19% in the recent quarter. The comparable returns were 1.7% and 21.3% in the fourth quarter of 2022. As a reminder, GAAP and net operating earnings for the fourth quarter of 2022 were impacted by certain noteworthy events. This included a $136 million gain related to the sale of the M&T Insurance Agency as well as a $135 million contribution to M&T's charitable foundation. These items collectively netted and did not materially impact net income. Next, we'll take a deeper dive into the underlying trends that generated our first quarter results. Taxable net interest income was $1.83 billion for the first quarter of 2023, slightly below the linked quarter. The $9 million decrease was driven largely by a $30 million in lower net interest income, reflecting the two-day shorter calendar quarter, partially offset by a $13 million positive impact from our hedging program and $8 million from higher average earning asset volumes net of higher average interest-bearing liability volumes. The net interest margin for the past quarter was 4.04%, down 2 basis points from the 4.06% in the linked quarter. The primary driver of the decrease to the margin was the impact from a higher level of borrowing, which we estimate reduced the margin by 19 basis points. This was partially offset by the impact from higher rates on earning assets, net of deposit funding, which we estimate added 18 basis points. All other factors had a negligible impact on the margin. Total average loans and leases were $132 billion during the quarter, up $2.6 billion or 2% compared to the linked quarter. Looking at the loans by category on an average basis compared to the fourth quarter, commercial and industrial loans and leases increased $2.4 billion or 6% to $42.4 billion with $1.9 billion being broadly based and $453 million of growth in average dealer floor plan balances. During the first quarter, average commercial real estate loans decreased by $363 million or 1% to $45.3 billion. The decline was driven largely by lower permanent mortgages as average construction loan balances were essentially flat. Residential real estate loans increased by $435 million or about 2% to $23.8 billion due largely to the timing of the retention of originations throughout the prior quarter. End-of-period balances were essentially flat sequentially. Average consumer loans were up $144 million or about 1% to $20.5 billion. Recreational finance loan growth continues to be the main driver of increased balances and these average loans grew $178 million or 2%. Average earning assets, excluding interest-bearing cash on deposit at the Federal Reserve increased $4.9 billion or 3% due to the $2.6 billion growth in average loans and $2.3 billion increase in average investment securities. Although average interest-bearing cash balances have decreased $777 million to $24.3 billion during the first quarter of this year, they came in higher than our initial projections. The sequential quarterly decline in cash reflects loan growth and the drop in deposit balances, partially offset by the proceeds from long-term borrowings issued during the quarter. Consistent with our expectations and normal seasonal outflows, deposits declined sequentially. However, the $1.9 billion or 1% sequential average decline was slightly better than our expectations at the January earnings call. We remain focused on growing and retaining deposits. Our experience in prior rising rate environments reminds us to expect increased competition for deposits and changing customer behavior, leading to a mix shift within the deposit base. During the first quarter, average demand deposits declined $8.4 billion. Savings and interest-bearing checking deposits increased $1 billion and time deposits increased $5.4 billion. Average commercial deposits declined a net $2.4 billion as business owners shifted $6.3 billion out of operating demand deposit accounts and into both on and off balance sheet sweep accounts to earn a higher return on their excess balances as well as to make distributions. Almost two-third of the decline in noninterest-bearing deposits was offset by movement into on-balance sheet sweep accounts where those average balances increased $3.8 billion during the first quarter of 2023. Turning to consumer deposits. They declined a net $758 million in the first quarter as $2.5 billion in outflows were partially offset by a $1.7 billion increase in average time deposits. Lower levels of activity in the capital markets and seasonal factors also impacted average balances for the following lines of business. Trust fund demand balances declined $1.2 billion. Municipal deposits declined $789 million and escrow deposits declined $684 million. Average brokered CDs increased $3.8 billion sequentially and due almost entirely from growth during the previous quarter. Turning to noninterest income. Noninterest income totaled $587 million in the first quarter compared with $682 million in the linked quarter. M&T normally receives an annual distribution from the Bayview Lending Group during the first quarter of the year, this distribution was $20 million in 2023 and $30 million in last year's first quarter. As noted earlier, the fourth quarter of last year included a $136 million gain from the sale of the M&T Insurance Agency. Excluding these two items, noninterest income was up $21 million or 4% sequentially. Trust income of $194 million in the recent quarter was flat sequentially. Service charges on deposit accounts were $114 million compared to $106 million in the fourth quarter. The increase primarily reflects a full quarter of service charges on acquired customer deposit accounts after these fees were waived in October and November of last year. Mortgage banking revenues were $85 million in the recent quarter, up 4% from the linked quarter. Revenues from our residential mortgage business were $55 million in the first quarter compared with $54 million in the prior quarter. Commercial mortgage banking revenues were $30 million in the first quarter compared to $28 million in the final quarter of 2022. Other revenue from operations excluding the distribution from Bayview Lending Group in this year's first quarter and the gain from the sale of the M&T Insurance Agency in the sequential quarter were $140 million, up $9 million sequentially. Turning to expenses. Operating expenses, which exclude the amortization of intangible assets and merger-related expenses, were $134 billion in the first quarter of this year, a little changed from the fourth quarter of last year. As is typical for M&T's first quarter results, Operating expenses for the recent quarter included approximately a Gretzky of seasonally higher compensation costs relating to accelerated recognition of equity compensation expense for certain retirement-eligible employees. The HSA contribution, the impact of annual incentive compensation payouts on the 401(k) match and FICA payments as well as the annual reset in FICA payments and unemployment insurance. Those same items amounted to an increase in salaries and benefits of approximately $74 million in last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. Excluding the charitable donation in the fourth quarter of last year and the seasonally higher compensation in the first quarter, operating expenses increased $32 million sequentially. The increase was due largely to in higher compensation and benefits costs, largely related to higher headcount in the first quarter, $6 million in higher FDIC insurance expense, reflecting a higher assessment rate for the industry, $4 million in higher advertising and marketing expenses and $5 million in professional services expenses directly attributable to the pending sale of M&T's collective investment trust business. Given the prospect for slowing revenue growth, we remain focused on diligently managing expenses and continuing to generate positive operating leverage. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator was 55.5% in the recent quarter, compared with 53.3% in 2022's fourth quarter and 64.9% in the first quarter of last year. Next, let's turn to credit. The allowance for credit losses amounted to $1.98 billion at the end of the first quarter, up $50 million from the end of the linked quarter. In the first quarter, we recorded a $120 million provision for credit losses compared to $90 million in the fourth quarter. Net charge for the recent quarter amounted to $70 million in the first quarter compared to $40 million in last year's fourth quarter. The reserve build was largely due to a combination of loan growth and the anticipation of declining values for office and health care properties partially offset by improved expectations for hotel, retail and multifamily property prices. At the end of the first quarter, nonaccrual loans were $2.6 billion, an increase of $118 million compared to the prior quarter, and that represented 1.92% of loans, up 7 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $70 million including amounts that reflect updated appraisals of nonaccrual office loans. Annualized net charge-offs as a percentage of total loans were 22 basis points for the first quarter compared to 12 basis points in the fourth quarter. Loans 90 days past due, on which we continue to accrue interest, were $407 million at the end of the recent quarter compared to $491 million sequentially. In total, 75% of these 90-day past due loans were guaranteed by government-related entities. Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.15% compared with 10.4% at the end of the fourth quarter. The decrease was due in part to growth in risk-weighted assets and the impact of the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock. Tangible common equity totaled $14.7 billion, up slightly from the end of the prior quarter. Tangible common equity per share amounted to 88.81 per share, up 3% from the end of the year. Turning to the outlook. As we look forward to the rest of this year, we believe we are well positioned to navigate through the challenging economic conditions. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year of 2023. As a reminder, the acquisition of People's United closed on April 1, 2022, and thus the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022. Our 2023 outlook also reflects the sale of the M&T Insurance Agency that closed in October of last year. And even though the sale of the Collective Investment Trust business is expected to close in the first half of this year, our outlook includes the full year of operations from this business. First, let's talk about net interest income outlook. The outlook for interest rates in the economy continues to change frequently. Since March 8th, the 10-year U.S. government bond yield has dropped 46 basis points and the forward curve has changed meaningfully as well. We expect taxable net interest income to grow in the 20% to 23% range when compared to the $5.86 billion during 2022. This range reflects different rates of deposit balance growth, deposit pricing and loan growth. Consistent with the current forward curve, our forecast incorporates to 25 basis point cuts in the final quarter of this year. As we noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning asset growth. We expect continued intense competition for deposits in the face of industry-wide outflows. Full year average total deposit balances are expected to be down low single digits compared to the $158.5 billion average during 2022. During the first quarter, we issued $3.5 billion in senior debt and we'll utilize the combination of FHLB funding and senior debt over the course of this year as needed to ensure that we can continue to meet the loan demands of our customers. We continue to expect the deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time and on balance sheet suite. This is expected to translate to a through-the-cycle interest-bearing deposit beta in the high 30% to low 40% range. Taking all of these factors into account, we anticipate the net interest margin to be slightly below 4% for the full year of 2023 and to continue to migrate towards the long-term range we have been discussing for the past couple of quarters. Next, let's discuss the drivers of earning asset growth. We currently plan to grow the securities portfolio by $2 billion compared to the $28 billion balance at the end of March of this year with the addition of longer duration mortgage-backed securities throughout the year. Looking at average loans. We expect average loan and lease balances during 2023 to grow in the 10% to 12% range when compared to the 2022 full year average of $119.3 billion. We anticipate growth to continue in the second quarter. and then for average balances to be flat to slightly down over the second half of the year. This implies total average loan and lease balances in the fourth quarter of 2023 to be up 1% to 3% and from the $129.4 billion average during fourth quarter of 2022. The mix of C&I, CRE and consumer loans, inclusive of consumer real estate, is almost one-third each as of the end of March. We expect this trend to shift slightly as C&I growth outpaces CRE. As we have seen over the past three quarters, Higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023. After these average loans grew 2% in the first quarter, we expect the indirect portfolio to be relatively flat over the remainder of the year. Turning to fees. Excluding the $136 million gain on the sale of the M&T Insurance Agency in the fourth quarter of 2022 as well as securities losses, net interest income -- sorry, noninterest income was $2.23 billion in 2022. We expect 2023 noninterest income growth to be in the 7% to 9% range compared to the $2.23 billion in 2022. This outlook for noninterest income includes the impact of a bulk purchase of residential mortgage servicing rights that we completed at the end of this year's first quarter. Turning to expenses. We anticipate expenses, excluding merger-related costs, the charitable contribution and intangible amortization to be up 11% to 13% when compared to the $4.52 billion during 2022. Recall that approximately half of this increase reflects an extra quarter of People's United expenses. In addition, this outlook for net operating expenses includes the impact of the previously noted mortgage servicing rights purchase. We do not anticipate incurring any material merger-related costs in 2023 and intangible amortization is expected to be in the $60 million to $65 million range during 2023. Turning to credit. We expect credit losses to migrate towards M&T's long-term average of 33 basis points, although the quarterly cadence could be lumpy. Provision expense over the year will follow the CECL methodology and will be affected by changes in the macroeconomic outlook as well as loan balances. For 2023, we expect the taxable equivalent tax rate to be in the 25% range. Finally, turning to capital. M&T's common equity Tier 1 ratio of 10.15% at March 31, 2023, comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer or SCB. We believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace over the long term. However, in the near term, we plan to maintain a CET1 ratio slightly above the current level until the current economic uncertainty abates. With that, let's open up the call to questions before which Shelby will briefly review the instructions.

Ebrahim Poonawala:

Hi, good morning. I guess I just wanted to go back to the deposit beta and the NII guidance. So high 30s to low 40s deposit beta if you can unpack that a little bit in terms of how has your view around deposit pricing behavior change today relative to January? And that could be because fed funds at 5%, events of the last one-month post SVB. Just give us a flavor of commercial versus retail? Are you seeing differences? And has one changed a lot more than the other? Would appreciate any color there.

Ebrahim Poonawala:

It was a lot. And just on a separate question, I think you mentioned you provided some -- made some reserves against office CRE. Obviously, a lot of focus there. Give us a perspective of is there a pool within your office CRE book that you view or within the CRE book at higher risk? And how do you frame the loss content if some of these buildings end up in foreclosure and you do have a distressed sale around that? Is it easy to handicap that right now? And just your thought process in managing that portfolio?

Operator:

And we'll take our next question from Manan Gosalia with Morgan Stanley.

Darren King:

Sure. I guess I would just caution on drawing cause and effect that the numbers are the numbers, but whether the decline that happened in March was specifically attributable to the SCV or Signature challenges is difficult to say just because there's normal activity that happens in the first quarter, right? As we mentioned, the trust demand balances move based on capital markets, not in activity, not necessarily because of an exogenous event. But roughly, when you look at the decline in total deposits over the quarter was about 60% happen before March and 40% happened in March. So, a little bit heavier March, but as you get into that March time frame, that's when we got our distribution from Bayview, which is when distributions often get paid right in front of taxes, for commercial clients. And so, when we look at the effect on the bank of the changes that happen, what we tended to see was we opened up more accounts in our business and middle market space than we would typically in a month. And we saw balances come on to our balance sheet as people sought to diversify. And there were some cases where that went the other way. But net-net, we were flat to slightly up from what our expectations were, given all the activity that was happening in the marketplace. So, from our perspective, we were in line with what we thought for the quarter and pleased with how the client base and our teams reacted to everything that was going on in the world in the month of March.

Darren King:

I'll start with. I don't have the spot deposit rates in front of me, and we can follow up with that. But in terms of the stability of deposits, again, keep in mind that it's the action that we're seeing right now is really in noninterest-bearing, and that's really being driven by commercial deposits. When we look at consumer balances outside of some outflow in January and when I say that, I mean noninterest-bearing, they've been relatively stable through February and March. And when you look in the consumer space, what you're seeing is a shift between interest-bearing categories. And so, we're seeing movement from savings and money market into time. which is pretty typical during rising rates? And the net is some small up flow in DDA, which again is pretty standard in the first quarter of the year. In the commercial space, outside of the normal seasonal activity, what will happen is deposits, noninterest-bearing deposits will start to stabilize as customers get down to the level of deposits they need to keep in their operational accounts to make payroll, to pay accounts payable and the like and excess will not necessarily leave the balance sheet. It will just shift into some form of interest-bearing. It could be interest checking or it could be an on-balance sheet sweep. And so there will be some decline, and there always is for M&T in these environments. When we look through the past, we see that when rates have gone down to zero, we tend to have an increase of about four or five percentage points in the percentage of our deposit base that sits in noninterest-bearing. As rates rise, that goes back the other direction. And that's just exactly what we're seeing now and what's happening. And so over time, if you go -- went all the way back into pre-global financial crisis for banks, not just for M&T but for the industry, noninterest-bearing deposits were in the kind of 20% range of total deposits. And they peaked at 45% for us and about 30% for the industry. And so, depending -- and that was the last time Fed funds was anywhere near the rates that they are today. On the flip side, time deposits were a huge percentage of total deposits in the industry in that time period, upwards of 25% or 30% and they've come all the way down into the 5% to 10% range. I give you that as context to say that what's going to happen, what we think will happen is you'll continue to see some outflow of deposits but it will stabilize as rates start to stop increasing. And what you'll see is less movement out and more movement across categories. And again, for consumers, we think that will be from interest products like money market and savings into time. And for commercial customers, it will be from noninterest-bearing DDA into interest-bearing things like sweep and commercial checking. And so, for us, for the rest of the year, we think things start to stabilize as we get into the second quarter and second half and the build back in commercial checking balances will start in anticipation of next year's first quarter. It's a cycle that it follows itself very predictably every year.

Operator:

And we'll take our next question from John Pancari with Evercore.

Darren King:

Good morning, John. How are you doing?

Darren King:

Yes. So, John, keep in mind that, that 10% to 12% includes four quarters of People this year in the averages versus three quarters last year, right? So, some of that is in there. I think we noted in the outlook that if you look based on the average balances in just the fourth quarter of last year, we're more in the 1% to 3% range. And if you look at that, a lot of that's happened already in the first quarter. And based on where the first quarter loan balances ended, just the averaging effect of that should carry a little bit of growth through the second quarter. And then we expect things to kind of flatten out a little bit as we go through the back half of the year. And that's how you -- that's just the math that gets the average into that range. And really, the -- I think the challenge that you're seeing is pipelines have been robust, but they're starting to slow down a little bit, and we're managing them to focus our liquidity on our best customers and our relationship customers. And then in some instances, in some of the consumer space as it is indirect and recfi [ph] with rates going up, you're seeing a little less demand from the clients and therefore, a little bit of a slowdown that will keep balances flat to slightly down in that space just as the duration of that portfolio is pretty short. And so, you need to continue to originate new to keep it flat or to grow it. Within the commercial world, there's not a lot of activity that's really happening in CRE. There's not a lot of new construction. And so, what we would expect is you see for us and for the industry, as loans mature capital and liquidity is devoted to those clients and keeping them around. And then in the C&I space, we've seen a fairly broad-based growth, whether it's by geography or by industry type. We did note that the dealer floor plan balances have grown. They're still maybe half of their long-term average, which is better than they were but there's some upside there. And obviously, you get a slowdown in indirect, you likely see an uptick in the dealer floor plan balances. But those are kind of the spaces where we're seeing activity and how we expect the rest of the year to play itself out.

Darren King:

Okay. A lot in there. Let me try and make sure I get it all. So, the office criticized is still right around 20%. It's up slightly, but not up dramatically. And the hotel criticized continues to come down. So, it's important to keep that in mind because as we talk about the CRE increase that you're asking about, there's an offset within the whole CRE allowance, right? We've seen some improvement in hotel and retail, offset by some decline in office. But we did add to the allowance in the quarter. If you think about dollar amount, it's probably half to two-third of the $50 million provision was allocated towards the net towards the CRE portfolio. The rest would be driven by growth in other portfolios. When you look at the LTVs, what we've seen in the ones that we have updated so far is we're seeing somewhere between a 15% and 20% decline in some of the updated values of the properties that we've reappraised. And so that's why you didn't hear me talk much about 80% or 70% LTVs because those ones are getting closer perhaps to where these properties might reappraise, but 60% LTVs and sub-50% LTVs would seem to still have a lot of cushion before you're into any material loss content. And so, when we look at that we feel good about where we are. It doesn't mean that we're taking our eye off the ball, but we feel good about where we are. And again, just to give a little more color on New York City office next quarter, this quarter we're in right now, there's five loans that are maturing with a principal balance of $30 million.

Dave Rochester:

Hi, good morning guys. On capital, the buyback going forward, it sounds like you're pretty much saying no buyback for 2Q? Or is that too strong a statement? Or is the thought just that you'll wait to get your CCAR results and then hope that the market is more stable at that point and go from there?

Dave Rochester:

Got it. Very helpful. And then as a follow-up, you mentioned your outlook on hotel, retail and multifamily properties improved. I was just wondering if you could unpack that a little bit and just talk about what you're seeing that drives that improved outlook there. And then, you had mentioned, I guess, office properties at the -- as you kind of redoing these LTVs are coming down, maybe 15% to 20%, if I heard that right. Is that how much you're actually marking these as well? So, the NPAs that you have in the market that you took this quarter, is that roughly the magnitude? Or is it less just given that 15% to 20% really doesn't cut into a lot of those properties if those LTVs as well. Thanks.

Dave Rochester:

The marks on the office.

Operator:

And we'll take our next question from Bill Carcache with Wolfe Research.

Darren King:

Sure. So, I guess a couple of thoughts, Bill, on the OCI base, when we've had that in mind for the last three years. And all the discussions that we've had over the prior number of years about putting the cash to work and the impact that, that might have in the securities portfolio on AOCI and our capital. We were looking at both the CET1 ratio as well as the tangible common equity ratio. And it was really the latter one that got us -- gave us a little bit of agita in debating how fast and how much to put into securities. And so, from an OCI perspective, if that comes to pass and that goes into our capital ratios. At the end of the quarter, we had about $1.3 billion in total marks across the AFS and HTM portfolios. About $350 million was pretax the AFS mark. And so, $264 million after tax, it's maybe 20 basis points of CET1. And then if you look at the total, you're maybe slightly below that, call it, 80-ish basis points of CET1, if you had to put both through. And so, when we talk a little bit about our thoughts on capital and where we're kind of managing the CET1 ratio for the next little while, it's giving ourselves some cushion as these things play themselves out. And so, from that perspective, it won't surprise me if that's a change that happens, but I think we're well covered and well prepared should that play itself out. When it comes to TLAC, that's really a longer-term change. I think when you look at what's happening in the industry right now. Most organizations have been increasing their use of wholesale funding and bank notes which ultimately will help with TLAC as it plays itself out. And then there's always the question of how Basel IV and those regulations come to pass and what the final proposals look like. And so, we're trying to be mindful that those are changes that could come and not do something today that would put us in a place where we would have to raise equity or issue TLAC at a suboptimal time.

Darren King:

So, I'll try and unpack that for you. The -- I give the comment about where rates were and where deposit -- or where balance sheets were pre-GFC to give context, right? That -- most of the time, when we talk about deposit betas in these industry forums, the point of reference tends to be the last rising rate environment, which was the '16 to '19 period, where Fed funds only got to about 2.25%. And so, given where Fed funds are today and we'll see how long they stay there, it's important to keep in mind what he balance sheet looks -- what bank balance sheets look like back in that time period. We might not get all the way back there. We probably won't get all the way back there depending on how long rates stay at this level, although it does look like they'll stay there longer than the last time, rates of rates rose. And so, when we look at the deposit mix and where things stabilize, we tend to look at and think about demand deposits in conjunction with interest checking and on balance sheet sweep. And what we've been seeing is some decline in those balances over time as deposit balances come out of the system with the Fed's quantitative tightening that they're doing. And what we think we'll see, which is included in that outlook is we'll see a continued shift from demand, particularly commercial clients, commercial and small business from noninterest bearing into interest checking and sweep. And that over time, you see those balances look maybe closer to 50-50 from where they are today in those particular categories. There'll still be interest -- noninterest deposits on the consumer side. And those you won't see as much movement into interest-bearing products because they don't tend to switch categories like that. And those are some of the factors that are implicit in those deposit betas. And really, the question to me is twofold. Where do Fed funds ultimately end up? And how long does it stay there?

Operator:

[Operator Instructions] We'll take our next question from Matt O'Connor with Deutsche Bank.

Darren King:

That is correct.

Darren King:

Yes. So, Matt, the biggest driver of the change in our posture and thoughts on NIM has really been the shift in funding sources, right? And so, if you look at the work that we did in the first quarter, the $3.5 billion that we issued, we had talked about issuing wholesale over the course of the year, the markets were very receptive when we went out in January. And so, we pulled forward a bunch of that funding, which had a big impact. We talked about 19 basis points on the NIM. And so, where we stand today, when you look at our asset sensitivity, you can see we're kind of plus or minus 2%, which is where we try to run the bank. And so, we'll see -- when we go through and we look at those factors and expectations that Fed funds are starting to top out and likely based on the forward curve, we see a decline in the end of the year. That's why you start to see that deposit -- or that margin start to come back down. But as I mentioned, with our asset sensitivity where it is, it's not going to drop precipitously because of the things that we've done with some of the forward starting swaps with the securities portfolio build, with the mix of fixed rate assets on the balance sheet and what have you. And so, it will start to grind down into that range. But given over the long run, the reason we've talked about that range is because we expect over the long run that things "normalize". And what we mean by that is that the mix of deposits on the balance sheet looks more like what you would see in a normal rate environment. It's not extreme, like where we had 45% of the deposits in noninterest bearing. That's not normal. As that changes, the margin comes down. We'll see a different -- or a mix of time deposits and what the rates are on time deposits, and that will affect the margin. We'll look at what percentage of the balance sheet, it's in cash and securities and as those start to normalize you'll see an improvement in the margin. And so, it's the shift in all of those categories that became very extreme through the pandemic that as they start to come back into what we would consider normal ranges, that's why we think that 3.60% to 3.90% is a normal long-term range for our bank and our balance sheet, just kind of based on history. And so, we'll start to see that migration happen. We started to see it, obviously, this quarter and at the end of last year, and it will continue through 2023. How fast we get there? It seems like things are moving pretty quickly right now just given quantitative tightening and how balances are shifting around the industry. As we get to the end of the year and the jumping off point for the margin, you're probably migrating towards the 3.60% range for the last quarter of the year. There's a lot of factors that can get us there. Between now and then that would be kind of the low end of where I think we would end the year. For the whole year, we're in the ballpark of high three’s just based on that trajectory. And then when -- as we go through the year and the balances -- the deposit balances price you see some migration down, but it starts to level off as we get towards the back half of the year and you operate in that range through most of 2024 would be our expectation right now. But Keep in mind, there's a lot of assumptions that go into that, not the least of which is what the forward curve looks like.

Darren King:

Yes. I would I would just alter that slightly and say that the bottom end of the range, you probably don't see until the first half of next year of that 3.60% to 3.90%, but you're slowly moving down as we go through the year. But as we get towards the end of the year, the rate of decline slows, and you kind of stabilize and hold flattish as we go through 2024.

Ken Usdin:

Darren has it go on. Just a quick one on -- the fee guide going to 7.9% from 5% to 7% growth, is the entirety of that just the MSR add that you mentioned you did at the end of the quarter?

Ken Usdin:

Okay. And then if I could just sneak in the same one on the cost side. Do you -- in terms of like the expected sale of the corporate trust business, you gave us the revenue number in the press release. Do you have an approximate idea of like when that's going to close so we can just kind of think about taking out the fees and the expenses relative to that over the -- as the course of the year goes on?

Ken Usdin:

Okay. Got it. Right. And you were pretty clear that the rest of the cost guide is inclusive of the MSR, any cost related to the MSR adds.

Ken Usdin:

Got it. Thank you.

Gerard Cassidy:

We are going to miss you. congratulations on your run in as CFO. I guess, when you started in 2016. So, I know you've got a heavy hit of replacing you, but good luck in the new role.

Gerard Cassidy:

It sure hasn't helping new role your spot rate on your -- my choice money market account is 3 basis points for under $10,000 in the account and over 10,000 adjust 2.96%.

Gerard Cassidy:

Oh, God, yes. No, no, I know. Absolutely. But here's my question. Speaking of deposit rates, can you share with us, and that you've alluded to this in some of your answers, if the Fed reaches its terminal rate on Fed funds in June, let's say, 5%, 5.5%. And does not cut even though I know you're looking at the forward curve, that includes two cuts in the fourth quarter. Say they don't cut until maybe the first half of '24. When does your deposit betas go flat after reaching the terminal rate, and second, if they go at 60 days afterwards or whatever you think the number would be, do you then benefit from reinvesting the cash flows off of the securities portfolio into a higher rate environment, assuming the Fed doesn't cut the Fed funds rate.

Operator:

And we'll take our next question from Steven Alexopoulos with JPMorgan.

Darren King:

Yes. No, happy to. The long story short was that the change was a positive for us for adding clients and adding accounts. And so, we're hopeful that we were able to serve as a source of strength and to help some of these folks out when these changes happened. And we were, I would say, a net slightly positive as a result of all the disruption that happened in these various markets. For our clients, when we look at particularly our commercial clients and the average tenure, 20, 25-year relationships. And so, they know us well, and they tend to worry a little bit less. That said, there were some people who chose to move some money into some of the money funds for diversification for rates, as well as some of their comfort level. We didn't lose a ton, to be honest with you to the larger organizations. But what I would say is, in some of those shifts, we were a recipient of balances as much as we saw an outflow. And so, when you add in some of the accounts that we opened, during the crisis, the net was a was a slight positive. And so, for us, it wasn't the big shift in balances that many were anticipating more, I would say, as much a continuation of the trend that we've been talking about of as quantitative tightening happens as rates are moving up in the money, the rates paid on the money funds, always moves faster than the deposit accounts on the balance sheet. That normal migration is happening and over time, we expect it will come back as those other rates start to match what you can get in the funds.

Brian Foran:

I guess just quickly on lending, it sounds like any underwriting changes on your end are only marginal if I got that comment about focusing liquidity on our best customers. So, I just wanted to confirm that. And then just more broadly, definitely appreciate the point that the rollover in commercial real estate in particulars is fairly slow. But do you think some of your peers will change underwriting more significantly, as people worry about a credit crunch and lending and care in particular? Do you think that's a valid concern or do you think that's overblown right now?

Brian Foran:

I appreciate all that. Thank you very much.

Brian Klock:

And 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.

Operator:

Welcome to the M&T Bank Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Darren King:

Thank you, Brian, and good morning, everyone. As we reflect on 2022, we want to start by taking a moment to recognize the hard work and dedication of our more than 22,000 colleagues, your tireless efforts to support our customers and communities during challenging times are the heartbeat of M&T. We also give a shout out to #3 and the early responders who saved his life, you remind us all about the bigger game of life. A year ago, we outlined three key objectives for 2022

Matthew O'Connor :

I guess, sticking with the 3s, I think at one point you talked about a long-term NIM of 3.6 to 3.9. So those 3s involved there and they're divisible by 3. And so why don't we kick it off with that.

Matthew O'Connor :

Okay. So 3 years, once again, 3 popping up to normalize on the NIM. But did I miss any comments on the NIM for '23? Or most importantly, what you're modeling for the fourth quarter this year?

Matthew O'Connor :

Both on the full year and then most importantly, the fourth quarter of '23, what are you thinking on the NIM? And then I think that would assume both the forward curve and then I think commercial loans tend to reprice a little bit sooner than maybe funds move. So if you have a 4Q '23 estimate and then framing of puts and takes, which it's helpful, including with the repricing earlier the commercial loans?

Operator:

Our next question comes from John Pancari from Evercore ISI.

Darren King :

Yes. There's a few things John, that we've been working on all this year to start to protect the NIM. First, you've seen us increase the size of the securities portfolio, and we've talked a little bit about growing that a little bit further in 2023. Within there, we also anticipate shifting the duration a little bit. We've taken some duration so far in -- on the balance sheet, in the mortgage portfolio, we'll slow that down and we'll take that duration in the securities portfolio with some MBS -- we'll also be doing -- we mentioned some term funding, which we'll lock that in, which will also help. And then the thing that ultimately is the biggest benefit to maintaining the margin and reducing asset sensitivity is deposit pricing, right? And so it's a little bit painful when it's compressing on the way up, when it's catching up to the loan pricing. But ultimately, the best way to combat declining rates is through repricing of deposits. And so those three things would be the biggest help. We will and continue to have a hedge portfolio that helps reduce some of the asset sensitivity in the short term, might help the NIM of some of the earlier hedges that were put on that are a lower received fixed rate roll off. And so those are kind of the three major things that will have helped us reduce our asset sensitivity, and will help us protect the NIM at these kind of higher levels as time goes on.

Darren King:

Yes. We'll see how much we grow from where we are at the end of the first quarter because of the position of the balance sheet and what we'll do will likely not be to add to outstanding notional but to add to forward starting is likely what we would do.

Darren King :

Yes, sure. Within -- in the commercial real estate portfolio, the biggest trend that we've had going on for probably the last four quarters is just the reduction in the construction portfolio. And so a large number of construction projects were originated in late '18 and during 2019. And as the pandemic went, they continued but at a slower pace, and those have been coming to completion this year. And as those have come to completion, they've turned into permanent mortgage financing oftentimes not on our balance sheet. And so you've seen the decline in commercial real estate largely being construction related. When we look underneath at some of the major categories and we look at the criticized, we actually have seen hotel criticized balances peak probably about two or three quarters ago. It got as high as about 86% of our hotel portfolio. It's now down below 50%. And if we're seeing remixing in the criticized, there's two categories. One is healthcare, which we've talked about a little bit before, and that's typically assisted living and senior housing. And that's not from a lack of demand that we're seeing some challenges in that portfolio. It's their ability to staff. And so we've seen occupancy rates in these portfolios come up post pandemic but they're not able to get all the way back to pre-pandemic levels because there's not enough staff to adequately care for the folks that want to live there. And then the other place, obviously, we're looking at is office, and we're paying a lot of attention to office. The portfolio, I think, is as of the end of the year, right around 20% criticized, we're watching lease expirations and lease sign-ups. The vast majority of our real estate portfolio has lease expirations out 2024 and later. So far, what we've seen is decent renewing. We are seeing some movement down in price per square foot. But what we've been doing is going through all of the lease portfolios -- sorry, the office portfolios and stressing both vacancy rates and lease rates to see what the debt service coverage ratio is and what making sure that we've got adequate coverage. If we talk about our expectations for charge-offs, in -- as we go into this year. That's the place where we'd have the most concern. When we talk about charge-offs moving up from the levels we've seen in 2022. It will be some of those portfolios that is still a place where we've really got our eye.

Frank Schiraldi :

Hi, Darren. Just wanted to ask about -- just, I guess, a follow-up on the office book. If you could just remind us where that total office exposure is and then specifically the exposure in New York City?

Frank Schiraldi :

Okay. And then just a follow-up on CRE. In terms of -- I think you mentioned that the permanent CRE book was sort of flattish linked quarter with construction balances rolling off. And it sounded like -- I just want to make sure I understand that for 2023, is the expectation that, that permanent CRE book will grow just to a lesser extent than the C&I book? Or do you still -- are you still looking for outflows in that or thinking about outflows in that CRE book?

Operator:

Our next question comes from Ken from Jefferies. Go ahead, Ken.

Operator:

Our next question comes from Ebrahim Poonawala from Bank of America.

Darren King:

Yes. There will be some movement, Ebrahim, between cash and securities over the course of the year. If you look at the as-at the end of the year, probably down in the $9 billion range. If you look at the average for the year, probably think in the slightly below $20 billion, between $20 billion and $19 billion is probably the spot. That number is going to move around a little bit, obviously, depending on outflows in deposits, as well as our funding needs to support loan growth as well as to make sure we're managing the bank's liquidity profile. And so those will move around a little bit over the course of the year, but those are kind of round numbers where we're forecasting 2023.

Darren King:

I didn't mention a number, obviously, that this is dynamic, right? And that the amount is going to be a function of what's happening with deposit funding and runoff and whatnot. But right now, we think it's in the $3 billion to $4 billion range over the course of 2023.

Darren King :

Well, it's a great question. There's -- obviously, the rate isn't depending on the tenor, right? And right now, there's a -- you like the opportunity to reprice the shorter-dated notes but they're trading higher than the longer-term debt. And so we think low to mid-5s is the range of yield on that depending on the term. And what we'll be trying to do since we've really brought down the level of wholesale funding at the bank will be to not lock in all-in-one tenor, but to start to build a more balanced maturity profile as we think about the funding of the bank, so that we don't have massive amounts coming due all at the same time. And so I think as you think about it, think about not being all one tenor and one type of but something that starts to build a little bit of a profile that is spread out over the next few years.

Darren King:

I don't know that I have that right off the top of my -- at the tip of my fingers here. Give me one second and let me see if I can find it. But it has -- in aggregate, that portfolio has still been above 1. And when we look at the LTVs in that portfolio, they still run below 60% on a weighted average basis. Now obviously, there are some above that and some below. But as we look at it right now and we look at the clients' ability to support the asset either with cash flow or with how much equity they have in the property where we feel pretty comfortable with where we sit, but we're watching it. As we've talked about, there's -- it's one of the places where we see the most risk and where we're focusing a lot of our attention from a credit perspective.

Manan Gosalia :

I was hoping you can break down your loan growth guidance for next year. In the past, you've spoken about the lending synergies from the People’s acquisition and the footprint there. I think you mentioned small business card and equipment finance. So just if you can break down how you see that contributing to loan growth in '23? And how you see that evolving?

Manan Gosalia:

That's really helpful. And I think you've also mentioned in the past that C&I is benefiting now because of less capital markets activity. Are you assuming some sort of reversal in your '23 guide?

Manan Gosalia :

Got it. And then just a follow-up on one of the prior questions. On the stress test, you've spoken about the adverse effects of the excess cash balances and of course, the Fed has been stressing CRE more than the other asset classes. Just given that December 31 will be used as a starting point for the next stress test, do you think you've done it now for how well do you think you're positioned going into that?

Operator:

And our next question comes from Ken Usdin from Jefferies.

Darren King :

Yes. Ken, the vast majority of the saves are in there through the end of the fourth quarter. We're probably -- if you think about we were targeting 30% of the cost base, we’re like 27% or something in that range, is what we've achieved so far. When you look at it on a percentage basis, we're almost there. When we look at it on a dollar basis, the run rate is actually a little bit higher than we thought it would be because of inflation. When we talk about the percent save, it's still the same. And so, some of that will come out over the course of the year. We're running -- we’re carrying a little bit higher staffing in the branches as we stabilize a little bit higher staffing in some of the call centers. And so those things will normalize themselves over the course of the year. But when we look at where we sit, from my perspective, we pretty much closed the book on the cost saves that we expected to achieve. A couple of other things that have worked out very positive is the onetime expenses turned out to be a little bit less than we thought. We incurred a little bit less in severance expense. We also incurred a little bit less in some contract terminations than we thought at due diligence. And the nice thing is the People’s was an asset-sensitive franchise. And with rates going up, the NII is coming in better than we thought. And so the PPNR is a little bit higher than we expected. So overall, the numbers that we thought we would realize post close and post conversion are in line to slightly better than what we thought, and we're almost back to breakeven on tangible book value. So overall, we're very, very positive about where things sit early on. And as we mentioned before, excited to go to work in New England and bring M&T's branded banking into that new market.

Darren King :

Yes. The biggest driver of that is compensation. And when you look at 2022, we made some meaningful adjustments to our associates' compensation. We raised the minimum wage. We've been dealing with competition for talent like everyone has, and compensation expense is about 55% of our total expense base. And so when you look at the driver of that growth, it's really that compensation cost that's driving it. Outside of that, the other line item, you'll see where we'll be investing and have been is in outside data processing and software, that I think for us and for the industry, you see more and more reliance on purchased software. And with those future software contracts come licenses and maintenance fees, which tend to go up, every year. And the other place, we'll probably see a little bit of growth in advertising and promotion. As we continue to stabilize the franchise and introduce ourselves in New England, we'll see an uptick in that as we go forward and then kind of normalize into what I would describe as a normal percentage of our operating expense over time.

Steven Alexopoulos :

I want to start. So looking at this quarter with the second quarter where you funded loan growth with excess liquidity, talking about issuing sub debt, when do you think you'll start growing deposits again? Is this back half '23? And where do you see the loan-to-deposit ratio trending through the year or maybe ending the year?

Steven Alexopoulos :

Okay. And then -- so where do you see the loan-to-deposit ratio moving?

Operator:

And our last question comes from Gerard Cassidy from RBC Capital Markets.

Darren King :

Well, we appreciate that and the 3 reference. There's something that happens in every call and it kind of seems to run its course. So 3 is this one.

Darren King :

Right. So I think it's hard, Gerard to pinpoint it on one or the other because they work together, right? I mean if occupancy and price per square foot was okay, are holding up, then you probably got the coverage to refinance when your loan is due. I remind you, when we underwrite whether it's multifamily, office or hotel, we underwrite to long-term interest rates and long-term occupancy rates. And so we've got some protection built in with our clients when we underwrite. So there's a little bit of room there. But as we look at it, I think in the short term, it's the refinance risk, it's a little bit bigger. Over the long run, we debate this a lot internally, and we go back and forth with our Chief Credit Officer, that this trend of more remote work, hard to handicap where that's going to end up, right? You can see some changes in the economy. You see some movements with some of the tech firms with employment. That may or may not drive people back into the office, we don't know. But when you see younger people early in their professional career, you can see the benefits to being co-located with their co-workers. And so that trend, I think, ultimately starts to come back. Is it five days a week probably not, but it's not going to be zero, at least this is Darren's opinion. So take it for what it's worth. To me, the bigger issue is when you look long term at the population, there's a big chunk of the population called the baby boomers that are approaching retirement age. They're not enough of them to come in up in the next wave to use all the space that they needed to sit in to be employed. And that's a longer-term cyclical trend, which will affect these things. And so there's going to be some pain in the short term, no doubt. Over time, rates will move up and down and refinancings will happen. There will be some movement in and out. But to me, the longer-term trend is what's happening with the population and the working population and what's the capacity that exists today versus what the likely future looks like, absent any other changes in politics. And I will leave it at that before we get into a discussion I don't want to get into.

Darren King:

Yes. I think, Gerard, to me, when I think about the way we all set aside reserves. We've got -- it's weighted heavily on your economic forecast and your R&S period, your reasonable and supportable period, which for a lot of the industry is the first couple of years and then there's a reversion to the long-term average. And so what you're seeing today is the current view where the charge-offs are well below the long-term average. And so the allowance is always going to take that the long term into account. And then you're forecasting and bringing forward those losses based on the assumptions that go into the R&S period. And the expectation for unemployment to go up and for GDP to come down is there. It's in the baseline for Moody's. It's moved a little bit. Most People like us will not just look at the baseline, but look at a more severe economic scenario as well as a better one. And you kind of weight those. And it doesn't necessarily need to be what you see today in the pricing and the spreads versus what's in the forecast. They should be connected, but they're not always, right? And there's always going to be points in time where these disconnects exist. And so we look at it and we think about the provision is keeping the bank safe. It's capital by another form. But as we underwrite business, we're always looking at each individual relationship and its ability to pay back. And the spreads are going to be a reflection of the expectation of that credit risk through the cycle. And so for us, we've had so many long-term relationships where we've seen the behavior of these clients through the cycle and their willingness to step up and many times bring outside resources to help maintain their payments and stay accruing. And so each organization is different, but that to me is a little bit of why you might see a disconnect between what's actually pricing today versus what's in the CECL outlook.

Darren King :

Yes. We're kind of in the 4-1 range on unemployment in the base. And that's during the R&S period, obviously, right? And so you're -- once you get past that, then you're reverting to the long term.

Brian Klock :

Again, thank you all for participating today. And as always, a clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at area code (716) 842-5138. Thank you and have a good day

Operator:

Welcome to the M&T Bank Third Quarter 2022 Earnings Conference Call. All lines have been placed on listen-only and the floor will be opened for questions following the presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Markets and Investor Relations. Please, go ahead.

Darren King:

Thank you, Brian, and good morning, everyone. As we reflect on the past quarter and the first nine months of the year, we're pleased with the progress we have made executing on the plans we laid out in January. Through the first three quarters of the year, we have been actively putting our dry powder to work. We deployed $6 billion of cash into net investment securities growth, investing at consecutively higher yields, thereby limiting the impact on accumulated other comprehensive income, and at the same time, we began to rebuild our derivatives hedging portfolio. Excluding the impact of the acquired loans and PPP loans, we've grown commercial and industrial loans by $3 billion, consumer loans by about $640 million, while the $2.8 billion decline in CRE balances reflects our decision to serve our commercial real estate customer base in a slightly different way. All of these efforts have led to a reduction in our asset sensitivity, helping to protect our net interest margin from future rate shocks and making our balance sheet more capital efficient. In terms of capital, we restarted common share repurchases in this year's second quarter and have now repurchased $1.2 billion in common stock, representing 4% of outstanding shares. And we closed the acquisition of People's United Bank and began the process of integrating this valuable franchise. Looking back through the first nine months of this year, this hard work has translated into strong financial results. We generated positive operating leverage and 27% growth in pre-tax pre-provision net revenue. And the trend has grown stronger each quarter as we generated pre-tax pre-provision net revenue of more than $1 billion in the third quarter of this year, representing 9% positive operating leverage compared to the linked quarter. Tangible book value per share has also remained relatively stable during 2022, despite the rising rate environment and the impact that can have on accumulated other comprehensive income. We ended the third quarter with a CET1 ratio of 10.7%, which exceeds the median peer bank level by a wide margin. But our work is not done. We continue on the path set out at the beginning of this year to build a more capital-efficient, less asset-sensitive balance sheet that will produce predictable revenue and earnings. A key element of our plan is to recognize the value created from the combined franchise. We're excited about our expanded footprint and the benefits that our combined company can bring to our shareholders, customers, employees and communities. Now, let's review our results for the quarter. Diluted GAAP earnings per common share were $3.53 for the third quarter of 2022 compared with $1.08 in the second quarter of 2022. Net income for the quarter was $647 million compared with $218 million in the linked quarter. On a GAAP basis, M&T's third quarter results produced an annualized rate of return on average assets of 1.28%, and an annualized return on average common equity of 10.43%. This compares with rates of 0.42% and 3.21%, respectively, in the previous quarter. Included in GAAP results in both the second and third quarters, were after-tax expenses from the amortization of intangible assets amounting to $14 million or $0.08 per common share. Pre-tax merger-related expenses of $53 million related to the People's United acquisition were included in these GAAP results. These merger-related charges translate into $39 million after-tax or $0.22 per common share. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T's net operating income for the third quarter, which excludes intangible amortization and merger-related expenses, was $700 million compared with $578 million in the linked quarter. Diluted net operating earnings per common share were $3.83 for the recent quarter compared with $3.10 in 2022 second quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.44% and 17.89% in the recent quarter. The comparable returns were 1.16% and 14.41% in the second quarter of 2022. In accordance with the SEC's guidelines, this morning's press release contains a reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Next, we'll look a little deeper into the underlying trends that generated these results. Taxable equivalent net interest income was $1.69 billion in the third quarter of 2022, an increase of $268 million or 19% from the linked quarter. The increase was driven largely by approximately $250 million of impact from higher rates on interest-earning assets, inclusive of the effect of interest rate hedges. Also an $8 million increase from one additional day in the quarter and a $6 million increase in interest received on non-accrual loans. The net interest margin for the past quarter was 3.68%, up 67 basis points from 3.01% in the linked quarter. The primary driver of the increase to the margin was higher rates, which we estimate boosted the margin by 55 basis points. In addition, the margin benefited from a reduced level of cash held on deposit with the Federal Reserve which we estimate added 10 basis points. All other factors added two basis points to the margin. Next, let's discuss the average loan balance trends during the quarter where you'll be able to see the progress we continue to make transitioning to a more capital-efficient balance sheet. Average loans and leases were $127.5 billion during the third quarter of 2022. The essentially unchanged with the linked quarter. Looking at the loans by category, on an average basis, compared with the second quarter, commercial and industrial loans and leases increased $504 million or 1% to $38.3 billion, with $458 million or 2% growth largely coming from core commercial banking clients and $353 million or 17% growth in average dealer floor plan balances. This growth was partially offset by a decrease of approximately $304 million in PPP loans. Excluding PPP loans, total average C&I loans and leases grew by $808 million or 2% quarter-over-quarter. PPP loans ended the third quarter at only $168 million and are not expected to have a material impact on loan growth going forward. With the People's United acquisition, we have two new business lines that impact our balance sheet. Growth in average equipment financing continues to be solid, growing $165 million or 3% sequentially. However, this growth was offset by a $171 million or 13% decline in average mortgage warehouse line usage. During the third quarter, average commercial real estate loans decreased by $946 million or 2% to $46.3 billion. Permanent commercial mortgages and construction loans equally contributed to the decrease. Our construction exposure continues to decline as projects reach completion and the decline in the permanent commercial mortgages is due in part to converting some of these loans into off-balance sheet financing facilitated by our M&T Realty Capital Corporation subsidiary. Residential real estate loans increased $201 million or about 1% to $23 billion, due to the continued retention of new originations that we hold on the balance sheet for investment, partially offset by normal amortization. Average consumer loans were up $167 million or about 1% to $20 billion. Recreational finance loan growth continues to be the main driver of growth. These average loans grew by $303 million or 4%. That growth was partially offset by a $236 million or 5% decline in average auto loans. Average earning assets, excluding interest-bearing cash balances, which is inclusive of cash on deposit at the Federal Reserve increased $1.5 billion or 1% and due largely to the $1.6 billion increase in average investment securities. During the quarter, we completed various balance sheet restructuring actions to optimize the funding base of the combined bank. These actions utilize some of the excess cash available and resulted in a decrease in deposits. We expect cash balances to remain relatively stable into the end of this year. Average interest-bearing cash balances decreased by $8.9 billion to $30.8 billion during the third quarter of this year, due largely to the decline in deposit balances and the cash deployed to purchase investment securities. Average deposits decreased by $7.4 billion or 4% compared with the second quarter. The decline in deposits reflect the impact of market conditions and planned balance sheet management actions. Some of these, include; a $1 billion decline in escrow and mortgage warehouse related deposits, reflecting lower levels of activity associated with the rising rate environment. $600 million reduction in trust demand deposits resulting from lower levels of capital markets activity compared with the second quarter; there was a $1 billion planned reduction in non-core high-cost deposits; and a $1.6 billion reduction in municipal average balances as customers pay down lines and shifted to paying off some higher-yielding higher balance products. $1 billion in commercial mortgages was a reduction of $1 billion in commercial balances as customers move to off-balance sheet sweep as well as a reduction in line utilization. And $2 billion in lower time deposit balances and other rate-sensitive products. Customer operating account balances have stabilized. Average non-interest-bearing deposit balances declined 2% during the third quarter of this year. However, these deposit balances grew by $648 million or 1% on an end-of-period basis. Turning to non-interest income. Non-interest income totaled $563 million in the third quarter compared with $571 million in the linked quarter. Mortgage banking revenues were $83 million in the recent quarter, unchanged from the linked quarter. Revenues from our residential mortgage business were $55 million in the third quarter compared to $50 million in the prior quarter. Residential mortgage loans originated for sale were $47 million in the recent quarter compared with $77 million in the second quarter. Both figures reflect our decision to retain a substantial majority of the mortgage originations for investment on our balance sheet. Commercial mortgage banking revenues were $28 million in the third quarter compared with $33 million in the linked quarter, that figure was $50 million in the year ago quarter. Trust income was $187 million in the recent quarter, down 2% from $190 million in the second quarter. The decrease was due largely to the impact of lower market valuations on assets under management and assets under administration. In addition, recall that the second quarter included $4 million in tax preparation fees, which did not recur in the recent quarter. These declines were partially offset by an incremental $5 million and recapture of money market fee waivers. These fee waivers are now fully recaptured. Service charges on deposit accounts were $115 million compared with $124 million in the second quarter. The decline primarily reflects the waiver of service charges in September on acquired customer deposit accounts. Turning to expenses. Operating expenses for the third quarter, which exclude the amortization of intangible assets and merger-related expenses were $1.21 billion compared to $1.16 billion in the linked quarter. The increase was due largely to higher salary and benefit costs resulting from one additional business day and the investment in talent that -- in an investment in our talent that affected approximately half of our organization as well as increased incentive accruals tied to improved bank performance. We also saw an increase in FDIC insurance expense, reflecting the impact of acquired loans deemed to be criticized. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and securities gains or losses from the denominator was 53.6% in the recent quarter compared with 58.3% in 2022 second quarter and 57.7% in the third quarter of last year. Next, let's turn to credit. Despite the supply chain disruptions, labor shortages and persistent inflation, credit remained stable. The allowance for credit losses amounted to $1.88 billion at the end of the third quarter, up $52 million from the end of the linked quarter. In the third quarter, we recorded a $115 million provision for credit losses compared to $60 million in the second quarter. Note that this amount in the second quarter excludes the $242 million so-called CECL double count provision related to the non-purchase credit deteriorated acquired loans. Net charge-offs were $63 million in the third quarter, compared to $50 million in this year's second quarter. The reserve build was largely due to changes in economic assumptions included in our reserve methodology as well as growth in our consumer portfolios. As forward interest rate curves were adjusted to reflect the rising interest rate environment, the baseline macroeconomic forecast experienced a deterioration in the third quarter for those indicators that our reserve methodology is most sensitive to, including unemployment rate, GDP growth and residential and commercial real estate values. Non-accrual loans decreased to $2.4 billion, compared to $2.6 billion sequentially. At the end of the third quarter, non-accrual loans represented 1.9% of loans outstanding, down from 2.1% at the end of the linked quarter. As noted, net charge-offs for the recent quarter amounted to $63 million. Annualized net charge-offs as a percentage of total loans were 20 basis points for the third quarter, compared to 16 basis points in the second quarter. Loans 90 days past due, on which we continue to accrue interest, were $477 million at the end of the recent quarter, down from $524 million sequentially. In total, 89% of those 90-day past due loans were guaranteed by government-related entities. Turning to capital. M&T's common equity Tier 1 ratio was an estimated 10.7% compared with 10.9% at the end of the second quarter. The decrease was due largely to the impact of the repurchase of $600 million in common shares, which represented 2% of outstanding stock. Reflecting the common share repurchases, tangible common equity totaled $14.6 billion, a decrease of 3% from the end of the prior quarter. Tangible common equity per share amounted to $84.28 down $1.50 or 2% from the end of the second quarter. Now, turning to the outlook. With three quarters in the books, we'll focus on the outlook for the fourth quarter relative to this year's third quarter. First, let's take a look at the outlook for the balance sheet. We continue to expect to grow the investment securities portfolio by $2 billion in the final quarter of this year. Keep in mind, this cadence could accelerate or slow depending on market conditions and customer loan demand. Turning to the outlook for average loans. We expect average loan and lease balances to be largely in line with the third quarter average of $128 billion. We expect growth in average C&I, residential mortgage and consumer loans and anticipate a slight decline in average CRE balances sequentially. As we look to the income statement, we're excited about the continued growth in pre-tax pre-provision revenue in the fourth quarter. Fourth quarter net interest income is expected to be $1.9 billion, plus or minus $25 million. The variability in this guidance reflects the uncertainty of the speed of interest rate hikes by the Fed as well as the reactivity of deposit pricing and the deployment of excess liquidity and loan growth. Turning to our fee businesses, we expect fourth quarter fee income to be essentially flat compared to the third quarter. We anticipate operating expenses which exclude both merger-related costs and intangible amortization. We expect them to also be flat from the third quarter. We do expect a further realization of merger synergies to be reflected in a decline in the salary benefit line. However, we expect this decline to be offset by elevated professional services and advertising and promotion costs as we continue to work to integrate both franchises and to introduce M&T to our new markets. Turning to credit. We continue to expect credit losses to remain well below M&T's legacy long-term average of 33 basis points. For the fourth quarter, we estimate that net charge-offs for the combined company will be in the 20 basis point range. Our provision follows the CECL methodology, which is heavily dependent upon macroeconomic assumptions. Any change in our allowance for credit losses would be reflective of any changes in the economic outlook and their assumptions. Turning to capital. We believe the current level of core capital exceeds that needed to safely run the combined company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace. M&T's common equity Tier 1 ratio of 10.7% at September 30, 2022, comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer, or SCB. We anticipate ending this year with a CET1 ratio slightly above the 10.5% range we have been targeting previously. With a solid starting CET1 ratio, and the potential to generate additional amounts of capital over the next years, we do not expect to change our capital distribution plans. We anticipate continuing to repurchase common shares at the pace of $600 million per quarter under our current capital plan. All right. Now let's open up the call to questions before which Gretchen will briefly review the instructions.

Ebrahim Poonawala:

I guess just some…

Ebrahim Poonawala:

Thank you. Good morning.

Ebrahim Poonawala:

I guess maybe just, Darren, talk about NII a little bit. Obviously, I think third quarter was a little shy of expectations, fourth quarter seems in line. As we think about the outlook from 4Q onwards, how do you see NII growing from there into 2023, given your outlook on the balance sheet, should we expect a steady lift higher given tailwind from rates and your view -- any question around.

Ebrahim Poonawala:

Okay. Thank you and helpful.

Betsy Graseck:

Hi, good morning.

Betsy Graseck:

I wanted to understand how you're thinking about just the capital levels. I know you have a significant amount of excess capital. But in this environment, do you anticipate leaning into loan growth? And then maybe you could help us understand how you're going to be funding that loan growth, or would you be looking to do the opposite. I know you gave us the buyback amount, but does it make more sense to buy back more? And grow loans less? Just a little bit of that dynamic and how you're thinking about it would be helpful? Thanks.

Betsy Graseck:

Right. That makes sense to hear how you're thinking about it. I'm just also wondering in this higher rate environment, higher inflation environment, does that tilt at all the decisioning? And part of the question comes from how we're fund, how you're thinking of funding the loan growth. It's obviously not just through capital, but also through either deposits or wholesale funds, et cetera. So, does that change the dynamic at all? Thanks.

Betsy Graseck:

Got it. Thank you.

Ken Usdin:

Thanks. Good morning. Darren, just a follow-up on the deposit side. You mentioned that we're just kind of starting to see that change in beta. So I was just wondering, if you can just talk about -- just update us on your thoughts around where betas go to incrementally from here? And also, any thoughts different in terms of where you expect them to go cumulatively over the cycle.

Ken Usdin:

Great. And that was going to be my follow-up, Darren, is that prior point you had made at Barclays just about, your line of sight in terms of how long into next year that you think the margin can continue to go up based on what we see in the forward curve right now. Can it continue to rise throughout next year?

Ken Usdin:

Yes, absolutely. All right, thanks a lot, Darren.

Erika Najarian:

Hi, good morning.

Erika Najarian:

My first question is just going back to the dynamics of the third quarter net interest income, you mentioned a smaller balance sheet from some of the rebalancing in deposits, but also I think your commercial real estate yields are probably less – had a lower beta than investors were expecting. Could you maybe talk a little bit about how your hedge book had impacted that loan beta in the third quarter? How we should expect that hedge book to impact the loan beta in the fourth quarter and how your hedging strategy, I believe there's $10 billion in notional that set to expire at the end of first quarter. What's sort of the strategy and replacement from there?

Erika Najarian:

Got it. My follow-up question is sort of a two-parter. Number one, just confirming the received fixed rate on the remaining book is about 1.3%. And the second question is, as a follow-up to Ken, there was a lot of debate in the marketplace in terms of what you meant about NIM peaking at four then going back down. So I wanted to sort of clarify that. If I assume that earning assets are flat in the fourth quarter versus third quarter that will get me to a NIM of about four and 415 to get to $1.9 billion. And so if we think about, the forward curve, with the implication that the Fed stops, raising rates in February. Are you saying to us that I think we all understand that if the Fed stops in February, then margin will peak in first quarter, second quarter and then go down. And in that case, do we have some NIM expansion in the first quarter? And then do we get back below four by year-end. I guess that's what we're trying to clarify do we get a three handle back in the NIM at some point in 2023?

Erika Najarian:

Thank you.

Bill Carcache:

Good morning. Darren, I wanted to ask if you could give us an update on your CRE exposure any concerns over potential downgrades across your different geographic regions? And any color you can give on conversations that you're having with customers, particularly on the office side?

Bill Carcache:

That's very helpful. And following up on the sequential increase in the reserve rate due to modestly less optimistic macro forecast. Can you give a little bit more color on how your baseline compares versus your other scenarios, how you're weighting them and where you'd expect -- or where we should expect the reserve rate to sort of settle your fund employment were to go to, say, the 5%, 5.5% range?

Bill Carcache:

Well, it’s a complex topic, but that’s very clear -- very clear explanation. Thanks. Appreciate you taking my questions.