M&T Bank Corporation (NYSE:MTB) Q3 2023 Earnings Call Transcript

M&T Bank Corporation (NYSE:MTB) Q3 2023 Earnings Call Transcript October 18, 2023

M&T Bank Corporation beats earnings expectations. Reported EPS is $3.98, expectations were $3.94.

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.

Brian Klock: Thank you, Angela and good morning. I’d like to thank everyone for participating in M&T’s third quarter 2023 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I’d like to mention that today’s presentation may contain forward-looking information. Cautionary statements about this information are included in today’s earnings release materials and in the investor presentation as well as our SEC filings and other investor materials.

Presentation also includes non-GAAP financial measures as identified in the earnings release and in the 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. 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia: Hi. Good morning.

Daryl Bible: Good morning, Manan.

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?

Daryl Bible: Yes, happy to do that. So on the criticized increase, it’s really just more of the same that we’re seeing. It’s more increases just in our IRE portfolio, primarily on the office side for the most part. So nothing really different from trends that we’re seeing as far as non-accrual, there was one large property that was sold in New York that was a primary driver for the non-accruals. We actually had an in that helped margin probably by about $5 million in the 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?

Daryl Bible: Yes. So I definitely agree with you, Manan, in that we do have excess capital. But right now, the economy is still kind of unpredictable rates higher for long go, we will probably continue to have stress on clients over the next couple of quarters if that actually comes to fruition. They were just trying to be conservative and cautious at the same time. And it’s also for us to actually have an opportunity to continue to grow organic growth in our commercial and consumer books and our trust folks as well. So I think we’re just trying to be cautious and we know when the economy gets a little bit more comfortable, we will consider repurchases there. It is true to our long corn strategy, the capital distribution back to the shareholders. It’s not going anywhere, but we just want to continue to make sure that we’re strong and can grow and serve our customers right now.

Manan Gosalia: Great. Thank you.

Daryl Bible: Thank you.

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

Ebrahim Poonawala: Hi, good morning.

Daryl Bible: Good morning.

Ebrahim Poonawala: I guess just want to follow-up Daryl, in terms of – so your NII guidance for fourth quarter is fairly clear, but we are hearing from some of your peers around potential for the margin NII bottoming in the fourth quarter especially if the Fed is done, give us your thought process around – is there something about your balance sheet, why that might get pushed out because of just deposits have been related to the price or the dynamics on your balance sheet or your markets? Any color there would be appreciated.

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.

Ebrahim Poonawala: Noted. And I guess just moving maybe give us a mark-to-market in terms of commercial real estate, what you’re seeing around there is some concern whether if we go into next year, given what the yield curve has done, we might see some more pressure flow beyond CRE office into multifamily. So one, give us a sense of like on CRE office has the visibility improved around the level of marks that you might have to take as some of this work through this system and whether or not you’re seeing more pain beyond the office complex?

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.