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

Thank you, Ashley, and good morning. I'd like to thank everyone for participating in M&T's second quarter 2024 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now, I'd like to turn the call over to Daryl.

Thank you, Brian, and good morning, everyone. As you will hear on today's call, the second quarter results continue M&T's strong momentum for 2024. Turning to Slide 4, this April, we released our fourth annual sustainability report. We are proud of our continued progress towards our sustainability goals. Our efforts are creating positive outcomes for our businesses, our customers and our communities. Of note, in 2023, our total sustainability finance loans and investments totaled $3.1 billion. Turning to Slide 5, we continue to garner awards for our businesses, products and employees, including the highest customer satisfaction for mobile banking apps among regional banks according to J.D. Power and the Securitization Trustee of the Year for Wilmington Trust from GlobalCapital. Turning to Slide 7, which shows the results for the second quarter. As noted in this morning's press release, we are pleased with the second quarter results and the performance through the first half of the year. We continue to grow loans, while also shifting the composition of our loan portfolio and reducing CRE. Customer deposits increased sequentially, while total deposit costs have leveled off. Net interest income and net interest margin both inflected off the first quarter cyclical low. Asset quality trends are performing as expected with reductions in non-accrual and criticized balances and net charge-offs in-line with our full-year outlook. Capital continues to build with the CET1 ratio increasing to over 11.4%. We continue to make progress on our capital return considerations, and our stressed capital buffer decreased 20 basis points to 3.8%, reflecting the strength of our core earnings power and ongoing risk management work. Now, let's look at the specifics for the second quarter. Diluted GAAP earnings per share were $3.73 for the second quarter, improved from $3.02 in the first quarter. Net income for the quarter…

[Operator Instructions] We'll take our first question from Manan Gosalia with Morgan Stanley. Please go ahead.

Hey, good morning, Daryl.

Good morning, Manan.

So, I wanted to ask on NII. So, you beat on NII this quarter, and then your new guide for NII implies that quarterly NII will be relatively flat from 2Q levels. And you did see a noticeable increase quarter-on-quarter this quarter in NII. So, can you just unpack the drivers in the back half? Is there some conservatism baked in there? Or is there some timing difference in being neutral to rates, but maybe perhaps being a little bit more asset sensitive with the first rate cuts? If you can just unpack those drivers there?

Yeah. Thanks, Manan. Our position from rate sensitivity is really quite neutral. It's based on assumptions, but I feel we are really neutral there. If you look on the slide deck where we had net interest income, in one of the bullets there, we highlight that we had a 5 basis point positive impact on non-accrual interest. So, let me explain that to you. So, when our loans go into non-accrual, we basically when we still receive payments, both principal and interest, all that goes to principal. And then, if the loan is basically resolved favorably and they pay us off, obviously, we pay off the principal balance and then anything left over goes into net interest income. So, what we saw in the second quarter was basically a large amount of loans that basically came out favorably out of our non-accrual portfolio. So, what we put on there and what I talked about in the prepared remarks is that if you look at our average non-accrual interest for the last five quarters, it's been running around $15 million. This quarter, we got double that. So, I would basically say our NIM this quarter was actually on track, because if you adjust the $15 million out, we were at [5.56%] (ph) NIM. And I said that we would be mid-3.50%s for the second quarter. So, we're really on path to what I said, mid-3.50%s second quarter and high-3.50%s for third and fourth quarter is really where we wanted to be and expect to be. So, I think we're just on track, Manan.

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

It's 3 is what I would say would be normal to the run rate. Yes, so -- go ahead.

And you are 5 basis points above that?

No, we were at 3. So, we were 3.52%. We said we'd be in the mid-3.50%s. I say we really came in at 3.56% if you back out the extra above non-accrual interest that we normally get. I mean, we're going to get non-accrual interest every quarter. We've been averaging a couple of basis point benefit every quarter because of that. That's going to continue for a long time.

Got it. All right. Perfect. And then maybe you can put this in the category of no good deed goes unpunished, but on the buyback resumption, your message in the deck is that capital levels should at least stay at current levels of around 11.5%. Just given that the SCB went lower, given the excess capital position, what do you need to see before you accelerate the pace of buybacks and bring that capital ratio lower?

Yeah. I think it's pretty simple. I think we are aggressively working down our asset quality, our criticized loans, non-performing assets. I think we need to continue to make progress on that. As we make progress on that, you could see us decide to increase our repurchase shares potentially. Obviously, the economy is a factor. In my prepared remarks, we said we don't think it's likely, but it's possible that maybe you go into recession. So, if that were to happen, I think we'd have to view that and just be a little bit more defensive if that made sense or not. We still want to see the impacts of Basel III. I know we are carrying in more favorable things, but until we actually see it in writing, you really don't know what's going on. But those are probably the primary things that we're working on. We continue to shrink our CRE concentration, made great progress there. I have no doubt we will continue to make great progress in the next couple of quarters as well there.

Great. Thank you.

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

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

Good morning, Matt.

...good morning, the big drop in the commercial real estate on a period-end basis. I think it's down about 9%. Obviously, great job bringing that down. And I know you touched on some of the kind of opportunities to offload that, but it's just a bigger drop than I would have thought. And I didn't know if there was any reclass into C&I as you kind of improve some of those like guarantees and things like that. So, just elaborate on all that in terms of how you're able to bring it down so much. Thank you.

Yeah. No, happy to answer that, Matt. So, we are very focused and working really hard both the first line and second line and working hard and made tremendous progress in bringing our CRE concentration numbers down. We did see a lot more liquidity in the marketplace this quarter. And we were able to see some of our clients that we had actually and criticized multifamily be able to do government placements out into the marketplace for liquidity. So, as we continue to have that liquidity, that helps us basically cure some of our criticized loan balances. The other thing that I would tell you is that we are doing a finance transformation. Finance transformation is basically putting in new general ledger system, subledgers, which we are doing really well and we're about halfway through that process now, but it's also improving and changing processes. So, as we improve and change processes, we are putting in better controls and more ways of actually how we put loans on the books. And that is causing some grading to go from what CRE would be into C&I owner occupied, because it really comes down to the source of repayment. Source of repayment is -- from an operating entity, it's basically not a CRE loan, it is a C&I owner occupied loan.

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

It is at a relatively high level. I'd probably trim maybe 5% or 10% out of that potentially on a run rate, but it's -- a lot of that other revenue that we talked about is the merchant fees and we had good quarter there and more activity. That could continue as we continue to have activity. The other is on loan demand and we're having loan syndication fees and all that, and that's going to be lumpy. We had a good quarter this past quarter in that area. We are seeing maybe a little bit of softening in some of the commercial areas, so it might be a little light. But yes, I'd say, at that same level to maybe down 5% or 10%.

Okay. Thank you so much.

Thank you. We'll take our next question from Erika Najarian with UBS. Please go ahead.

Yes, hi. Two follow-up questions, please. Daryl, the company clearly did a great job in terms of interest-bearing deposit costs coming down. I know some of that is a mix of broker being actively taking down in terms of exposure. Could you give us a sense before the rate cuts? And we appreciate the downside beta guide that you gave us, but if we don't rate cuts, how do you feel like this level of progress is sustainable? And maybe break it down in terms of what you're observing with client deposit rates versus the continued runoff in brokered CDs?

Yes. So, brokered CDs will continue to run off. We have another big chunk coming off in third and fourth quarter. So, we'll be pretty much out of brokered deposit CDs at least by the end of the year. As far as the betas go and rates, we continue to just see more rational pricing in the marketplace and we're able to maybe offer specials, but the specials that we're offering just aren't as high as what they were before. So, you're still seeing that. There is still some disintermediation. It is slowing down, but there's still continued disintermediation. The one that impacts NII the most is obviously the one that goes to DDA to interest-bearing deposit balances. We're capturing any disintermediation, but it's still seeing a little bit in the commercial area. The other thing is on the retail side, as long as rates are at this level, you're going to see a little bit of attraction of money going out of the non-maturity bucket into the CD deposits. But we feel pretty good that our deposit costs are flat and maybe down as the year progresses and into next year. I think it's just more rational pricing in the marketplace right now.

Thank you. And my second question is a follow-up to Manan. So, last quarter and during the quarter, I think you guys are telling us, oh, don't back into this 11% CET1 when thinking about buybacks, listen to what we're saying on the total amount of what we're buying back. And then, of course, you had a pretty strong progress in terms of CET1 this quarter and the floor went up even more. And I appreciate your response to Manan's question, and I know that's part of the conservatism of this company and why long-onlies value you guys so highly. I guess, I'm wondering, how should we think about the future. I get that there's still uncertainty. There's still a willing -- desire to take down CRE concentration, desire to see the economy play out, but at this level of earnings power with $200 million, you're going to continue to build capital, especially if the C&I loan growth is engulfed by CRE declines. So, I guess, as your long-term shareholders think about forget buybacks for a second, returns and what that appropriate capital floor is, how would you help them frame that, Daryl?

From a floor perspective, obviously, we are much higher than where we have to run the company long-term for M&T. We do have elevated criticized loan balances and we're really working hard. Our teams are working their butts off to basically bring those balances down. And we hope and plan that to continue through the rest of this year into next year. So that is definitely one of the key things that we're looking at. We are conservative. What I've said in prior quarters, the capital is not going anywhere, Erika. We will return it. We promise you that. We aren't going to be wasted or do anything stupid. It will come back to the shareholders at some point down there. We're just going to do it in a very conservative manner because that's just who we are.

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

Yeah, [indiscernible].

All right. Thanks, guys.

Thank you. We'll take our next question from John Pancari with Evercore ISI. Please go ahead.

Good morning, Daryl.

Good morning, John.

On the -- back to CRE, I know you mentioned the ongoing focus to reduce the concentration of CRE. Where do you see the CRE, the risk-based capital percentage going? I believe in the past you've indicated you wanted to see it into the 150% range. So, I want to get that update. And then separately, in terms of the improvement that you saw in credit this quarter, in terms of the pass-through declines, non-accruals and criticized, can you just talk about what specifically you saw that is driving that and broadly those trends can continue in that direction? Thanks.

Yeah, sure. So, we've made tremendous progress over the last three-plus years on getting our CRE concentration down, the plans that we put into place at that point and continue to execute. And you saw the benefits in our stress capital buffer because of that and that will hopefully continue when we continue to submit the stress capital CCAR test. I would say we're getting close, John. We are at 151% now. I think we're in the neighborhood of being close to where CRE will be much more normal space for us. We're at a level that we think is makes sense for the size of company we are and serving our communities and clients. So, we're probably maybe a quarter or two away, but I think that's not too far off. As far as non-accruals go, I tell you, this quarter, everything kind of worked, came together really strong. Our first-line credit team was working with our clients. We have a process in place where we're looking at all the CRE loans that are maturing and trying to see where and how we can work with our clients to either get it right-sized to get it upgraded off of criticized. We are seeing some of our criticized loans getting refinanced by others in the industry. And I talked earlier that we're seeing some of our criticized loans getting placed in the agencies with our programs with the GSEs. So, we're basically really focused on that. The teams are diligent and working hard, and we plan to have those numbers continue to drive down and be really positive.

Great. Thanks, Daryl. That helps. And then related to that, maybe could you just talk about the role that loan modifications have played here as you've addressed commercial real estate? Maybe help us with the trajectory of your financial difficulty modifications? Do they continue to rise? And maybe if you could just talk about the concerns out there that they're simply kicking the can down the road, and a year from now, we can see these pressures rear directly ahead again?

So, when you look at loan modifications, when we are working with our clients, loan modifications, we are asking for more type of recourse or capital to be put into the transactions for them to get more time to work through their -- the higher interest rates that we have. So, the modifications we are doing are actually enhancing our position. So, we're giving them more extension on time and they're giving us more capital liquidity recourse for that time. So, we're actually in a better spot. So yes, our modifications are going up. This is our history of M&T. We work with our clients. If our clients support us, we're going to support them. That's what we do and that's what we're going to continue to do.

Great. Thanks, Daryl.

Thank you. We'll take our next question from Ebrahim Poonawala with Bank of America. Please go ahead.

Hey, Daryl. Good morning.

Good morning.

Just wanted to go back to the criticized C&I and CRE. So, a lot of decision-making on capital revolves around how some of this plays out. If you don't mind, give us a sense of when you think about criticized loans, if rates go lower, I think you mentioned soft landing base case probability most likely for you. Is there a point in time if rates are lower, you get the financials maybe in March of next year, we could see a meaningful reset lower from this $12 billion going down by a couple of billion? Like, I'm just wondering, could there be a step function decline in criticized loans at some point in the first half of next year based on rates and macro clarity.

Yes. So, Ebrahim, that's a great question. We saw a short window in the fourth quarter, in December, when the 10-year dropped 4% or a little bit under that. And we had huge volume that we're able to place our clients out with the agencies. Our RCC business was able to place a lot of loans out because of that. So, I think our 10-year last time I looked was 4.18%. So, I think we're getting closer to more of a pivot point where more volume will actually happen. So, I think lower rates would definitely help us lower our criticized balances sooner and faster from that perspective. That would be even more liquidity in the marketplace than what we saw this past quarter.

That's helpful. And I guess the other question on CRE, given all the work you've done over the past year, stress testing, et cetera on the CRE book, just give us your perspective on the loss content in these loans as they maybe some of these go into non-accrual based on what you know today, what's already been reserved, and as we think about like charge-offs relative to the 40 bps that you guided for this year?

Yeah. We have a long-term history of our great strong credit performance. So, if you look at our LTVs that we have for the CRE portfolio, even office, we're still under 60% LTV there. So, if you -- a great thing to look at, if you look at our non-accruals, half of our non-accruals don't have a reserve against it. And typically you'd have a specific reserve on non-accruals. That's because we have collateral value that's stronger than what the loan value is today. So, it's really the strength of how we underwrite. And that credit performance is really what shows through in times of stress. So, yes, we have a higher level of criticized and non-accrual. We're working those down, but we think the loss content is still a lot lower.

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

Thank you. We'll take our next question from Ken Usdin with Jefferies. Please go ahead.

Thanks. Good morning. Hey, Daryl, you had a great amount of securities repricing this quarter, up 31 basis points on a bigger book. And I can imagine some of that was just a switch from cash. But I think you had talked about 15 basis points to 20 basis points going forward. So, maybe can you just give us a little back color on what drove that 31 basis points, and then how you're looking at what securities yields could look like from an incremental perspective going forward? Thanks.

Yeah. So, we are being very disciplined on how we're approaching our security purchases. We're trying to keep our durations relatively short. We really don't want to have a negatively convex portfolio. So, when we go to market and when we buy securities, we are basically balancing our securities between positively convex securities like treasuries and CMBS agency securities coupled with some negative convex securities, which could be some agency CMOs or MBS. So, we're being very balanced from there. So, we're trying to keep our duration around three years. Because of that, our yields, if you look at where rates are today, are blended to be around 5%. That negatively convexed are over 5%. Positively convexed are under 5% approximately. And we're living in three-year-type duration-type instruments, overall, is kind of what we're focused on. That said though, we're still going to have a nice benefit. If you look at what's maturing in the third and fourth quarter, the average yield of what's maturing is about 2.5%. So, we'll -- depending on where rates go, but right now where we get 250 basis points, still increase in that yield portfolio as that turns over. So, I think we feel really good. We're just being very disciplined. I'm not good at timing rates, so we kind of do dollars averaging over time. We've done that now for the last year. We're going to continue to do that going forward. And we'll just do it over time and averaging and hopefully continue to average up higher.

Okay. And then, obviously, for a long time, M&T has had a really healthy amount of cash and I think cash and earning assets together is about -- cash is like 30%-something, still low-30%s. And do you still anticipate, given that conservatism, keeping cash and securities at -- over 30% as you look forward and what would change that if anything?

Yes. So, on the prepared call, what I mentioned is that right now our investment portfolio is about $30 billion. We believe that the cash at the Fed is closer to mid-$20 billion-s, so closer to $25 billion. We're basically just trying to get out of some wholesale funding and just shrinking the balance sheet a little bit. So, our balance sheet size is coming down as well. So, we'll have a smaller balance sheet. It shouldn't really impact NII just because of the cost of the borrowings and what we earned on the Fed balance kind of canceled each other out. But we just feel mid-$25 billion is good. We do have limits in place to how well we go that be in the mid- to high-teens. So, we have well above that buffer that we're operating right now, but just want to be here again conservative. If we could go into a recession, which we don't think will happen, but if we do, this will be a really conservative balance sheet.

Okay. Thanks, Daryl.

Thank you. We'll take our next question from Gerard Cassidy with RBC. Please go ahead.

Hi, Daryl.

Hey, Gerard.

Daryl, you obviously did a good job with the DFAST and the stress capital buffer coming down. I guess a couple of questions. First is, when you look at the improvement and you touched on it what you've obviously done, do you think that improvement can be as large next year as you guys continue to reduce these risks to M&T as we look out into 2025?

Yeah. So, our plans right now, Gerard, we are really pleased that we were down 20 basis points in our peer group. We were one of three banks that had a lower SCB, so we were really excited to have that outcome. But by us really focusing on and pushing down our criticized, besides share repurchase maybe increasing, it's also going to help us in our stress capital buffer when we go through the stress test. So, we're really focused in trying to bring down our criticized levels to as much as we can working with our clients over the next couple of quarters so that when we do seek our next year, if we decide to do it, which we may or may not, probably will though, we'll continue to try to get a lower stress capital buffer.

Got it. And then, when you look at M&T's history, obviously, the organic growth has always been complemented very successfully with acquisitions. And when you look out over the landscape over the next 12 to 24 months, can you give us your views on depository acquisitions? Not to say that you're going to do anything near-term, but just how are you guys thinking about depository acquisitions? And I know there's changes and we've got a presidential election coming up, which could influence as well, but what have you guys been thinking in that strategy?

So, M&T has a long-term history of doing acquisitions, successful acquisitions, and that is one of the reasons how we grow here. But to be honest with you, we haven't really been talking about acquisitions. We're working on our four priorities that we have in the company right now. Our four priorities that we have are basically building out our markets in from the People's acquisition in New England and Long Island. We think that's really important, continue to build out. That's a great opportunity for us. And we think the M&T Bank will be really good in the markets that we serve theirs. I think they need a bank like us in those markets and we want to deliver to those clients. We're enhancing our risk areas throughout the company, making great progress in those areas. We will continue to focus on that. We're also improving resiliency. Some of the transformations that we're doing, we're putting in data centers, putting things up into the cyber or applications into the cloud. So, all that is going forward. And then lastly, we're continuing to optimize revenue and expenses. We put some money into treasury management this past year and we're now growing our treasury management revenues at double-digit pace. It's 13% right now. So, they're doing really good and continue to gain more momentum there in that treasury management. As we push more into C&I, that's a huge growth opportunity for us and that's really what we're focused on in trying to grow and serve our clients.

Great. Thank you.

Thank you. We'll take our next question from Chris Farr with Wells Fargo. Please go ahead.

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

Yeah. I mean, we're right on track from our expense guidelines. Actually, we're doing a little bit better than what was in plan. So, you might see a little bit of shift in that in the second half of the year, but we're right on track. We're going to hit our plan numbers on expenses. I have no doubt about that. FTEs, we are down a couple of hundred [million] (ph) in FTEs from the start of the year. So that's just being managed by all the leaders and their groups and all that. So, I think from an expense perspective, we really have an owner's mindset at M&T. They really take to heart how we spend money and make sure how we're spending money in the right places and getting the right outcomes from that. So, I'm really fortunate to have a really great company that really understands how to run a company both from a revenue and expense side basis. So, it's all really good.

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

No, a couple of hundred FTEs. Yeah.

I got you. All right.

Sorry.

And then -- no worries. And then, just on the outside data processing, a big delta, and how much is that related to this upgrade that you've been talking about? And will some of that run off? Or are you kind of now at a higher operating plateau on tech expense?

I would say second half of the year, you might see elevations in outside data processing and professional services. As we have now seven projects and our investment accounts are ramped up. Those probably will be areas of increase or still come into our target that we set on expenses. So, I feel really good about that. Some of the projects are just larger and takes time to ramp up. But as we get into '25, you'll see some projects start to complete. And whether we reinvest in other areas or not, we'll talk to you at that time right now. But overall, the company is making tremendous progresses on many fronts and we've got a lot of momentum going and we're going to continue to press on that.

All right. Thank you.

And there are no further questions at this time. I'll turn the call back over to Brian Klock for any closing remarks.

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

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.