Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Don MacLeod, Director of Investor Relations.

Thank you, Laurie, and good morning. I’d like to thank everyone for participating in M&T’s second quarter 2020 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 them along with the financial tables and schedules from our website, www.mtb.com and by clicking on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I’d like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings on Forms 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements and risk factors. Now I’d like to introduce our Chief Financial Officer, Darren King.

Thanks, Don, and good morning, everyone. As we noted in this morning’s press release, M&T’s results continue to be impacted by the economic slowdown, brought on by the COVID-19 epidemic and the return to a zero interest rate policy by the Federal Reserve. Our clients, both consumer and commercial, have adjusted to the new economic reality, which is reflected on our balance sheet by a slowdown in some loan categories and notably higher levels of deposits. In light of the challenging economic environment, our focus has shifted somewhat from capital distribution to capital strength. As far as the impact on M&T goes, the low interest rate environment resulted in a decline in our net interest income. Payment related fees suffered from the reduced level of economic activity due to the pandemic related lockdowns. However, lower rates also led to a 13% improvement in mortgage banking revenue compared to the first quarter. Trust income remained solid, and operating expenses were well controlled. The net result provided a solid foundation to support expected credit costs while also improving our capital ratios. In connection with the CECL loan loss accounting standard, which reflects our assessment of the future economic conditions as of the end of the quarter, we added $254 million to our allowance for credit losses. The common equity Tier 1 ratio improved by 32 basis points to 9.51%, indicating that M&T is well positioned to meet the needs of our customers and our communities. Now let’s review the results for the quarter. Diluted GAAP earnings per common share were $1.74 for the second quarter of 2020 compared with $1.93 in the first quarter of 2020, and $3.34 in the second quarter of 2019. Net income for the quarter was $241 million compared with $269 million in the linked quarter and $473…

Thank you. [Operator Instructions] Your first question comes from the line of Gerard Cassidy of RBC.

Good morning, Darren.

Good morning, Gerard.

Question for you on the net interest margin. Obviously, you’ve cited the reasons why the margin came down so much this quarter, and the PPP loans and the excess deposits certainly were the contributing factors, as you pointed out. When you look at your asset yields, the loan yields, in particular, they came down quite steeply. Your cost of funding, not as much. As we go forward, do you sense that the asset yields in the loan portfolio, the decline will start to diminish, but you still see continued reductions in the cost of funding?

Yes. Sure. When we look through the composition of the balance sheet, I think you saw that the yield on the C&I loans, in particular, came down with the CRE loans, that tends to be where the hedging impact goes, and we’ll see those come down through time. We also did see a nice decrease in the deposit cost. A significant portion of our deposit costs now are linked to the index, and so they came down proportionately. And so when we looked forward, if you hold the cash and the PPP aside and look at what we would consider to be the core margin, we think we wouldn’t expect to see a drop like the 22 that we saw this past quarter that it would be more tied to movements in LIBOR, which given how close we are to zero, we would expect to be pretty minimal. And so we would see relatively small movements in the yield on loans and a similarly small yield in the deposit costs, with probably minimal exceptions from the managed costs where time deposits are still repricing, and there will be some of that go on through the second half of the year as well as some of the other managed deposit costs like some of the money markets and the like. So probably, all else equal, we follow LIBOR and maybe trickle down a couple of basis points in the core margin. But as we kind of pointed out, the printed margin will bounce around depending on how the cash balances move in the quarter as well as the PPP funding.

Very good. And then as the follow-up question. You obviously built up your reserves this quarter. M&T has distinguished itself as one of the best banks through a full cycle on credit. If the economic outlook does not deteriorate from the period that you just came through, in which you made your assumptions for the reserve buildup, and granted, you’ll have some reserves for any loan growth, should we anticipate provisions for loan losses coming down in third or fourth quarters, assuming this economic outlook doesn’t deteriorate from this quarter under CECL accounting?

Well, I guess, the math would say if the economic assumptions are identical, then the provision wouldn’t really change with the exception of reflecting loan growth – net loan growth and perhaps by category. So if you had a mix – a meaningful mix change, you would see an increase. But all else equal, as you point out, you probably see the provision not moving much. And that the action would be predominantly actual charge-offs.

But would the provisions still be at this level, though? I mean could you build up reserves so much, assuming life of loan losses?

Yes. The provision would only be impacted by net loan growth, if the assumptions – macroeconomic assumptions were unchanged.

Okay. Thank you.

Your next question comes from the line of Dave Rochester of Compass Point.

Good morning, guys.

Good morning.

I appreciated the detail on the deferrals in some of those loan buckets. I was just wondering what the total amount was at the end of the quarter, if you happen to have that or the current total in terms of the total amount of loans in deferral? And then if you happen to have the criticized or classified asset trends for the quarter, that would be good to hear as well?

So we’ll get you the sum of the loans in forbearance or with some kind of payment relief. When you look at the nonaccrual loans, the nonaccrual loans bumped up by $95 million for the quarter. More action was in the criticized space. And a lot of that was related to some of the forbearance activity. And so as we went through the portfolios and we looked at loans that were in forbearance, we took them down a greater to, depending on where they started. And that was really the primary driver of an increase in criticized. But most of them are just over the threshold that we would start to consider criticized. Back to the balance figure of what’s in the forbearance in aggregate for loans that we own, it’s about $17 billion, about $14 billion commercial and about $3 billion for consumer, which would include the mortgage portfolio that we own. And then if you add in what we service for others, there’s another $13-odd billion, but that’s not our credit risk. And I guess it’s important to point out that as we come to the end of the quarter, we’re getting close to the end of some of the 90-day forbearance period. And within that commercial portfolio, there’s a large amount, $4.4 billion or around there of commercial or dealer floor plan balances. And we are not seeing a lot of activity in extension requests. And so we would expect that number to start to come down as we go into the third quarter.

Okay. And then for the total amount of criticized loans you have at the end of the quarter, what were those?

We typically don’t disclose that until the 10-Q comes out.

Okay. Got you. But it sounds like those were up, I guess, I’m not sure with some of the other deterioration that you guys disclose. Okay. Got you.

Yes. It’s primarily because of those – the down rates that we talked about.

Got it. And then just switching to the NIM quickly. Just so I understand, you’re saying that the core NIM moves a little bit lower, but the reported NIM with all the impacts on cash and whatnot could actually be higher if cash does actually decline in the next quarter or two? Is that what you’re saying?

That’s right. Yes.

Okay. And I was just curious, just looking at the balance sheet. I mean you have a decent amount of borrowings there. Your cash grew more than your entire borrowing balance this quarter. Are there any opportunities where you can – little away at that balance over time? I realize you may have some built-in prepayment penalties that you have to run into. But any opportunities on that side?

Yes. I guess if you’ll look around – we probably – given where rates are, we wouldn’t be taking on any duration risk at this point with converting into mortgage-backed securities, but would prefer to stay short. We’ll have some long-term debt that will mature and roll over, and we won’t replace that in the short term. We can take advantage of those balances for funding. And then we’ll probably use some of it, as we mentioned in balances in the mortgage servicing business, where we would buy out some of the loans that are being modified and take them out of the pools. And we’ll use some of the excess cash to fund those in the short term.

And going back to the roll-off of the borrowings, what’s the schedule for that look like over the next year? Do you have any lumpy roll-offs that could really help the NIM in any of these quarters?

There’s – look, everything is swapped. So the savings is not materially large.

Okay. Got it. Great. Thanks, guys. I appreciate it.

Your next question comes from the line of John Pancari of Evercore ISI.

Good morning. On the reserve, have you – actually on your loss expectation, have you run your internal company run stress test yet for 2020 DFAS? Or have you disclosed it?

We don’t run a company stress anymore as part of the – being a category for bank.

Okay. All right. So if the – so I guess I just want to see if you could help think about the reserve level now at the 1.68%, that’s about half of the last time you did run the publicly disclosed company run stress tests in 2020. And – so how should we – could you help us kind of triangulate that reserve coverage where it stands now versus the stress loss estimate? Is it really the macro assumptions behind it and dialing in of stimulus that you can attribute to that difference?

Well, I guess there’s a number of factors, John, to think about when looking at that level of allowance. I guess, the first place that I start is we think about it more as 1.8% as opposed to 1.7%, which is I know splitting hairs, but just because of the PPP loans and the fact that there’s no credit risk there, or very little. And then when you compare the CCAR process to the CECL process, there are a couple of key differences. One is the assumptions that you mentioned. There are – the stress test is specifically designed to really put the bank under stress. And so when you look at some of the assumptions, the depth of the decline in GDP and the length of time it stays at those depths, the drop in unemployment, while we saw a bigger drop in unemployment in the short term. When you look at where that trends out over the last four to six quarters of the projection, it’s actually not as bad as what CCAR would have. And so there are some parts of the macroeconomic assumptions that are different. A key difference would be HPI. And that we’ve seen HPI hold up really strong right now, and the decrease in HPI is a lot different in our economic assessment today than what it would be under stress. Another really key difference is within CCAR, you assume that all – or we assume that all non-accrual loans charge-off. And we know that’s not our experience in the CECL allowance. Our CECL process would reflect our experience at recovering or curing those customers that are in non-accrual. And so those are some of the differences between the two. I guess the thing that we look back to is how the portfolio…

That’s very helpful. Thanks for all that color. And then separately, just wanted to see if I can get a little bit more granularity around the underlying commercial demand that you’re seeing on the loan book. It sounds like understandably, given that you expect commercial balances to remain flat to slightly down. It sounds like not a lot of underlying commercial demand. But just want to get your updated view on what you’re seeing live in terms of borrower demand, given where we stand right now in the pandemic.

Yes. We’ve definitely seen a slowdown in demand. I think PPP helps create some of that slowdown because the customers were able to take advantage of those programs. But really, what’s encouraging to us that we’ve seen is a really rapid reaction by the customers to the new operating environment. And we’ve seen them make changes to their business to manage the burn rate of expenses. And so when you look at how they’re running their business, part of this you will see reflected in the deposit balances. The pace of turnover in their operating accounts isn’t what it was pre-pandemic. And so when you factor that in, along with some of the PPP funds and their ability to manage, they’re very liquid. And that’s a great thing from a credit perspective because they can withstand a longer slowdown in economic activity. But it doesn’t necessarily lead to a lot of loan demand in the short term. And so that’s really what’s going on there. But from our perspective, when we look at how the customer base has actually responded, we’re quite pleased with what we see. And the customers, I would say, are quite sanguine about what’s going on. I think we’re in that period right now where for our part of the country, we got through the hard hit that happened in April and May. We’re starting to see a rebound, and our customers are guardedly optimistic about how things are – how they will unfold, but cautious, and all of that is what’s leading to that forecast.

Got it. Thank you.

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Good morning, Darren. To start, just to follow-up on the reserve. How much of the reserve build this quarter was tied to the change in economic forecast as opposed to portfolio specific changes? And were qualitative overlays a material factor this quarter?

So if you look at the allowance, the biggest driver of the increase in – or the provision was the economic forecast. When you look at the moves in the grades, in some cases, the grades moved by one or two, and those aren’t generally the PD, the loss assumptions under those changes, aren’t big enough swings to cause a meaningful move in what you think your loss rates would be. It’s really as you get up into the criticized and even beyond the criticized and the non-accrual, where you really start to see an uptick in those rates. I would describe it as the grating that happened this quarter kind of caught up a little bit to the macroeconomic assumptions that were in the model at the end of the first quarter. And so those are the drivers there. And when you look at the qualitative overlays, we really didn’t change the overlays from an economic perspective in terms of the impact of the stimulus. That was pretty consistent from quarter-over-quarter. I would say the place where there was a qualitative overlay was looking at some of the instances in the models where they haven’t seen these types of inputs in terms of GDP changes and unemployment and in worse economic conditions tend to overpredict losses. And so for certain portfolios where we went through bottoms-up and looked at what we thought our loss was we kind of took that into account and made an overlay. But really, not much change quarter-over-quarter and not tremendously significant.

Okay. That’s helpful. And then what are the areas that is a focal point for you guys? Is New York City commercial real estate exposure, as you know?

Yes.

Could you give us what’s the balance today? What are you seeing there? What are the deferral requests in that bucket? Any color would be helpful. Thanks.

Sure. So within New York City, I think when you look in the 10-K, including construction, the balances are right around $9 billion – actually, sorry, a little bit high, $7 billion. And when we look at the requests for forbearance, they haven’t increased since what we saw in the first quarter. And when you walk down the portfolio by category, if we look at the industrial type of space, it’s really quite small, and that’s the least impacted segment. We’re still seeing rent collection rates of 95% plus there and low levels of forbearance. With – excuse me, the multi family portfolio, which in total exposure, including construction, is about $2.5 billion. We’re still seeing rent receipts above 90%. In fact, they went up slightly in July compared to what they were in April. And we haven’t seen any increases in requests for forbearance there. The office space continues to also see some slight upticks in rent being collected slightly over 90%, which is up from what it was in April, although not totally meaningfully. Hotel is probably one of the more challenged portfolios in aggregate, at least in terms of the economic impact, although the ability of the clients to handle things has been quite strong. And so the forbearance rates there are the highest, upwards of 70% plus. But what’s interesting is when we look at the forbearance rates across the whole hotel portfolio, they aren’t materially higher in New York City than they are across all other geographies. And we have seen through our card activity that hotels are – people are going back to hotels. The – in the retail world, which is another relatively large portfolio and then where there’s probably the next highest level of forbearance activity after the hotel portfolio, is about $1.3 billion. And interesting, that’s probably where we’ve seen the biggest increase in rents being paid since April and now is up over 50% from being slightly above 30% before. And so the New York City portfolio is so far holding up well. We’re seeing some trends that are positive in terms of payments, ultimately to the landlords. And then I guess the other thing that we just – we keep an eye on is what the loan-to-values are in that portfolio versus the – any other. And the loan-to-values across all those categories, in New York City, tend to be five to 10 percentage points lower than what the LTVs might look like in a similar asset class in the rest of the footprint. And so it’s still early days. And so far too early to declare victory. But the trends and the change in the trends from early in the quarter to the end of the quarter haven’t deteriorated and arguably are slightly more positive.

All right. There was more color that I was hoping for. Thanks for taking my question.

Your next question comes from Matt O’Connor of Deutsche Bank. Matt O’Connor: The PPP loans are a pretty big part of your loan portfolio, bigger than I think a lot of your peers. And if you just think about the origination fee that you’ll get on that, it seems like a pretty decent chunk relative to earnings, capital reserves. Can you just give us an estimate on what you think the blended origination fee is on the $6.5 billion? And how much you think will be forgiven or repaid the next few quarters in aggregate?

Yes. So the blended fee on the loans is probably somewhere between 270 and 280. And the pace of forgiveness is, as we said, a little bit tough to handicap. Although as we think about it, Matt, there’s a couple of things. There – the change to the program rules extended the time that the customers had to actually use the money. And so that pushes out the time period for the forgiveness. We thought a bunch of it originally, and we in the industry that it would be starting even as early as late in the second quarter, now that could push all the way into the fourth quarter. And so we expect forgiveness in the second half of the year, probably in the range of 60% to 70%. But how much is in the third quarter versus the fourth quarter. I guess, conservatism would lead us to say, we think it’s a little bit more back-end loaded in the fourth quarter than the third. But it remains to be seen. And the other thing that’s still just kind of hanging out there is the rules for forgiveness are still in consideration and will there be any automatic forgiveness or not for the small loans. I think those things will impact the timing that the longer it takes for the rules to be clear on forgiveness. I think that’s – that will have two impacts. It will slow down when that actually happens and when those fees get accelerated. And then the second thing that will happen is I think customers are being cautious about when they use the money. And so that sits in – on the balance sheet while they want to make sure that they spend it appropriately so that they have a better chance of having their loans forgiven. And so it’s a little bit fluid in there. But what’s relatively certain is that, that amount of origination fee or processing fee will come in over the next couple of years. The timing of when that shows up is a little bit uncertain. Matt O’Connor: Got you. And then just separately, the expenses were very well-managed this quarter. The guidance for second half to be similar to first half, kind of implies 1Q expenses might have been bloated, 2Q expenses might have been unusually low, is that a reasonable way to frame it? Because the cost came in a lot lower, I think, than anyone would have expected in 2Q. And it doesn’t seem like that’s sustainable. So I just want to make sure I’m framing that right.

Yes. I think you’re in the right ballpark there. We think that it’s closer to Q2, obviously, than it was to Q1. But this is M&T. And when we see movements in revenue and headwinds, then we take action on the expense side. And that’s kind of what happened in the second quarter and many of the things that we impacted in the second quarter should continue in the back half of the year. As we mentioned, there might be a little bit of lumpiness just because of some seasonal things that happen third quarter versus fourth. But if you average them out, you’re in the ballpark, maybe slightly higher than Q2 on average for each of those last two quarters with a bit of a mix difference between third and fourth. Matt O’Connor: Got you. That’s helpful. Thank you.

Your next question comes from the line of Ken Usdin of Jefferies.

Thanks, good morning. A question on the fee side of things. Darren, just wondering if you can help us understand some of the lines are better, some of the lines were worse. And as you look out, can you just talk about – can those service charges rebound? What do you see for mortgage? And just what were the fee waivers this quarter interim? And then what did they turn into? Thanks.

Sure. So just kind of going category-by-category. If you look at the mortgage business, second quarter was a bang-up quarter for us and for most of the industry. Whether we continue at that pace in the consumer space, it’s difficult to say, but seems unlikely. But I don’t think we go all the way down to where we were in the first quarter. I would expect we’re somewhere in between. We should continue to see some gain on sales just from where rates are and from some of the portfolios that we’re servicing, where people will refi, which will be offset a little bit by slightly lower servicing fees. But net-net, I would expect us to be in the range between where we were in the first and the second. Trust income, you start to see a little bit of pressure on the – that line item just because of the fees that are associated with the money market mutual fund and the management fees. And so well we might see a little bit of pressure there. And then the service charge line is really the one that was impacted this quarter. And it’s interesting when you look at it that the payment related fees, so interchange have come back to where they were and up year-over-year. The biggest impacts are on some of the other line items, some of the ATM related fees where we’re, from some of the government programs, state related programs, we’re not allowed to charge for those. And so those will be off the table until that changes. And then one of the other big categories is NSF, and NSF is lower, mainly for two reasons, there’s less transaction activity and also higher average balances and customer accounts and then commercial account balances. So I think in a long-winded way of saying, I think we start to see service charges come back up through time, but probably takes a couple of quarters to get back to the run rate we were at in the first quarter. And then in some of the other income, again, you’ve got payment fees, that’s where the credit card-related fees are just because they’re not associated with deposit accounts. And so interchange and merchant should come back with business activity. And then that’s where some of the loan origination fees are like syndications. And again, as the – as those markets pick up, we’ll see those fees come back.

Got it. And then just a follow-up on the fee waivers. I think you talked last time that they could get to around $10 million. Do you have any different view there? And what were they this quarter? Thanks.

They were – well, they were slightly higher than that this quarter. And I would expect them to be in that range in the third quarter, and then we’ll see how the – how things unfold to the fourth. It’s just because they’re more policy related. I’m hesitant to comment on what they might go beyond the third quarter.

Oh, wait. I’m sorry, Darren, I meant the trust, the waivers with the money market fee waiver side.

Oh, okay. They were small in the second quarter. I mean really not that significant, and we’ll start to see them go up as we go forward, maybe in the neighborhood of $10 million a quarter, something like that.

Okay, got it. Thanks very much.

Your next question comes from the line of Saul Martinez of UBS. Sir, your line is open. Please state your question.

Hello. Can you hear me? Sorry about that.

We got you now.

So just kind to make sure I understood the guidance on expenses and have my numbers straight. So I think – I mean you mentioned that it would be similar to the second half versus the first half and stripping out some, I guess, some small amount of noncore items in the first quarter. By my calculation, that gets you a little under $1.7 billion or let’s just call it, $845 million, $850 million a quarter, which seems a little bit high versus what you kind of implied in your answer to Matt. So I just want to sharpen the pencil a little bit and make sure I kind of have the – a little bit tighter range in terms of the outlook going in the second half of the year.

Yes, sure. I think the difference might be the comment about first and second is, it’s the same, excluding the seasonal salary impact or similar, excluding the seasonal salary impact. And that by itself will be about $60 million that you’d exclude. And if you were including that in the first, equal second, then you’d get that higher run rate. I think if you take the run rate that we saw in the second quarter and bump it up by $10 million or $15 million and think about that on average for the second half of the year, you’re probably in a better run rate.

Okay. Got it. So basically, second half normalizing to the seasonality?

That’s right.

Is that what you’re saying? Okay. Got it. I just misunderstood that. Okay. And I guess on the NII, another bit more of a clarification question as well. I mean you gave a ton of color on the moving parts around that interest margin, I probably got lost in all of it. But I think the punch line was you do expect some uptick in net interest income in the third quarter versus the second and – first, I think I just wanted to make sure that was right. And are you – is that outlook incorporating any of the PPP deferral gains that you talked about 60% to 70% in the second half, fully realizing it’s completely uncertain and more fourth quarter tilted? But is that view that you will have some NII growth dependent on some realization of PPP forgiveness gains?

Yes. That’s – and if you go in the third quarter, we expect a slight uptick in NII and that’s because some small amount of forgiveness starts to come in, and then you’ll have a full quarter of the PPP loans outstanding and the amortization of the fee. And then really start to see more of that weighted to the fourth quarter.

Okay. But there is some stuff that view that there is some uptick is incorporating some forgiveness. And I guess, the 60% to 70%, is that – I mean what – if you could just clarify on that, do you have a view of what percentage of the loans will be forgiven? And is the 60% to 70% based on the percentage of forgiveness, in other words, of those loans that are forgiven, you think 60% to 70% will in the second half without the right interpretation of what you said?

Yes. I guess – so at the highest level, when you look at the PPP loans, you’re probably up to 75% over time. I guess, I’m kind of hedging my bets a little bit and thinking that maybe it’s more like 60% or 70%. What we know is just, again, because of the rules about when the funds are supposed to be dispersed, that it needs to happen by and large by the end of the year. And then the question on timing is when the customers go and seek forgiveness and then how quickly the SBA processes it. It’s likely to be concentrated in the next three quarters. And then there will be some – the rest of it will hang on and show up kind of over the normal course of those two year loans and the normal amortization. But that’s kind of how we’re thinking about it. And as I said, a little bit of that is in the third quarter, which helps. And then obviously, whatever doesn’t show up in the third quarter, starts to show up in the fourth and the first of 2021.

Got it. And I fully realize. It’s a very precise science. But I appreciate it. That’s all.

Your next question comes from the line of Erika Najarian of Bank of America.

I just had one follow-up question on NIM. Darren, you said earlier that the net interest margin was 25 basis points by excess cash and 3 basis points by PPP. I think investors thought it was helpful when one of your peers said this morning what the – what normalized NIM could be – could stabilize as we look at your earnings power post all the PPP noise. So if I exclude that, I would get to net interest margin in the 3.40% range. And as I think about your outlook for LIBOR decreasing, but potentially offset by deposit costs. As you think about second quarter, third quarter of 2021, is 3, 4 low or high 3, 3 is a good starting point for the margin?

Yes. I think that’s a good way to think about it that we talked about that, that we look at the core earnings power of the bank, and that 22 basis points gets you down to where we would be absent those large increases in cash balances at the Fed as well as PPP. And you probably see that move down small amounts per quarter, just as the different hedge activity rolls on and rolls off, that the way the hedges were constructed through time that the received fixed rate on the hedges will slowly come down, and that will create some headwind. The flip side is the loan activity that is happening, we’ve seen some increases in the margin on that. And so that will help offset. So I think you’re thinking about it right, you’re in the ballpark of how we would see it without those factors. Really the – one of the big questions in the printed margin. And I would just kind of hold this to the side, it’s just where the cash settles out.

Got it. Thank you.

I will now return the call to Don MacLeod for any additional or closing comments.

Again, thank you all for participating today. And as always, if any clarification of any of the items on the call, the news release is necessary, please contact our Investor Relations department at 716-842-5138.

Thank you for participating in the M&T Bank Second Quarter 2020 earnings conference call. You may now disconnect.