BANCANALYSTS ASSOCIATION OF BOSTON'S ANNUAL BANK CONFERENCE - MT BANK CORP

Welcome back, everyone. We're going to get going. I'm Jerry Benson with Fidelity Investments, and I have the pleasure of hosting M&T Bank Corporation, a regional bank holding company headquartered in Buffalo, New York, and is the parent of M&P Bank. It is one of the largest regional banks in the northeastern U.S. and is one the largest in the U.K. It is the ninth largest in the U.S. by market cap at roughly $33 billion and has assets of $221 billion at September 30th. M&T is a conservatively managed, relationship-focused bank distinguished by its strong commercial real estate franchise, its well-regarded Wilmington Trust wealth management platform, and its reputation for consistent through the cycle financial performance uh presenting today for m t is daryl bible chief financial officer joined us many times before and happy to have him join us again uh joined the bank in june of 2023 he has over 30 years of experience in banking in corporate finance leadership. Previously he was the CFO of Truist where he established a proven track record of economic transformations in operational execution. Daryl joined Truist's predecessor BB&T in January of 2008 and that was after a 24-year career with U.S. Bank serving 10 years as a treasurer. So please join me in welcoming Daryll. all right so i thought it would make sense why don't we start with the big picture daryl you know as you look toward 2027 i mean how would you characterize the operating environment for m and t and where do you feel the bank is particularly well positioned yeah so thanks jerry for being here and m and tand myself present today so thank you for that you know i think we enter the year in 27 pretty optimistic of what we're doing we've made a significant changes in our company as we continue to operate and function you know two of our priorities that we have that really drive the company right now are ones called teaming for growth and the other is called operational excellence when you look at teaming 4 growth it's really getting all of our leaders that have all of products and services that support our community banking markets come together and really deliver full products and services to our customers you know we've been doing that for a while but we're doubling down on it and actually this year we've had some good growth in our regional platform of our customers and growing customers in that so that's been a big positive for us Eric Feldstein is now responsible for this this community bank that we operate for the most part in that he has the consumer side he has the business banking and he has a mortgage area and that together you know brings everybody together and with his leadership and others around that we really deliver our community bank on an operational excellence perspective you know we're really remaking how we do business we're really going down the path of trying to automate and get a lot more efficiency out we're going into the back offices and basically having teams go in map all the processes and then tear the processes up and try to figure out how to use automation and ai to automate that and if you see that we've had a fair amount of success with that this year and that's going to continue to grow and prosper in the 27 and beyond so those two priorities are really helping us drive and get more momentum as we move the company forward right okay thank you for that i mean maybe we can talk about the environment a little bit and the impact m&t i mean the rate environment has is changed um pretty meaningfully over the past year um how should investors think about the implications to m&ts earnings power you know particularly given the benefit from all the fixed rate repricing that you have but you have a balance sheet that's neutral to slightly a liability sensitive on the short end yeah yeah so you know from an interest rate perspective what you said was right uh short end we're um relatively neutral but slightly liability sensitive really depends on what your deposit paid is going to be is really the main driver for for that piece but feel really good uh how we're positioned the yield curve will depends a lot on the fixed at repricing, steeper curve improves NII, flatter curve, you know, hurts NII to some extent. But we have about $16 billion of fixed rate assets that reprice over the next 12 months, you know. And we'll get 75 to 100 basis point benefit on it based upon where the curve looks like today, which is a good guy. If the curve does, though, flatten down, you know we're pretty balanced in that we have two strong origination channels, both our resi mortgage origination as well as the commercial mortgage origina tion and you know when the yield curve drops you know and gets closer to 4% on the 10-year those kind of take off and really produce a lot of fee income for us so that's very positive the other counter cyclical business we have is our servicing our mortgage servicing business that we have it actually does as well when the economy is struggling. We're really a good subservicer in government servicing, FHA, the hard to service type customers. When the loans are delinquent, we get paid more fees. And when we get them out of delinquency, we get reward fees for that. So that's a counter cyclical piece. So overall, M&T actually performs really well in both good times and bad times and has much more consistency as we kind of move out and operate. And the biggest variable being just the shape, flatter, obviously worse. Yeah, but we can adjust and we can still deliver strong earnings in both scenarios. Good. So it's been a lot of discussion in the industry, returns versus NIM or NII versus NM. You've emphasized optimizing total relationship returns rather than simply maximizing your NIM. How does that influence the way you're deploying the balance sheet today, especially in a more competitive lending environment? Yeah, it's competitive. Some business is more competitive than others, but it's definitely very competitive on both sides of the balance sheet. When you look at it, we really are driven to maintain a 17% return on tangible common equity. Not every transaction, not every customer relations we have hurdles 17, But we are willing to take some under that hurdle and some over the hurdle, but we blend out close to the 17% return, which is really the objective. We want to maintain long-term, both good times and bad times. If you look at it, we believe that you don't have to maximize margin. If we have customers that really need demand in their lending services, we're willing to deploy that and grow NII positively, but maybe sacrifice a little bit on the NIM. i mean our nim is usually top quartile we feel very confident and can stay in top quartiles in our peer group and that's probably the right thing to do both to support the customers that we're having but also from a shareholder perspective delivering more net earnings for you so we can redeploy back to the shareholders as well as to our own businesses okay thank you and you know maybe we could talk a little bit about the deposit franchise. Deposits have become an increasingly important differentiator from a competitive perspective. What do you think distinguishes M&T's deposit franchise? And how confident are you that customer deposit growth can fund your loan growth? Yeah, that's a great question. So M&Ts historically always been driven by having strong growth in operating accounts and that really hasn't changed our four businesses go to market every day trying to get the operating account from our customers that's our consumer business business banking commercial and wealth and that that's really what they want to do we believe if we get the operation account we get other opportunities down the road for other products and services and help grow the relationship that also helps fund the balance an operating account tends to have a low beta is less rate sensitive and that usually helps us keep our margins higher so that's key to our how we deliver we've been investing in technology whether it's in more digital capabilities so we can have more access and success having our customers you know basically open accounts online digitally having more products and services so we can do at work banking services to help deliver that to our customers and employees that our customers have from that. So we're investing in that, and we're really focusing on it. You know, in 2027, our focus is to make sure we grow households and net operating accounts and all of those businesses that I talked about. Right. Okay, thanks. And then maybe we can touch upon just interest-bearing deposit costs increased about 10 bps this past quarter. You guys have talked, or at least in the last couple of deposit rate cycles, you've seen a deposit beta in the mid-50s. What do you see this time around, and is there anything structurally different this cycle? Yeah, so there's a mixed change, but the 10 basis point increase we had this past quarter four of it was driven by a large um uh add of uh cds that we had in late second quarter early third quarter um that cost four of the ten so we were closer to six if we didn't have that cd drive there but what we put it on was at a four percent rate which is it looks like a pretty good rate now in the marketplace so that's a positive but as you look at the the betas that you have there the last cycle with rates increasing our beta was 54 percent i think when you look at it we believe we're going to be in the 50s but it's going to tilt probably closer to 57 because the mix changes continues to be a little bit more on the more rate sensitive side of the formula which is kind of pushing the beta up a little but we feel comfortable at 57 we still have really strong net interest margins and support from that perspective but that's kind of what we're seeing and for forecasting right now. And when you say that, you know, a mostly higher beta on the mix, like is that an M&T-specific comment, or is that kind of an industry view comment? You know, since this is kind of you had rates go up, then they went down a little bit, and now they're back up, I think people are just more aware of rate increases, and they're just asking for more, you Know, rate-sensitive type funding from that perspective. So I don't think it's an M & T thing. I think it's more of an industry thing because of the frequency and how close the cycles have been to up rates. I think people are getting more adapted to asking for more. Okay. And if deposit competition becomes, like, materially more aggressive, where would you be more inclined to address it? Is it pricing? Is it wholesale funding? Is it pace of loan growth? So, yeah, I get the question asked a couple different ways, and what I would say is, you know, we want to fund our balance sheet with core funding, but there's a ceiling to that, right? You don't really want to go over the wholesale market for funding if you don't have to. I mean, we have access to a lot of wholesale funding sources. Our preference is to come from a customer, but if rates irrationally go up for whatever reason, and I'm not saying they're doing that now, But if they did, then you'd probably switch back to a little bit more wholesale or securitizations or something like that to fund. But our objective and what we've shown to date is that we can fund long growth. We've actually funded it and paid down some wholesale borrowings. So that's kind of where our mindset is. But you're only going to pay up so much for a certain deposit and not really go over what you can get in the wholesale market. Okay. That makes sense. you know kind of hone in on a topic we've heard across the industry is whether AI driven cash management tools you know ultimately they make deposits more rate sensitive than mobile how do you think about that risk and you know what does a bank need to do to protect the value of their deposit franchise yeah so this has come up a fair amount lately and what I would say from our perspective we see a very small percentage it's a it's a fraction of one percent of our activity that's coming into the company would probably be through these type of agents so it's a very smart number but you know they are trained to actually act like humans such that it's not going to all go in real fast it's going to go in at the pace of human enters information and all that right now we've only seen extracting information on what account balances they have the customers cut you know credentials of information and what are what rates were paying but really haven't seen any movement of money or asked to change products or services we know some of our peers are out there and not allowing that to happen we're closely watching it right now and if we see anything that we think is not appropriate we will try to shut that down or shut it down and you know do that but right now we aren't seeing anything that we're concerned about okay and so in this small percentage from activity that you've seen it hasn't there hasn't been much in the way of any fraudulent activity any bad act now you have to remember if you want to move money out or move your accounts around there will be a human basically put in the middle of it in that transaction so you know if that actually happens that human in the middle will you know be able to alert if something's not looking right right has there been I'm just curious if there's been any feedback at all from the regulators on this topic I mean they ask a lot of questions around that I I don't think there's any real alert of risk that we've seen in the industry, per se, because of that. But that could change. There's a lot of bad things that could go on out there and all that, so you have to be careful. But if we see anything that has risk or fraud or anything involved from that perspective, we'll shut it down as fast as we can. Okay. Maybe we can shift to the other side of the balance sheet, talk a little bit about loan growth. you know the loan growth has been solid at M&T although the mix is varied across categories as you look into 2027 where do you see the strongest opportunities to deploy capital at attractive risk adjusted returns yeah so we've had really good loan growth this year second quarter was probably our best quarter in a while third quarter was as good as well but it was pretty broad based across all of our portfolios that we have and if you look at it our CRE has now grown two quarters in a row after shrinking for several years on that and you know even with a higher rate environment we still feel confident that we're going to be able to grow CRE in 2027. When you look at that portfolio we've been funding a lot of construction loans over the last couple years those are still funding out in the marketplace and then when you look at loans that are maturing sometimes those customers want to put permanent financing on those buildings real estate that they have but rates the rate environments so high they probably won't like the rates won't like the finances of doing that so they're probably just stay you know more of a short-term bridge type facility with us on balance sheet until they get rates that more comfortable for them to do that so i think that's good i'd say from a cni perspective it's a big business for us it's broad based it really starts with our regional cni middle market business that has had really nice growth this past year both in utilizations and in actually outstandings. So that continues to perform well from that perspective. Our specialty businesses have been growing nicely for the last couple years. For the most part, you know, corporate institutional still growing nicely. Mortgage warehouse obviously is not growing right now with rates being as high as they are. Fund banking is super competitive. So, that's portfolios is probably pausing a little bit but we still feel all said together that you know with our teaming for growth initiative that we're doing Augie who's on ELT is basically responsible for all the RPs that we have in the community bank and with his initiative and you know basically bringing the whole banking services to our customers we feel confident that we'll be able to grow in that space okay so I mean as you're having these discussions with the commercial customers I mean rates are higher but it's it's like when we look at on a shorter term span it's not that material but like what how are they discussing their capex and barring plans as they look out and what at what point does rates really have an impact yeah i would say there's more questions right now and more pauses um from an origination perspective we're still growing but it is more at a modest pace. CRE was still growing. It's like fourth quarter, but I think some customers are a little bit more cautious. I mean, higher rates does put a pause out there, but the economy is still relatively strong. You still see good employment growth. People are still working. People still spending money. I think it's just more maybe not as active as what it was earlier in the year. Okay. And going back to the commercial real estate and refinancing it to the agencies, What is that critical interest rate where you see a lot leave the balance sheet versus staying on the balance sheet? So broadly speaking, at the level we're at now, we're a little bit under 5% on the 10-year. That tends not to have a lot of activity in the permanent placement. We still have some, but not as much. When the 10‑year treasury rate gets closer to 4% is when that business really starts to activate and really have a lot of people put money out into the term marketplaces. So that's kind of the toggle that you see there. But there's always one-offs that could maybe create some transactions out there, but it is relatively rate-sensitive from that perspective. And on the construction side, there's kindof a lead time, a long lead time in terms of funding up, and it sounds like you still have. It's usually your equity goes first, and then you start drawing down on the lines and all that. and with your pipeline you have pretty good visibility on we do a nice runway into 2027. yeah yeah we feel good that our cru will grow in 27. okay um i'm going to hit one more on credit and then i'm gonna open it up just credit remains very strong by historical standards in the third quarter there was um you know somewhat of an inflection after multiple years of consistent improvement I guess how should we think about the credit dynamics from here you know for us our credit has been performing really well this quarter we did have a slight increase in our non-accruals but we're coming off of a 20-year low like from 2006 so we actually feel that's going to bounce around at the bottom a little bit it was driven primarily by one credit the lender finance and it was basically an issue it was a leasing business and the residual values didn't hold on a U.S. manufacturer from that so it was kind of a one-off but that drove the the uptick that you saw in non-accrual in the criticized book we still continue to see improvement in the CRE side of that book that continues to come down nicely even this past quarter we expect that to continue but from a CNI perspective you know we had five leverage lending credits um that basically you know dipped into uh criticized in there nothing that we think long term has a lot of lost material with it but they did go in there two of those uh five were in the franchise business space uh but that said we still think our criticized book can stay where it is maybe continue to come down some as well uh from that perspective so we feel pretty good about credit and our charge offs you know year to date have been coming in lower than expected and planned and we got a couple more months left to go but feel pretty good what we're seeing from a charge off perspective and i wouldn't expect any big changes uh for 2027 from that perspective and when we think about from a credit perspective um where you may be tightening or pulling in the horns a bit it's is it franchise landing the leverage landing are there any other so the areas that we're watching with a higher rate environment obviously starts with leverage lending we have about six billion dollars of leverage lending exposure in the marketplace about a billion of it is basically owned by private equity those are the ones that tend to have more issues when rates rise from that perspective they tend to be maybe levered a little bit more than the others from that so we're watchin that very closely you You know, small businesses, it's a big business for us, small business. A lot of small businesses don't have the same resources as larger companies do. So as rates rise, we're looking at that portfolio. We have a business credit card that we look at and, you know, just monitor very closely. So that's something that we're monitoring closely. You know franchises, you want off there, trucking we're look at. I mean, anything that, you know, has any impact with, could have impact on changes in the economy from that perspective. But, you Know, so far our credit team hasn't really found anything outstanding that would cause any alert or harm that we would see. Okay. Thanks. Why don't we open it up to questions? Do we have the mic? We'll start with Mike, if you want to. Hey, Darrell, what are your views about branch density in terms of opening a lot of new branches? I don't think you've opened as many as some peers, and you haven't done that deal we were expecting you to do the last few years. So buy or build, and how much? Thank you. Yeah, no. So we definitely believe in density in our retail system. We definitely want to continue to be kind of shoot for being top three. yeah could you move so i could yeah top three market share in the markets that we serve we open just a handful of branches for the most part when we look at it our earn back isn't as attractive as what maybe others have from that perspective you know we're looking at you know can we put more business and services into the branches to make a more revenue generating and all that and we're experimenting in a couple branches we just opened up now where it's not just consumer and business banking but adding mortgage and wealth and and all those other pieces that said it might work in certain spots probably won't work in all the markets that we serve but you know we're pretty disciplined making sure we get a decent earn back on the capital we deploy you know all i can tell you is is you know we continue to be open for anybody that's wants to partner with m t from that perspective you know our our strategy really hasn't changed we want to continue to grow and get scale and density in the 13 states that we operate in and that's really what we're focused on and we'll see when that happens scott i think i guess just sort of a follow-up on that one just given especially the election results yesterday I think there's this sort of this narrative or concern that this regulatory window of being accommodative to M&A is is closing does that in particular uh sort of up your sense of urgency and then you guys are always always talking to people is your perception that you know potential partners does does this um increase their sense of emergency to to do something yeah so when we say we were talking to People when we talk to People we usually aren't talking about M&A we're talking about business to them it's very rare we have talks about any M&a to be honest with you but you know what we're seeing right now is is that we believe we can do deals in any administration if you remember the people's deal we did it under the Biden administration so for M&T to do acquisitions it doesn't have to be in this administration it could be in other administrations so we're we're open when it's and when it'S the right thing for us as well as the the other person on the other side from that so we don't have a sense of urgency maybe some others might from that perspective but we feel comfortable we can do deals in both environments and just how we do it hey Ryan Kenny with Morgan Stanley so we talked about density is really important to M&T strategy can you just give a history lesson of why density is so important for M&T? How it's an advantage to you? Why not go outside of your current footprint? And then within your footprint, are there any specific markets where you're looking to increase density? Yeah, so I'll ask you your last question first. You can look on the FDIC data. Anywhere where we operate today, we aren't in top three. That would be a market that we would consider trying to go into from that perspective you know as far as density goes you know we we want to have density and scale in the markets we serve it gives us the ability to have we know the customers so it gives I mean one of the reasons we have a really good credit history is because the customers who we lend money to and knowing the right customers in the right markets is really critical for us having everything in a tight environment you know like we're packed together in our 13 states with a density that we have we believe that actually lowers our expenses and scale so we can operate more efficiently from that perspective and it just feels us you know we're more you know focused on growing the communities and we can have more of a bigger impact because we're how scale and density with what we have we use our foundation to make investments there so that that's really what we want we don't want to be spread across the united states and you know have a lot of different areas we really want to have more scale and density and where we have over time that may grow out of the 13 states but right now we're focused on trying to get scaling in those markets and then just as a follow-up you also mentioned operating accounts as being a key differentiator and focus area for mnc So as you grow, are there any tech investments that you need to really lean into or businesses like treasury management where investments need to accelerate to continue winning operating accounts as the environment becomes more competitive? Yeah, so I've only been at M&T since June of 23, but we've given, you know, the way we do a capital allocation process, everybody starts with what they have and then we reallocate certain capital. Treasury management has gotten additional capital every year since I've been there, and we'll continue to do that. It is really important that we continue to have top-notch treasury management capabilities to serve our customers. You know, and, we probably aren't the best for, you know, international-type customers, but middle-market core customers, small businesses, we want to be best in breed in that capability, because that is core to who we are and how we operate. Thanks. There's one behind you. Hi. Brent Arantzoff, backbencher here. Thanks for my question. You were at U.S. Bank and Trust Company in their glory days, U. S. Bank until they hit the skids in duration management, and then M&T, or rather, sorry, Truist, when they did the MOE, proving that they don't work. what does that say about the future of M&T Bank? You know, M&t has a really strong strategy, really strong performance over a long period of time. I think M&Ts future is bright and will continue to be very successful. We will grow both organically is really what our strategies are. We've made a fair amount of changes in our management structure in the last couple of months to actually accelerate a lot of that growth. Peter Darcy is now responsible not just for the commercial bank, but also Wilmington Trust. Putting those businesses together to get more scale and more cross-selling in there is something really efficient. Mike Whistler and Rich McCarthy are really remaking how we do our operations and processes. we are really changing how M&T goes to work in business and becoming a lot more efficient. If you look at it, our headcount's down 1,000 FTEs. We did it quietly just by how we're making more efficiency. We're going to continue to drive that. But we believe as we continue to invest and we make M&Ts best in breed from that perspective, we will continue to survive and grow and prosper. Okay. I'll switch back to me for a couple. You've talked about AI helping M&T automate, augment, and reinvent work across the bank. And it's kind of included in one of those initiatives that you opened up with. When should investors begin to see those benefits become financially tangible? And should we think about it primarily as an efficiency opportunity, growth opportunity a scalability opportunity or all of the above yeah I think it's all the above I mean when you're remaking you know how a department actually performs and does its operations it's a major overhaul and we're basically having less people do it you know when a finished product product's done but you go through you map the processes and then you build processes more automated using AI and actually make it more automated We use managed services to help with that as well, so we're being more flexible from that perspective. So all those tools in the tool chest are there, and we're going from group to group and actually changing how we go to market and how we perform our structure from that. So I think all that is performing really well. We have savings that we have there that helps. You've seen an improvement in our efficiency ratio. I know that's a function of revenue and expense, but we also have a lot of investments that we're making you know a lot of our investments a few years ago were more focused on resiliency like putting the new financial systems up into the cloud or putting in the new data centers now we're looking to digitize our corporate trust function we're working to grow our add more scale and capability to our capital markets areas but all that is you know trying to get closer to the customer closer to serve them and each and increase that so there's a lot of investments we want to make one of the questions I get a lot is our return on tangible common equity you know the 17 threshold the board made at 17 they didn't want us to stretch for something more than that because they thought that'd be too risky but at 17 you know that's what we as a leadership team you know get our highest payout from that perspective so hey we aren't anything Anything over 17, we would probably redeploy back into the company and actually make more investments so we can assure that we can maintain that 17% longer over a long period of time and not get greedy and shoot for 20% or something like that. So that's where our mindset is. It's on the long-term view of how we want to operate this company, but consistently be a long, top-core Tyro performer. Right. So as you think about that 17%, though, to your point, if the efficacy is there, if AI does what you think it should, should we expect that in the proxy, the bar is going to be raised for the management payout and just a higher threshold? And what does that look like in your view? You know, Rene and I and others, we talk a lot about what AI is going to do to our industry and to the world and all that, and we're really focused on trying to get people to adopt it, use it, learn how to use it. And we don't want to wake up one day where other people are ahead of us in how we're using and deploying AI. It could be a game changer on how banks function and work from an expense perspective. from that. It could be something to help deliver and get more products and services out there. We don't really know all the capabilities. We know that it's a tool out there we need to be really good and learn how to use and use it to help us support and drive our customers and communities to be financially successful. Okay. Thanks. I'm going to, one more time, are there any other questions from the audience? Okay. Let's kind of, as we're winding down here, talk about capital. You know, by most measures of capital, you know, M&T is in a better relative position than the industry. Just curious how you're thinking about, I mean, you have been aggressive with the share repurchase over the past couple of years, but your capital level still is elevated and generate a lot of capital. And we have Basel III end game, knock on wood, coming in December, which will be a tailwind. I mean, so how are you thinking about it, you know, capital management from here? And maybe you can comment on, like, is there a reason why M&T with your business model, your historical performance should be, should run with a higher capital level than peers? Yeah, we start with the mindset that we want to be the bank that can support customers and communities in good times and in stress times, and we want to be there in stress time for the people that really need it, that are loyal to us from that perspective. So that by starting point says we're going to run our balance sheet, run our company maybe a little bit more conservative from that perspective, but still generate top quartile returns. So we start from that framework. work you know as far as how much we can go you know ideally in a perfect world we'd like to operate a company in good times at about a seven and a half percent tangible common equity number we think that is the right number uh to operate and that would include aoci and all that mark from that perspective so it's fully loaded but we think that is that the right number to operate i know there's others that want to go lower than that and all all that, that's fine. But we think at that level, we can produce 17% ROTC and still have capital to deploy into the businesses and support the communities and customers. That's kind of what we believe is the right balance that we have. Okay. And there has been some noise from the rating agencies about these capital levels and the proposal out there. I mean, any thoughts you can share on what you think their view is. I mean, their view is valid in that, you know, if all of a sudden your tier one or your CET one ratio goes from 10 to 11, you'll get 100 basis point benefit there. You have less capital, you if you start using it up. So from that perspective, it is credit negative from that. But, you know, are you waiting that the risk waits correctly? And they have to be concerned about how they're doing the ratings throughout the whole world, and I don't really know, you know, risk ratings and how that's done throughout the world from that perspective, but they were balanced as well, and I think, you Know, to us, you know what, we would expect that they would allow us to, you know, maybe use some of that capital to come down, but maybe keep some of it, and to be honest with you, where we are today, it's probably used 30 to 50 basis points of the benefit that we have, and then probably just run with a higher CET1 ratio is probably what I would expect from that going forward, but be targeted at the tangible seven and a half that we have there. Other people might want to try to use it all up, but we think seven and the half is the right number for us. And it's not just running the company, it's how we make loans and we look at returns. And we look M&A transactions you guys ask about, we use seven and half from that perspective. That's how мы make our decisions And, you know, tangible capital is really the real capital, and that's really how we make decisions from a financial perspective as we move forward with investments and other things that we do. Okay. Great. That's time. I mean, just quickly, there is lunch out. I think it's available now, but please join me in thanking Daryl from M&T. Thank you.