M&T Bank Corporation (NYSE:MTB) Q1 2024 Earnings Call Transcript

M&T Bank Corporation (NYSE:MTB) Q1 2024 Earnings Call Transcript April 15, 2024

M&T Bank Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

Brian Klock: Thank you, Todd, and good morning. I’d like to thank everyone for participating in M&T’s first quarter 2024 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the events and presentations link. Also, before we start, I’d like to mention that today’s presentation may contain forward-looking information. Cautionary statements about this information are included in today’s earnings release materials and in the investor presentation as well, and as well as our SEC filings and other investor materials.

The presentation also includes non-GAAP financial measures as identified in the earnings release and in investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T’s Senior Executive Vice President and CFO, Daryl Bible. Now I’d like to turn the call over to Daryl.

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.

Operator: At this time, we will open the floor for questions. [Operator Instructions] Our first question will come from Manan Gosalia with Morgan Stanley. Please go ahead.

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Q&A Session

Manan Gosalia: Hi. Good morning.

Daryl Bible: 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?

Daryl Bible: Yes. So let me start with the latter part first, Manan. Thanks for the question. We are really pretty neutral to interest rates right now. So whether we get two cuts, three cuts, or we get no cuts, we’re going to probably pretty much be pretty comfortable with 6.8 — $6.8 billion-plus in that range. I think because of the size of the balance sheet we had this quarter, we were a little bit heavy with liquidity and a margin of 3.52%. I think for the most part, our margin has bottomed out this year and we’ll probably be in the mid to high 3.50s the rest of the year. But we’ll probably have a little smaller balance sheet, maybe $2 billion or $3 billion shorter than that. But we feel really good about it. If you look at how things are playing out, our deposits, the real value of our deposit franchise I think came out really strong this quarter.

I mean, our core deposits hardly budged and increasing of interest rates. We still saw some growth in our retail CDs, which kind of drove the increase. But other than that, core deposits were flat from a cost perspective. And if you look on the asset side of the equation, we’re getting nice reactivity both on our consumer loans. Our consumer loans are increasing nicely and auto, RV, and HELOC and all those are contributing positively. And then as we put money to work in the investment securities portfolio, I know it’s not as high as what it is at the FED, but as we help manage our sensitivities, we’re going to have some really nice repricing on our investment portfolio. We’re up 17 basis points. We could easily do that for the next couple of quarters plus throughout the year.

So I think we feel pretty good about NII going forward right now.

Manan Gosalia: Can you — did you mention what duration you’re putting on, on the securities book?

Daryl Bible: So the purchases we did this quarter, we basically did three chunks of securities. And the way we look at it is trying to keep our convexity flat. So we’ve been purchasing treasuries and CMBS, which basically has positive convexity, coupled with some low convex MBS together. So the yields have been — we’ve been getting in the first quarter, 4.6 — 4% — 4.6% yield. Duration at about a little over three years from that perspective. Where rates are today now, you can probably easily add another 30 basis points to 40 basis points higher yield from that. So as we continue to do the same thing we did in the first quarter and the second quarter, we’ll probably get some more uplift.

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?

Daryl Bible: With the latter. Anytime there’s any scare in the industry, we’re going to be conservative. That’s just who we are. We’re going to make sure we take care that the company has strong capital and a lot of liquidity and that’s first and foremost. I would say, we’re comfortable as we kind of let some of this excess liquidity come out of our balance sheet, have it go down to maybe $27 billion, $26 billion at the Fed ballpark over — as we kind of go throughout the year from that perspective. So it will come down, barring any other stresses that hit our industry.

Manan Gosalia: Great. Thank you.

Daryl Bible: Yes.

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

John Pancari: Good morning.

Daryl Bible: Hey, John.

John Pancari: Back to the balance sheet — Hey, Daryl. Back to the balance sheet trends. The C&I loans, you sounded relatively constructive in your commentary there and the growth you’re seeing. You cited better line utilization, maybe elaborate there a little bit. Where you see demand and what’s your outlook there on that front or where you can actually see some growth in the coming quarter?

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.

John Pancari: Okay, great. Thanks, Daryl. And then on the credit front, it’s good to see the commercial real estate nonaccruals down in the quarter. What are you seeing on the CRE front in terms of NPA inflows? Are you seeing a slowing or is that somewhat impacted by an increase in loan modifications? And then just separately on the C&I front. I know you noted some higher nonaccruals there. Just what are you seeing on that front that’s driving the added stress?

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.

John Pancari: Thanks, Daryl. If I can ask just one more on the credit front tied to that. Your criticized loans do trend above your peer levels. But is there a degree of conservativeness in there, in terms of I guess, how you treat your recourse agreement as part of CRE and elsewhere? Is there something in the way you’re doing your internal risk ratings that may include your criticized levels? We’re getting a fair amount of incomings regarding that.

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.

John Pancari: Okay, thanks, Daryl.

Daryl Bible: Yes.

Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala: Hey, good morning, Daryl.

Daryl Bible: Good morning.

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?

Daryl Bible: Yes. If you don’t mind, Ebrahim, I’m going to pivot a little bit, because we actually ran a scenario last quarter and stressed our CRE portfolio up 100 basis points of what impact that might have for us. So I mean, if you look at it from that perspective, it really depends on what level of rates are going higher. So let’s just assume right now, it’s the Fed rates, the short-term rates. If you look at our CRE portfolio, the vast majority of the CRE portfolio is fixed rate, either a fixed rate loan or they synthetically have swaps that have it fixed. So only 29% flows. If you look at going up 100 basis points, we see really very minimal impact on the portfolio, maybe at most approximately $500 million might go into criticized if they fall below the 1.2 debt service coverage ratio.

That’s what we had from that. If you look at the C&I book, C&I book, $58 billion is all floating. Now the vast majority of the C&I book has debt service coverage ratios well over 2% and very strong. But if you look at a subset of the leverage book that we have in there, that’s closer to $5 billion. We call them leveraged, but when we put them on, they were leveraged, about half of those aren’t even levered anymore because of their performance. So you’re really only looking at about half of that. It is really pure levered loans. And when you look at those levered loans coming through and stress them 100 basis points, it’s a minimal impact for us, a couple of hundred million dollars from a criticized. Now, if you go to the longer end of the curve, and in the longer end of the curve, let’s say, five or 10 year goes up 100 basis points, that really impacts more our construction book, because you need to have takeouts there.

And from that perspective, it’s going to — it’s just what’s happening now, people are going shorter. They aren’t going 10 years, they are going five years, try to get placement and all that. So all that being said, we think it’s very manageable. If rates even go up 100 basis points that we can get through and not have a significant impact on our credit performance.

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?

Daryl Bible: Yes. So there’s actually five. So let me go through them again. We — you might have missed when I was going through it.

Ebrahim Poonawala: My apologies.

Daryl Bible: That’s alright. No problem. Macroeconomic environment, baked capital generation, results from the stress test, the level of CRE, and then overall asset quality. I would say, we’re going to evaluate those at the end of second quarter from that perspective. There’s still a lot of uncertainty in the marketplace and we just want to be good stewards of our capital. The capital is not going anywhere, and this capital is for our investors. It’s going to come to the investors sooner or later. It’s just a matter of when we feel comfortable. Right now, we just don’t want to make sure that it’s — now is the right time and we can basically put it over. But it’s not going anywhere. I would feel that if we did decide, and I’m not saying we are, but if we did decide, I would say, we’d probably start off modestly and probably keep a 11% plus CET1 ratio and then kind of see how that goes.

But right now, what I can tell you is we’re going to review it in our earnings call three months from now, and we’ll let you know how we feel about share repurchase at that point in time, and then we’ll go from there. But it’s not going anywhere. The investors — it’s core to who we are. We buy back stock when we don’t deploy it in acquisitions and that’s what we’re going to do.

Ebrahim Poonawala: Got it. Thanks for taking my questions.

Operator: Thank you. Ou next question comes from Ken Usdin with Jefferies. Please go ahead.

Ken Usdin: Thanks. Good morning.

Daryl Bible: 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?

Daryl Bible: Ken, it’s really all around trying to make sure we grow our core deposits. And to be honest with you, some of our businesses, I mentioned it in the prepared remarks, but in our trust businesses, they’re growing nicely. Again, a lot of traction, and we had some nice wins in those businesses that added to our deposits in the second half of the first quarter, early part of the second quarter. So we have a lot of momentum in that business and doing really well. I can’t be more pleased though with the other areas. Our commercial bank is really focused on growing deposits as well, as well as the retail bank. So I mean, everybody is focused on doing the right thing and that’s where we are. Our bread and butter is really getting the operating account, and we’re really good at that. And once we get them, they tend not to leave us. So we’re happy with that as we move forward.

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?

Daryl Bible: Yes. So if you look at the yields on the — to give you a couple of examples. So let’s just look at auto and RV and give you examples. So if you look at it on a spread basis, our spreads are higher, and this is to our marginal cost of funds, up 24 basis points in auto and 63 basis points in RV. But when you look at the yields, that we’re getting incrementally versus what’s rolling off. We’re getting a 192 basis point higher yields in auto and 140 basis point higher yield in RV. So that’s really what’s moving the yields in the consumer loan portfolios as an example. Does that help?

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?

Daryl Bible: I would say for the other businesses, it’s competitive in the middle market. But some of our other businesses that we’re in, I think we’re getting a little bit higher spreads and yields overall if you look at some of the businesses. So I think overall, we feel pretty good about that. And then on the securities portfolio, that’s going to reprice nicely. I talked a little bit with — with Manan. But with what we have maturing on the securities portfolio and what we plan to buy and repurchase, we could easily go up 20-plus basis points in the next couple of quarters in that whole yield on that portfolio.

Ken Usdin: Great. Thanks, Daryl.

Operator: Thank you. Our next question will come from Steven Alexopoulos with JP Morgan. Please go ahead.

Steven Alexopoulos: Hey, good morning, Daryl.

Daryl Bible: Hey, good morning.

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?

Daryl Bible: Yes, yes, I can do that. I think we had about $2.3 billion mature in the first quarter. Out of that $2.3 billion, I would say, 56% of it was basically extended and out of that was extended, there was about — 9% that was in upgrade. We had, I think, another percent, maybe 23% actually paid off. And then we have the residual that we’re working through right now and that’s going to either be extended out or paid off. So very little incremental went into criticized, small portion. But for the most part, our teams are working very closely but that was the impact of the maturities we had for the first quarter, and we hope that plays out through the rest of the year.

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?

Daryl Bible: So typically, when we extend, you always try to get more equity and more recourse from the customer. So fees wanting to extend out a year, we’re going to try to right-size the debt service coverage ratio and they’ll put more equity in or give us more tangible assets to protect us as we move forward is kind of how the negotiation goes. And typically, we extend anywhere from six months to a year after willing to support it.

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.

Daryl Bible: Yes. I’m trying to give you the best color that I can give you with what I know. But I — at the end of the day, the biggest factor, and it’s been this way my whole career in asset liability management. How deposits behave, especially the non-maturity deposits really drives your interest rate sensitivity. And while it’s slowing in the commercial, we’re still going to see growth in the retail CD book just because you’re over 3%. So you’re going to have that. Now to offset that, we are paying off some of our brokered deposits, which is a good guy to counteract some of that. But this disintermediation piece is just really hard to model. And we put our best guess out there is what we think is going to do there. Obviously, we could outperform, but I’d much rather under-promise and over-deliver right now.

Steven Alexopoulos: Got it. It sounds like you’re being conservative. Okay. Thanks for taking my questions.

Daryl Bible: Thank you.

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

Matt O’Connor: Good Morning. I was hoping you could talk about the recent action by S&P to lower your ratings to — or a negative outlook. There was no rating change, but just a negative outlook. I mean, obviously, capital is strong, earning is strong, liquidity is strong. So a lot of those boxes are checked, but I do think they — one of the things they flagged was the CRE concentration. But — so maybe just address that topic overall and how you think you can alleviate some of their concerns? Thank you.

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.

Matt O’Connor: Okay. And then just separately, on the trust fees, you talked about them being a driver going forward. Maybe just like frame how much equity drives that business, what some of the other drivers are? Because obviously, like the underlying trends are a little tricky to see because year-over-year, as you mentioned, you had a sale linked-quarter, I think there is some seasonality that maybe has a drag from like annuity sales or something. But just talk about some of the underlying drivers of that business and what gives you confidence that being a key driver of fees this year.

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.

Matt O’Connor: Okay. Thank you.

Daryl Bible: Yes.

Operator: Thank you. Our next question comes from Brian Foran with Autonomous. Please go ahead.

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?

Daryl Bible: Yes. Brian, I think we need to kind of see where our stress capital buffer comes out. But I mean, at the end of the day, we’re going to be really conservative. We are in uncertain times, risky times. So we are just going to be a little bit more cautious typically. I would say, long term, our average might be lower than that. But just starting this year repurchase, I think, it would be a significant change, to be honest with you, as we move forward. So not saying that’s going to happen. But if it does happen, we’re going to be very modest as we started out.

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?

Daryl Bible: So there’s a new liquidity proposal that’s supposed to come out from the regulators probably in the next quarter or so. So we’ll see what’s in there. We’ve done some of our own modeling. The treasury team has. And when you look at what we need from an operating basis, what’s the fluctuations that we have within our businesses, our minimum is probably $15 billion, so we would operate with a cushion over that. But we are in no way going to come near that in the near future. We’re going to be much more conservative than that as we move forward.

Brian Foran: Thank you. Thank you for taking both.

Daryl Bible: Yes.

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

Peter Winter: Good morning. I was wondering — there’s been so much focus on commercial real estate. So I guess I was a little bit surprised by the increase in criticized loans on the C&I side. I’m just wondering, do you feel like we’re in — this is in an early stages of more C&I, just given that we’re in a higher for longer rate environment?

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.

Peter Winter: Okay. And then just separately, Daryl, you had said at the conference, you’re looking to lower the CRE as a percent of capital reserves to about 160%. How long do you think it will take to get there? And is that one of the — I know you listed five things about starting up the buyback, but how important is that in terms of the overall theme of starting buybacks?

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.

Peter Winter: Okay. Thanks, Daryl.

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

Frank Schiraldi: Good morning.

Daryl Bible: Good morning.

Frank Schiraldi: Wondering if you can — Daryl, just in terms of the criticized balances, the reduction in CRE overall, curious if you can just point to any specific driver there? I think this is the second quarter in a row where you’ve seen a reduction in criticized balances? Is it just occupancy is better and debt service coverage better? Is it stuff moving maybe into modification? Just any sort of like specific driver in terms of the last couple of quarters, seeing those balances move lower?

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.

Frank Schiraldi: Okay. And then just to follow-up on the expense side. I know even though you have limited expense growth baked-in for this year, you do have some investments you guys are focused on. And just wondering if given the stronger NII outlook driven by rates, if you could potentially foresee accelerating some of that investment in 2024. Thanks.

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.

Frank Schiraldi: Great. Okay. Thanks for the color.

Daryl Bible: Thanks, Frank.

Operator: Thank you. Our next question will come from Gerard Cassidy with RBC. Please go ahead.

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?

Daryl Bible: I’m going to see if I have a friend here to help me with that. I don’t have that. Yes, hold on a second, Tom.

Thomas Leddy: Okay.

Daryl Bible: So back in 2008, 2009, it was more — I’ll just let John talk about it. John is our Corporate Controller. He was here back then. I’ll let him talk about it. I don’t know that.

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.

Thomas Leddy: Okay. Thank you. That’s helpful. And then just a quick follow-up. With the increase in criticized C&I loans reported today, do you guys still feel pretty confident that you can maintain M&T’s historical track record of outperformance in terms of credit losses relative to peers?

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.

Thomas Leddy: Okay, great. That’s helpful. Thanks for taking my questions.

Daryl Bible: Yes.

Operator: Thank you. Our next question will come from Christopher Spahr with Wells Fargo. Please go-ahead.

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?

Daryl Bible: So, we basically did some Federal Home Loan Bank advances back closer to when New York Community was happening. And then we did an unsecured issuance in the month of March. That will carry through. I think for the rest of the year, our focus is really on growing customer deposits and paying down noncustomer funding. That’s really what we’re really focused on. You might see us do some more securitization. We’ve done securitizations now in our equipment leasing business as well as our auto business. That’s something that could possibly play out down the road. But we will prudently grow customer deposits as much as possible. And then we’re going to work — and try to work down our broker deposits and work down our Federal Home Loan Bank advances and put it into more other types of funding like securitizations if we need to from that perspective.

And then we have more capacity if and when there’s another stress period, we will always want to keep it open in case something happens, so we can find if we have to.

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.

Daryl Bible: No. So it’s two different businesses. So the stress is in the floor planning business for the non-auto, so RV and Marine. So that’s floor planning. That’s where the stress is. We also are all in the indirect business for RV. Just like you have indirect auto, you have indirect RV, and that’s where we’re getting the yield pickup on the consumer loan portfolio. So we have a very prime-based consumer loan credit box. If you look at the average FICO score that we have in that portfolio, it’s 790. So it’s pretty pristine in there, and we feel good about the performance of that portfolio.

Christopher Spahr: Thank you.

Operator: Thank you. At this time, I will now turn the call back to our speakers for additional or closing remarks.

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: And this does conclude the M&T Bank First Quarter 2024 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.