Q4 2021 M&T Bank Corp Earnings Call

January 20, 2022

[music].

Good morning, and welcome to the EM is cheap Inc, fourth quarter and full year 2021 earnings conference call. Currently all phone participants have been placed in a listen only mode. Following management's prepared remarks, we will open the call for your questions. If you have a question at that time. Please press the star one.

On your telephone keypad, if you wish to remove yourself from the queue. Please press the pound key today's call is being recorded lastly, if you should need operator assistance. Please press star Zero I would now like to introduce Brian Klock, Brian Clark head of marketing and Investor Relations. Please go ahead.

Thank you Britney and good morning, I'd like to thank everyone for participating in <unk> fourth quarter 2021 earnings conference call.

By telephone and through the webcast.

Joining me on the call today are Darren King <unk>, Chief Financial Officer.

And Don Macleod, Mmc's outgoing director of Investor Relations.

Who will be retiring after our annual meeting of shareholders in April .

And he has done for the past 17 plus years, let me turn the call over to Don to read our disclaimer.

Thank you Brian if you have not read the earnings release, we issued this morning, you may access it along with the financial tables and schedules from our website www Dot MTB dot com by clicking on the Investor Relations link and then on the events <unk> presentations link.

Also before we start I'd like to mention that today's presentation may contain forward looking information.

<unk> statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for complete discussion of forward looking statements and risks.

Factors. These statements speak only as of the date made and empty undertakes no obligation to update them.

Now I'll turn the call over to Darren King.

Thank you, Brian and John and good morning, everyone.

John It's hard to believe that Thats. The end of an era 17 years at <unk> and 40 years in the industry.

Then nothing but a true professional and certainly helped make my transition into the role of a lot easier I've learned a lot from you.

And we wish you all the best in your retirement.

Before we get into the details of the recent quarter's results I'd like to pause and reflect on a few highlights of the past year.

While the impact of the pandemic is still being felt by FMT and the rest of the banking industry. The turnaround in 2021 has been remarkable.

We've seen a transition from economic contraction and the zero bound interest rate environment to this prospect of persistent inflation and higher interest rates in 2022.

Against that backdrop.

GAAP based diluted earnings per common share were $13 eight.

Compared with $9 94, and 2020 up 39%.

Net income was $1 86 billion.

Compared with $135 billion.

In the prior year.

Proved by 37%.

Those results produced returns on average assets and average common equity of one 2%.

11, 54% respectively.

Net operating income, which excludes the after tax impact from the amortization of intangible assets as well as merger related expenses was $1 9 billion.

Up 39% compared with $1 $36 billion in the prior year.

Net operating income per diluted common share was $14 11.

Compared with $10 <unk> in 2020 up 41%.

Net operating income for 2021 expressed as a rate of return on average tangible assets and average tangible common shareholders equity.

It was $1, two 8% and 16, 8% respectively.

We increased the common stock dividend for the fifth consecutive year to an annual rate of $4 80 per share per year.

Tangible book value per share grew to $89 80 at the end of 2021 up 11, 5% from the end of 2020.

And as we build capital in anticipation of the merger with People's United Financial Our CET, one ratio increased to an estimated 11, 4% at the end of 2021.

From 10% at the end of 2020.

While the season pardon me the year had its ups and downs it sure felt like another Division championship.

Now, let's turn to the results for the quarter.

Diluted GAAP earnings per common share were $3 37 for the fourth quarter of 2021, compared with $3 69 in the third quarter of 2021.

And $3 52 in the fourth quarter of 2020.

Net income for the quarter was $458 million compared.

Compared with $495 million in the linked quarter and $471 million in the year ago quarter.

On a GAAP basis <unk> fourth quarter results produced an annualized rate of return on average assets of 115%.

And an annualized return on average common equity of 10, 91%.

This compares with rates of 128, and 12, 6% respectively in the previous quarter.

Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $1 million or <unk> <unk> per common share little change from the prior quarter.

Also included in the quarter's results were merger related expenses of $21 million.

Related to <unk> proposed acquisition of peoples United Financial.

This amounted to $16 million after tax or <unk> 12 per common share.

Results for 2021 third quarter included $9 million of such charges amounting to $7 million after tax or <unk> <unk> per common share.

Consistent with our long term practice <unk> provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur.

<unk> net operating income for the fourth quarter, which excludes intangible amortization and merger related expenses was $475 million.

That compares with $504 million in the linked quarter and $473 million in last year's fourth quarter.

Diluted net operating earnings per common share were $3 50.

For the recent quarter compared with $3 76.

In 2021 third quarter and $3 54.

In the fourth quarter of 2020.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of one 2% 3%.

And $15, 98% for the recent quarter.

The comparable returns were 134%.

17, 5%, 4% in the third quarter of 2021.

In accordance with the SEC guidelines.

This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Included in the recent quarters, GAAP and net operating results with a $30 million distribution from Bayview lending group.

This amounted to $22 million after tax effect.

<unk> 17 per common share.

We received a distribution in the fourth quarter of 2020.

Prior to 2020, we had generally receive such distributions in the first quarter of each year.

Turning to the balance sheet and the income statement.

Taxable equivalent net interest income was $937 million in the fourth quarter of 2021.

<unk>, a decrease of $34 million or 3% from the linked quarter.

The primary driver of that decrease was a $30 million decline in interest income and fees from PPP loans.

That portfolio continues to decline following forgiveness of those loans by the small business administration.

The net interest margin decreased by 16 basis points to 258%.

That compares with $2 seven 4% in the linked quarter.

We estimate that the higher balance of low yielding cash on deposit at the federal reserve diluted the margin by about nine basis points in the quarter.

The lower income from PPP loans, including declines in the scheduled amortization and accelerated recognition of fees from forgiven loans contributed about five basis points of the margin pressure.

All other factors, including lower benefit from hedges accounted for an estimated two basis points of the decline.

Average, earning assets increased by $4 billion compared with the third quarter. This.

This includes a $5 3 billion increase in cash on deposit with the federal reserve.

And a $785 million increase in investment securities.

On average total loans decreased by $2 1 billion.

We're about 2% compared with the previous quarter.

Looking at the loans by category on an average basis compared with the linked quarter.

Commercial and industrial loans declined by $1 4 billion.

We're about 6%.

That reflects a $1 6 billion decline in PPP loans, primarily reflecting loan forgiveness.

Auto floorplan loans to vehicle dealers.

<unk> declined by $858 million on an average basis, but grew by $554 million on an end of period basis.

All other C&I loans grew about 1% compared with the prior quarter.

Commercial real estate loans declined $830 million or about 2% compared with the third quarter.

We've seen a higher level of Paydowns and payoffs of some of the troubled loans often being refinanced by other lenders.

Residential real estate loans declined by $89 million or less than 1% as a result of principal repayments as well as the ongoing re pooling of loans previously purchased from Ginnie Mae servicing tools.

That was largely offset by the retention of new loans originated and held for investment.

Consumer loans were up over 1%, reflecting growth in indirect auto loans and positive, but seasonally slower growth in recreation finance loans, partially offset by lower home equity lines of credit.

Average core customer deposits, which exclude Cds over $250000 grew by $3 6 billion.

Or 3% compared with the third quarter.

Primarily reflecting noninterest bearing products.

Turning to net interest income or noninterest income.

Noninterest income totaled $579 million in the fourth quarter compared with $569 million in the prior quarter.

The increase reflects the $30 million distribution from Bayview lending group that I previously mentioned.

Mortgage banking revenues for $139 million in the recent quarter compared with $160 million in the linked quarter.

As we noted on the October call, we have begun to retain a significant majority around 85%.

Residential mortgage originations to hold for investment on the balance sheet.

Which utilizes a portion of the excess liquidity we currently have.

This includes the roughly 20% normally held for investment.

As a result of increasing mortgage rates and the holiday slowdown.

<unk> mortgage loan applications during the most recent quarter amounted to $1 $7 billion compared with $2 2 billion in the third quarter.

Of those we recorded gains on sale on the $191 million that were locked for sale in the fourth quarter versus gain on sale on the $1 $1 billion that were locked in the third quarter.

Total residential mortgage banking revenues, including origination and servicing activities were $91 million in the fourth quarter compared with $110 million in the prior quarter.

The decrease reflects the lower level of loans originated for sale.

Partially offset by gains from the sale of loans previously purchased from Ginnie Mae servicing pools that based on borrower re performance recently became available.

Residential servicing revenues improved slightly.

Commercial mortgage banking revenues totaled $48 million encompassing both originations and servicing compared with $50 million in the third quarter.

Recall that in the third quarter's commercial servicing results.

They included an $11 million.

Fee for yield maintenance.

As a result of prepayments previously securitized commercial mortgage loans.

Trust income was $169 million in the recent quarter.

Proved from $157 million in the previous quarter.

Business remains solid with very strong capital markets activity continued growth in retirement plan assets and higher asset values.

Service charges on deposits were $105 million in the recent quarter unchanged from the third quarter.

Turning to expenses.

Operating expenses for the fourth quarter, which exclude the amortization of intangible assets and the merger related expenses were $904 million.

Compared with $888 million in the third quarter.

Salaries and benefits increased by $5 million from the prior quarter.

This reflects in part higher levels of branch staffing as customer traffic returns to normal and our ongoing program of adding on payroll it professionals.

Data processing and software increased by $6 million from the third quarter tied in part to higher business volumes as well as the costs from software licensing and maintenance.

Yeah.

The $6 million linked quarter increase in advertising and marketing reflects the beginning of the winter marketing campaign combined with incentives paid on new customer accounts.

The efficiency ratio, which excludes intangible amortization and merger related expenses from the numerator and securities gains or losses from the denominator was 59, 7% in the linked quarter.

Compared with 57, 7% in the third quarter.

It's cliche in sports.

At Defense Defense wins Championships and.

Banking.

Credit is the defense.

Let's take a look at credit.

While some sectors of the economy remained challenged by supply chain and labor constraints credit trends overall continued to improve even in the most severely impacted sectors.

The allowance for credit losses declined by $46 million to $1 $47 billion at the end of the fourth quarter.

It reflects a $15 million recapture of previous provisions for credit losses, combined with $31 million of net charge offs in the quarter.

At December 31, the allowance for credit losses, as a percentage of loans outstanding was $1 five 8% compared with $1 six 2% at September 30.

Annualized net charge offs as a percentage of total loans were 13 basis points for the fourth quarter down slightly from 17 basis points in the third quarter.

Yeah.

With the advantage of hindsight it would appear the criticized loans did indeed peak in the third quarter of 2021, and when we file our 10-K, we expect to report a noticeable decline in criticized loans, reflecting both payoffs and upgrades.

Non accrual loans as of December 31 declined to $2 1 billion.

<unk> of $182 million from the end of September .

Non accrual loans.

As a percentage of loans outstanding were two 2%.

Compared with two 4% at the end of the prior quarter.

Okay.

Loans 90 days past due on which we continue to accrue interest were $963 million at the end of the recent quarter.

Those loans $928 million.

We're at 96%.

Were guaranteed by government related entities.

In a difficult environment.

One might argue our credit is the top ranked defense in the league.

Yeah.

Turning to capital.

<unk> common equity tier one ratio was an estimated 11, 4% as of December 31.

Compared with 11, 1% at the end of the third quarter.

This reflects the impact of earnings in excess of dividends paid and a slightly higher risk weighted and slightly higher risk weighted assets.

As previously noted we increased the quarterly common stock dividend by 9% this quarter to $1 20 per share per quarter right.

Raising the annual dividend rate to $4 80 per share.

Yeah.

Now turning to the outlook.

Yeah.

Okay.

As we look forward into 2022.

We're pleased to see that the economy is improving.

Evidenced by the fact that GDP is growing and unemployment is falling.

However, these conditions are driving inflation, which is impacting our cost structure as well as that of our customers.

It has also changed the outlook for interest rates as the forward curve now has embedded a number of increases in both 2022 and 2023.

Our outlook considers these macro factors.

Also as we are still awaiting regulatory approval for our merger with People's United We will focus our comments on M&A standalone.

That said there are no material changes to our expectations for the financial impact and benefits of the merger.

Of course, the timing of those benefits will depend on the date, we closed the merger and complete the conversion.

Starting with the balance sheet. There are a number of moving parts that will impact where we are headed.

We don't expect the $42 billion of cash on the balance sheet at the end of 2021 to endure through 2022.

We are managing deposit balances, both brokered and customer relationships that don't make economic sense and this rate and liquidity environment.

We would expect interest checking and.

MTA accounts balance.

Balances excuse me to decline over the course of the year.

Our current plan is to continue securities purchases to increase the proportion of our liquid assets that are held in longer duration assets and have higher yields.

We expect to do this.

Replacing maturities and principal amortization and to increased investment securities by an incremental $1 billion by the end of the year.

On the commercial side PPP.

PPP loans on our balance sheet amounted to $1 2 billion at year end.

We expect that a significant majority of those loans will be largely repaid or forgiven in the first half of 2022.

We've seen a meaningful turnaround in vehicle inventory financing. We believe we're passed the low point and expect growth in 2022, although not fully back to pre pandemic levels.

The remainder of our C&I portfolio experienced growth this past quarter and we believe we have also reached the inflection point in these balances we expect this growth to continue.

The pandemic.

<unk> and our slow pace of new commercial real estate transactions over the past two years, putting pressure on balance growth.

This leads us to expect low single digit declines in CRE balances in 2022.

Our efforts to make this portfolio more capital efficient should result in a transition to more fee income less interest income less.

Use of the balance sheet and higher returns over time.

In connection with those efforts, we may seek to participate CRE loan exposures to third parties, while retaining the customer relationships and loan servicing.

These factors are.

Are reflected in our outlook for interest and fee income.

As noted earlier, we are retaining a large majority of the mortgage loans we originate.

Which we expect will grow balances by approximately $2 5 billion in.

In 2022, depending on the level of refinance activity.

Offsetting that growth are $2 8 billion of mortgage loans purchased from Ginnie Mae servicing pools on our balance sheet at the end of 2021.

More than half of which we believe will qualify for retooling over the course of 2022.

On average.

We expect the residential real estate.

Residential real estate loan portfolio will contract during 2022.

We expect more of the same in the consumer portfolios with growth in indirect vehicle financing being partially offset by continued pressures on home equity back.

Okay.

Taking all of this into account the balanced headwinds from PPP and Ginnie Mae buyouts will lead to average balance declines in 2022.

However, excluding those impacts we expect aggregate loan growth to be in the low to mid single digits.

We expect net interest income to be down in the low to mid single digits on a year over year basis.

Growth in securities retention of mortgage loan originations and a return to growth in C&I loans will help but not fully offset.

The lower benefits from the PPP loans, and our interest rate hedging program.

We continue to expect net interest income to trough in the first quarter of the year and grow from there.

That should result in a net interest margin.

Little changed from full year 2021 in the area of 275%.

Our forecast incorporates three increases in short term interest rates, although the third increase occurs late enough in the year to not have a meaningful impact on either net interest income or margin.

Turning to fees.

As we noted residential mortgage gain on sale revenues will be diminished in 2022 by our programs to retain for investment a large portion of originations, although retooling of Ginnie Mae buyouts should be a partial offset.

Commercial originations and servicing as well as residential mortgage servicing should still be solid.

We see continued momentum in trust income based on the capital markets activity continued growth in retirement plan assets and possibly higher asset values.

We would need to see short term interest rates rise by 50% to 75 basis points before we can fully recover the money fund fees. We are currently waiting.

Those amount to an annual run rate of approximately $50 million.

We expect service charges on deposit accounts to be down.

With modest growth in commercial offset by declines in consumer largely related to changes in our overdraft practices.

All in we're looking for low single digit growth in noninterest revenues in 2022.

Turning to expenses.

Non interest operating expenses in 2021 group at an uncharacteristically high rate rising five 6% over prior years.

Lower profitability in growth led to decreased compensation costs in 2020.

The recovery in profitability in 2021 carried with it a return to more normal compensation costs, which accounted for over half of the increase.

Our current estimate contemplates low to mid single digit operating expense growth in 2022.

And like 2021 salaries and.

<unk> data processing and software and advertising are the categories that will drive the majority of the increase.

We would expect to see our typical seasonal surge and compensation expense during the year's first quarter.

That amount last year was approximately $69 million.

And we're encouraged by the improvement in credit conditions over the past several quarters overall.

Overall, we expect net charge offs to be consistent with the average of the past two years, although it could be somewhat lumpy from quarter to quarter.

We expect loss provisioning to normalize as loan growth offset potential declines in troubled credits.

Lastly, turning to capital.

We paused our buyback program, while we wait to close the merger with People's United.

Since that pause our CET one ratio has increased by 140 basis points to 11, 4%.

Leaving us positioned well in excess of what we believe we need to run the combined company.

Our focus as always will be on deploying excess the excess capital we have beyond that needed to support growth in the business.

Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth changes in interest rates political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.

Now, let's open up the call to questions before which Britney will briefly review the instructions.

At this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by a Christian pound key.

Once again that is star in line, if you would like to ask a question.

And we will take our first question from John <unk> with Evercore. Your line is now open.

Good morning.

Hi, Doug.

Dan I wish you all the best in retirement.

And Doug Division Championship comment you made in your prepared remarks, all the best of luck to your bills.

Bill.

Although im Andy Reid fan so.

Good luck to you this weekend and then we appreciate the comments.

One of the Navy everything, but that's not the.

Keith.

On the on the deposit topic I know.

You mentioned that the checking balances and.

And money market are likely to decline what is your overall deposit growth assumption as you look at 2020.

And then related to that what are your deposit beta assumptions baked in.

And maybe if you could talk about the sensitivity to a 25 basis point rate hike.

Yeah.

So I guess I'll start with the with the latter.

When we look at where we are with rates and.

And the first set of increases our expectation is that the reactivity early on is really low and then for the first.

Probably 100 basis points of increase.

The net interest margin would increase.

Nine to 12 basis points.

For each 25 of the first 100.

And then we'll go from there.

When we look at it the balanced growth that we expect over the course of the year.

We're really anticipating that.

Much of the cash that we have on hand, we will start to deploy.

Or move out there's some.

Escrow balances that are tied to the.

The index that we expect.

Will will run off in the first part of the year and when you look at the brokered money market.

<unk> balances.

Those have a term on them and we expect those to decrease.

When you look at kind of the core balances on the balance sheet, we're really expecting fairly modest decreases over the course of the year.

There is the usual uptick in <unk>.

Commercial balances that you see at the end of the year. That's part of what we saw in the fourth quarter, where our middle market and business customers hold onto.

Our buildup their balances for distributions that usually happen in January and February we also saw an uptick.

Again in the fourth quarter and trust demand balances, which really reflect activity in the M&A markets in the agency business and so those should start to come down a little bit.

But at the moment were really not.

Anticipating.

Meaning full rundown in.

In our core operating account balances for for 2022.

Okay, Great. That's helpful. Thank you and then separately on the peoples.

I know you mentioned that the.

Yes.

Our forecast related to the <unk> remain unchanged.

Any comment on the terms of the expected timing around the closure of the deal we have seen the bottleneck.

Deals will begin to clear here and so.

Good.

Yes.

We're we're kind of in the same boat we were in the fourth quarter, John where we were pleased to see that as you've noted the bottleneck clear and that things are happening.

And we're hopeful that.

We will receive positive news here in the first quarter.

Yeah.

And we will take our next question from Ken <unk> with Jefferies. Your line is now open.

Hey, Thanks, good morning, guys.

I wanted to just follow up on your comments about the excess liquidity position and the securities I think there's a perception that.

You might have gotten more aggressive I heard you just say that you're only expecting to build the book by about $1 billion over runoff.

I guess can you just give us updated thoughts on.

How youre looking at the mix of earning assets presuming that those deposits do shrink and.

What kind of an in and out as you mentioned in your loan growth guide how are you.

Your interest expense.

The overall composition of the book So look for Mike.

Starting assets perspective, thanks, Darren sure.

Sure.

There is a lot to unpack.

Question Ken.

As so just starting with the cash in the securities.

If you think about uses of the cash.

There is two that we've been looking at one is retaining our mortgage production.

And that's the way to get some some duration and some yield and so we're taking that on the balance sheet instead of in the securities portfolio and MBS and when you look in the securities portfolio.

Over the last quarter, we've kind of shifted a little bit to shorter duration treasuries kind of two to three years the curve reshaped.

And so we'll continue to build that portfolio, but we're we're being patient because we see where rates are headed and so we're trying to trade off the incremental spread that you can get by putting more securities on the books with the downside of the mark to market risk that goes through your <unk>.

And affects your tangible book value and so that's what's on our mind as we look through through those balances. The other thing to keep in mind as we talk about the brokered money markets and Cds coming off that will be a use of some of that cash and we also expect to see some use with people's when when the two.

Thanks come together and so.

The cash we were watching it closely we don't love, having such excess balances that donor much.

But at the same token we want to make sure we're careful with how we how we start to deploy it.

When you look at the balance sheet in the earning assets in total.

So given that decrease in cash that would be the largest driver of the decrease in earning assets.

In our forecast of 22 over 21.

But it doesn't have as meaningful an impact on NII, obviously, because they're very low margin.

When I look underneath and you know what I get excited about looking into into 2022 is that across all of our portfolios holding the specials, which I'll get to in a second aside whether it's C&I, whether it's residential mortgage or whether it's consumer.

We're expecting growth in those portfolios.

And we do expect a decrease slight decrease in the CRE portfolio over the course of the year.

For the reasons that we've talked about is we built.

<unk> shape, our go to market strategy. There. So that we can actually provide better service to our clients.

As well as just the normal course of construction loans.

Paying down in reaching their end.

And so when you when you take that which is the core of the bank, it's actually low to mid single digit growth in those portfolios.

What I would refer to I referred to as the specials.

One is the PPP loans.

So when you look at those on an average basis.

In 2021, they averaged about $4 billion.

And that average in 2022 is down to about half a billion dollars.

And so thats got a meaningful impact on on the printed loan growth and then the same thing with the Ginnie Mae buyouts.

We're on an average basis in 2021.

They were around $3 $5 billion, and we think as those re pool.

And we put them back into the into this into the servicing portfolio and do the gain on sale that those dropped to about $1 six and so when you. When you look at on average so when you look at the what I would refer to as the specials you kind of see a decrease.

In those balances, but that's that's the things that have happened over the course of over 2021, and 2020 and so as we exit 2022, we start to have a more contemporary balance sheet.

That starts to skew a little bit more towards C&I.

And.

And a little less cash on the balance sheet, which overall should should start to see the margin increase and allow us to benefit from the.

The rising rate environment.

Got it that was a complicated question and great answer so I'll leave it at that thank you. Thanks.

Thanks, Ken.

And we will take our next question from Gerard Cassidy with RBC. Your line is now open.

Hi, Darrin.

Mark Gerard.

And we view our strong defense does win the big gains, but when you're behind you have to have a hurry up offense, so with that in mind and your capital levels being so high how aggressive can you be after the peoples deal and buying back your stock are using that excess capital to bring that.

CET, one ratio down to a more normal level.

Well Gerard that's a good question, we could we could debate with our capital is offense or defense.

But but certainly to your point holding up 11, 4% CET, one, which I think will post quite high relative to the peers. When we when we're finished with the year.

As a higher level of capital.

Obviously, we believe we need to run the combined organization.

Given the credit emphasis of both of those organizations. When you look at People's history of strong underwriting and you look at how our results have held up over the course of the last couple of years and the improvements we're seeing in the portfolio.

We definitely see an opportunity to bring that down.

And we will look to bring those ratios down.

Over the course of 2022.

What are the actual target and how fast we will get down there will be we will kind of be dependent on when we close and convert the merger.

But as you think about targets of where we'd like to be and think about where we were kind.

Kind of pre pandemic.

A good place to think about where we might end up over the course of the next six quarters or something like that once you get get through the deal.

Very good and then as a follow up you touched on.

Credit quality, obviously your net charge offs.

Remarkably low similar to some others in the industry, but that's a hallmark for you folks.

Can you share with us what you said about being taken out on some of the.

Classified loans by competitors, what are the flows in and out of the non performers.

Especially with the hotel loans in the hospitality and leisure industry.

Yes happy to.

Well, what you will see the full principal.

When we put 10-K out.

But if you look at where are the decrease was over the quarter.

Predominantly in the hotel and retail space.

And when you look at the hotel portfolio. What we're seeing is we're seeing a couple of things we're seeing upgrades because when we look at our.

The activity Thats happening in the hotel space when you get to resort oriented hotels are ones that are more suburban and drive up we've seen occupancy rates come back in and being very strong.

There is still some some challenges in the larger city hotels as business travel isn't quite back to where it was but thereafter pandemic lows.

And then some of the when we look at some of the properties that have been refinanced by others.

No matter what class. It is what we're finding is there are other institutions that are that are coming in and offering terms that might be interest only for one or two years and not fully amortizing.

Which for many of these these properties as a very attractive alternative.

What's kind of interesting about it is if we were to restructure those loans to a similar thing similar.

Setup, it would be a troubled debt restructure for us but for someone else, that's a new loan and so.

Yes.

It's one of those things, where I guess I'd, rather have a payoff and a charge off.

And so that's part of what's helping.

Bring down both the criticized in the non accruals.

Great and done good luck in retirement, and if you're ever in Boston in November for the Fab Conference Youre always welcome Doug.

Thank you.

And we will take our next question from Christopher <unk> with Wells Fargo. Your line is now open.

Thank you. Good afternoon. So my question is just now that you're kind of getting under the Hood with People's I mean, you took a merger charges quarter.

Is there anything thats going to surprise you on the upside and also unrelated note people said the larger share of securities as a percentage of earning.

Earning assets much larger than what you have on your balance sheet is that kind of why you look a little bit more cautious on adding more securities on your own portfolio.

Excellent question and observation, Chris that's definitely one of the things that is on our mind as we think about the securities portfolio.

Not just the size of it but the composite composition of it if you look within the People's portfolio.

There is a large municipal bond portfolio there.

It gives you a little bit different.

On duration and composition and so as we think about the cash that we have and how we want to build up our <unk>.

Our securities portfolio were taking that into account as.

As I mentioned before we're also taking into account some of the other funding sources that peoples has on their balance sheet that we would be able to reduce that funding and lower our overall cost of funding with the cash balances that we have.

Obviously, we're all in the same banking industry. So there is still also seeing some cash balances grow as well and they're looking to deploy them but.

That's absolutely part of our thought process and patients on putting that cash to work and.

And I guess as we've gone through the through.

Through the merger preparation process.

We just continue to be.

Excited by by the combination of the two organizations.

The cultures between the two couldnt be more similar to <unk>.

Focus on clients and the focus on geographies.

The opportunity to have complementary product sets.

Is encouraging and we're just.

Between both organizations anxious to to be able to go to market as one unified team because everyone can see see the potential.

Is there anything really new from what we saw going in the answer is probably no.

We continue to be excited about the opportunity to grow the small business.

Segment within the People's portfolio and bring some of our.

Treasury management into the C&I space.

We're both pretty pretty solid at commercial real estate.

When when you look at what we what we have from People's Theres some unique.

Segments that they serve that we can bring to our client base, they're leasing equipment finance small ticket leasing.

Some of the fund lending.

As well as some of the niche businesses they have like the mortgage warehouse lending and so we think the combination we're still excited about it they're very complementary.

We loved the funding the deposit franchise that they have and so.

No no real big upsides in terms of new things, but certainly continued enthusiasm for what we saw back almost a year ago.

And if I could just one quick follow up how quickly can you close the deal safety merger is approved tomorrow, how quickly can you close it and start the integration process. Thank you.

Sure so.

Bye Bye Bye Bye law Theres, a 15 day cool off period once the approval is granted.

So technically 15 days is your fastest.

Usually you are within.

That time period, plus or minus a week depending on.

Turning to manage things like month, Enzo quarter ends in the Lake.

But that's kind of generally the timeframe.

And then once that's done then.

And then you try to lock down a time to do your system conversion.

And so the complicating factor there is when you merging with an organization that has a number of outside contracts.

And outsourcing where some other technologies provided by third party you got to coordinate with a third party to make that happen and so we think it's probably.

In the order of 120 to 150 days post.

Legal close that you can do the system conversion and then you're probably trying to time it around along weekend to the extent that you can just because it helps de risk that.

That system integration.

But obviously, our our mutual desire is for.

A quick close and as quickly as possible our conversion so that we can get onto the things that I mentioned before.

Talking to customers and driving business.

And we will take our next question from Dave Rochester.

With Compass point your line is now open.

Hey, good morning, guys.

Good morning, a quick one on the on the loan side. It sounded like the floor plan segment was was really strong. This quarter can you just give an update on the dynamics, you're seeing in that market and what your outlook is there.

It sounds like maybe you have some more momentum there. So just curious what youre hearing from customers how much do you expect that to contribute to loan growth this year.

Sure Yes.

On an end of period basis.

<unk> the floor plan loans up just over $500 million.

Which typically you would see an uptick in the fourth quarter.

There is a pattern to that business that you would see balances billed in the fourth quarter and a little bit into the first and then as those inventories get sold and.

And ultimately the dealers clear out there lots of one model year to prepare for the next you see a decrease in the third quarter and so.

That pattern has shifted a little bit for the glass.

18 months I would say and it's mainly been a decrease so we were pleased to see see some balances come back and it's really about the level of production and so if you looked from a dealer's perspective, they loved the current situation where the.

Inventory is low.

Full time online as low that's very helpful for their profitability, but youre seeing the manufacturers ramp up and Thats what was reflected in our in our auto Floorplan growth, we expect that that ramp up to continue.

The Saar last year in 2021 was was the lowest it's been in a while you know a $14 $15 million or $40 50 million vehicle level I think we got as high as $17 17, and a half pre pandemic and so we'll see that start to come back what are the things that youre seeing in the dealers is the shift to electric.

And so I think theres, some changeover that youre seeing thats comparable.

<unk> that volume in the short term and so our expectation for floor plan over the course of the year is that we will see bal.

Balances and utilization rates tick up.

Not all the way back to what they were pre pandemic, but maybe two thirds of the way back in 2022.

And then the rest of the way back in.

Excuse me about halfway back in 'twenty two.

75% of the way back in 'twenty, three and then by the time you get to start at 24, you're probably back to to where you were pre pandemic and it's just.

Going through that change.

Within the within the manufacturing world that will drive.

The pace of inventory buildup at the dealers, but.

The long story short.

It's a positive thing to see those volumes going as good for good for clients and good for the economy.

Yes sounds good.

You've definitely hit the inflection point there on that.

Great.

Maybe just a real quick.

A quick one on deal timing I know you are really limited as to what you can say and I. Appreciate the color you've given so far I was just curious if.

They are still kind of getting a request for information or.

Info exchange or whatever with the regulators or if that process is completed and you are just.

Waiting on an answer at this point.

Yes.

What I would describe is by and large the normal process with back and forth with questions.

And whats, what's abnormal obviously as the time and some of the things that are happening around Washington.

Kington, then and we're just.

Got our fingers crossed and we're waiting some of it.

Figures crossed at Sam Moore.

More dire than it is it's I think it's just being patient that Washington gets through the through the backlog.

And the optimism is.

It's happening right. We saw some deals get get approved and we expect to continue.

Yep sounds good one last one on the securities purchases I. Appreciate all the color. You gave there was just wondering if theres any kind of sensitivity around.

As it relates to the steepness of the curve. So if we were to see.

More materials Steepening that you guys are looking for if maybe that could make you more comfortable with picking up some more volume there and sorry, if I missed it but can you talk about what your expectation is at this point for the long into the curve that you've got baked into your <unk>.

NII and margin estimates that'd be great.

Sure.

We've got.

Obviously, a lot of a lot of liquidity to put to work and when when we think about the securities portfolio.

The steepness helps what we probably pay a little bit more attention to is not just the steepness, but where the where the short end is.

When we look at some of the cash we've been deploying we've been deploying it in mortgages as I mentioned through through the balance sheet as opposed to through the securities portfolio and so instead of having MBS were actually putting mortgages on our balance sheet and getting some duration and yield that way and soon in the securities portfolio, we've tended to skew a little bit recently towards the short.

End of the curve.

So kind of in the two to three year space.

And so that's that.

It's really where we've been watching and looking and.

One of the things that will pay attention to from a shape of the curve perspective is where the forward rates are and if we start to see.

The forward rates move.

One of the other ways that we will start to train.

Take some of that asset sensitivity off the table and maybe it will be through the hedging program and restarting the hedging program depending on what.

What we see there so there's a lot of different avenues that we're thinking about both.

Both to protect and grow net interest income as well as two two.

To put the cash to work and just thinking through all the alternatives not just empty, but but the combined entity with peoples.

And managing the asset sensitivity across the balance sheet, the securities portfolio, and hedging and making sure that we.

Getting maximizing yield without over hedging at the same time.

Alright, great appreciate the color and Don Congrats on a great career at MMC, great working with you.

Thanks.

And we will take our next question from Ebrahim <unk> with Bank of America. Your line is now open.

Good morning.

Good morning, I, just wanted to just wanted to circle back.

Loan growth I think you mentioned CRE balances low single digits.

Joe.

If you don't mind, you talked to us in terms of.

Look beyond 'twenty tool.

Is it is it possible that this portfolio of means of tag.

As you move towards the fee different strategy and give us an update in terms of the season.

C side, how quickly will that start.

It's in the ground running.

<unk> revenue impact from that.

Yes, I think.

As it relates to the CRE portfolio.

The way to think about it is the decrease in balances will be.

Consistent but slow.

And what what will what we're looking to do is more on a prospective basis as we work with our existing clients as well as new ones.

And we're helping them finance there.

They're at their properties.

That will look to use a mix of both our balance sheet as well as the balance sheet of others and so what will happen is the rate of growth.

New originations will slow and that will be what drives the decline because there's normal amortization and there's there's normal payoffs that happened.

But obviously as we as we make that shift then we will start to grow the fees.

And the fee income will come they will probably lag by slightly the net interest income.

The flip side of that is that it reduces the capital required to support that and so that allows us to.

To both improve the economics of the individual deals, but then to manage.

Manage our balance sheet and manage our our equity levels.

And either deploy it into other high yielding.

Customer segments, and asset types or to or to deploy it back to shareholders and so when we think about it.

From an EPS perspective, and a return perspective.

While on a.

The balances may decline it is in our opinion additive to returns and additive to EPS.

And did.

I need you to EPS can you or is it a yield out by.

By the time, we get it there.

It will be a year before that that stuff starts to happen to know that it will grow as we go through 'twenty three and 'twenty four.

And just a second question on.

On loan growth.

Chin of mortgages.

The level that you're targeting in terms of how big.

That book and kitchen.

Overall portfolio give us talk about a slowdown.

When you mean.

Again.

Versus selling some of that production.

Yes, I guess as we look forward.

I think.

It's safe to say that for 2022, we'll be retaining most of those most of those mortgages and perhaps into 'twenty three we'll look at where gain on sale margins are.

And what.

Constraints, if any the mortgages are putting on the balance sheet, and we'll think about whether or not we want to hold MBS in the future instead of having the mortgages on the balance sheet.

As rates move up.

And then you start to reduce some of that convexity risk that sits in the MBS portfolio and when we might think about shifting some of the balances there as well.

If you went back and looked at our balance sheet through time.

You would see that the mortgage balances peaked when we acquired Hudson City.

And we came down from there so that would probably be the upper bound I don't think we'd get we get to that level, but overall our objective is to maintain.

A diversified balance sheet across geographies and customer segments and asset classes and so the mortgage portfolio and got a little bit smaller.

Through the course of.

The last few years, and we will look to build it back up where the where.

The ending point is.

Again, we will.

We'll come back with a little bit more detail there the reason I'm not giving a specific target is.

Hudson City has has mortgages on their balance sheet as well and when we put the two organizations together.

Im sorry people.

But in my mind, that's alright.

Having PTSD.

When.

When we combined with peoples. There also have mortgages on their balance sheet. So again like we talked about with the securities portfolio.

We're thinking about not just what we looked like by ourselves, but with the combined organization and balance sheet might look like.

So we're taking that into account as well.

Alright, Thanks, and Don Congratulations and good luck.

Thanks.

And we will take our next question from Erika <unk> Chen with UBS. Your line is now open.

Good afternoon, just wanted to ask a few follow up questions.

Darren.

The 12 basis point of NIM sensitivity to each 25, I just wanted to make sure I heard it right that includes.

The ramp in terms of deposit repricing that you experienced in the first 100 and is that nine to 12 basis points on a static balance sheet or a dynamic balance sheet.

Okay.

Good questions.

It is on a dynamic balance sheet.

It's nine to 12 per 25.

For the first hundred.

Alright, sorry, yes, yes, and then so what's the deposit beta underneath the nine to 12 425.

Well it depends and Thats why we got the range.

There is some part of the of the deposits that are pegged to the index and so if it's just those that move then youre down enough kind of a 5% to 10% range of deposit reactivity.

If it happens to get all the way up to 25% to 30%.

Then you would get to the lower end of that range, but.

We believe much like like others that with all the excess deposits in the system and excess liquidity that the reactivity.

At least for the first few.

With the exception of those that are tied to an index will be pretty low.

Got it.

Darrin the stock did.

Did turn on when you gave your guidance for.

Expenses being up low to mid single digits on a standalone basis, and if we wanted to take the football analogy for either.

I know in the 3% to 5% I guess, how much is offense versus defense right in terms of how how much are you.

Pulling forward some investment spend versus the cost inflationary catch up.

You said five 2% with not a normal rate of growth.

For expenses for adding team.

Five of the new norm.

Our modem.

Mid single digit the new normal.

Well lets I guess start with its hard to say what the new normal is given the inflationary environment. We're in.

If we step back and we will give context, if you look at our expense growth.

Compound annual growth rate over the last two years, it's actually under 2% I think it's about one six or one 7% and so what happened was when we when we took the actions we did in 2020 to adjust some of our expenses given the environment we're operating in.

Most notably compensation.

We actually had a decrease in 2020 compared to most others, who had an increase and so it came back in 2022 or 2021, excuse me and so when you look over the course of.

The average over those two years, we're talking 2% expense growth, which in the inflation environment is pretty good and pretty consistent with <unk> long term average and so when we think about 2022 and the three to five.

There's a couple of things going on there one is just when when you look at the changes that happened over the course of 2021 and where we ended the year.

Annualized the run rate.

The fourth quarter bakes in some of growth.

Just by itself.

And then on top of that as we mentioned we start to come back to a more normal environment, and we see advertising and promotion expenses come back closer to what they were pre pandemic, although not all the way back and then as we talk about investments.

The software and outside data processing and outside data processing is largely tied to volume and so as we see fee income growth, we're going to see expense growth.

And a lot of the software licensing and maintenance is as we continue to make our investments in the franchise.

And we shift more to buy.

Buying software rather than developing it ourselves.

And using the cloud that you see some of those expenses.

Move up and obviously as we make those investments they will have countervailing impacts on other parts of the organization, notably.

Notably in professional services of salary and benefits costs.

But there'll be a timing mismatch and so.

Those should help us moderate expense growth in the forward years, but some of it is just the timing of when these changes occurred in 2021 and in their full year impact in 2022.

And we will take our next question from Matt O'connor with Deutsche Bank. Your line is now open.

Hi, I wanted to come back to the balance sheet.

I know you're quite firm a lobbyist pieces, but.

I'm sitting here and I'm hearing deposits down the only back I'll cover where they're talking about deposits down loans down.

Curious if not really growing after a meal shrank a 75%.

And I get it right like you are the best bank at PPP relative to the size of it could be a drag you've probably got the most anybody buyouts, which is very profitable relatively low fives, but it just doesn't feel right at kind of where we are in the economy.

Yes, I'll come back and wonder like are you missing some things on the loan origination side right like a lot of your peers have gotten to the top of the market with some large corporate opportunities on the lending side, they've acquired point of sale.

I'm not sure how economically I talk of all these things are but they are doing things to improve their alpha generation.

And I know you've been very conservative in the past you've talked about playing defense and you kind of do it extremely well kind of in a credit cycle.

But I'm just wondering is there something more of that's needed on the asset generation side, if we get the multiyear recovery.

People think worked out.

Yes.

I appreciate the clarification.

We will go back through some of the some of the categories.

When we look at the C&I portfolio and our expected growth rate there, which would include what we talked about in the.

Floorplan business as well as other C&I, we're actually expecting growth in 2022.

On an average and.

And end of period basis.

It's low double digits.

When we look at residential mortgage growth as we retain the balances.

On an average basis, we think thats mid single digit growth.

And the consumer business is up.

Upper upper single digits, the only one portfolio, where there is some decrease as the CRE portfolio and Thats for all the reasons we've talked about.

When you when you put all those together you've got kind of mid single digit growth in the in the core.

Core portfolio, which I think is consistent with what we're what we're seeing and how we're thinking about the world and taken advantage of the growth that's out there.

It's the size of the the PPP.

And how well we did in 2020 20 in 2021.

That is affecting the average and the total and then the other piece is the Ginnie mae's, but outside of that.

Things were seeing the growth that you're talking about.

When you talk about deposits the core.

Core deposits and the core operating accounts of our customers when we're not expecting material decreases in some of the deposits where they're tied to an index and they would not be what we can consider core operating accounts that were anticipating some decline and whether thats the brokered Cds brokered money market in <unk>.

<unk> Cds as well as escrow balances.

So with just continuing to to look to optimize those balances and deploy that excess cash in a way that is additive to clients without.

And being shareholder friendly and so I guess when I look forward at 2022.

You make it sound dire actually I feel as optimistic as I've been in.

In the last 18 months about the prospects for all the reasons that you talked about.

The it's a little bit difficult with some of the moving parts on the balance sheet, but.

When I look forward at that what we've got in front of us whether it's deploying the excess cash it's growing the assets as we talked about.

It does.

The excess capital there.

There's a.

Number of opportunities and options that we havent front of us to continue to grow the bank in mid 2022 and beyond.

And the same <unk> that we would that you're used to seeing and so it's just getting through.

Some of these transitions that are happening on the balance sheet, but underneath.

I think things look really good.

And we currently have no further questions on the line at this time I will turn the program back over to our presenters for any additional or closing remarks.

Alright, Thank you and thank you all for participating today and as always if any clarification of any of the items in the call or news release is necessary. Please contact our Investor Relations Department at area Code 700, 6842 by 138. Thank you.

This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful day.

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Good morning, and welcome to the MSC Bank fourth quarter and full year 2021 earnings conference call.

Also participants have been placed in a listen only mode. Following management's prepared remarks, we will open the call for your questions.

You have a question at that time. Please press the star one maybe your telephone keypad.

Sure remove yourself from the queue. Please press the pound key today's call is being recorded lastly, if you should need operator assistance. Please press star Zero I would now like to introduce Brian Klock, Brian Clark head of marketing and Investor Relations. Please go ahead.

Thank you Britney and good morning, I'd like to thank everyone for participating in <unk> fourth quarter 2021 earnings conference call.

Both by telephone and through the webcast.

Joining me on the call today are Darren King <unk>, Chief Financial Officer and.

And Don Macleod, <unk> outgoing director of Investor Relations.

Who will be retiring after our annual meeting of shareholders in April .

As he has done for the past 17 plus years, let me turn the call over to Don to read our disclaimer.

Also before we start I'd like to mention that today's presentation may contain forward looking information.

Factors. These statements speak only as of the date made and <unk> undertakes no obligation to update them now.

Now I'll turn the call over to Darren King.

Thank you, Brian and John and good morning, everyone.

Dan It's hard to believe that Thats. The end of an era 17 years at MTT in 40 years in the industry <unk> been nothing but a true professional and certainly help make my transition into the role of a lot easier I've learned a lot from you and I. Thank you and we wish you all the best in your retirement thanks.

Before we get into the details of the.

The recent quarter's results I'd like to pause and reflect on a few highlights of the past year.

While the impact of the pandemic is still being felt by MSC and the rest of the banking industry. The turnaround in 2021 has been remarkable.

We've seen a transition from economic contraction and the zero bound interest rate environment to the prospect of persistent inflation and higher interest rates in 2022.

Against that backdrop.

<unk> based diluted earnings per common share were $13 80.

Compared with $9 94, and 2020 up 39%.

Net income was $1 $86 billion.

Compared with $135 billion in the prior year.

Improved by 37%.

Those results produced returns on average assets and average common equity of one 2% and 11, 54% respectively.

Net operating income, which excludes the after tax impact from the amortization of intangible assets as well as merger related expenses was $1 9 billion.

Up 39% compared with $1 $36 billion.

In the prior year.

Net operating income per diluted common share was $14 11.

Compared with $10 <unk> in 2020 up 41%.

Net operating income for 2021 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was $1, two 8% and 16, 8% respectively.

We increased the common stock dividend for the fifth consecutive year to an annual rate of $4 80 per share per year.

Tangible book value per share grew to $89 80 at the end of 2021 up 11, 5% from the end of 2020.

And as we build capital in anticipation of the merger with People's United Financial Our CET, one ratio increased to an estimated 11, 4% at the end of 2021.

From 10% at the end of 2020.

While the season pardon me the year had its ups and downs and sure felt like another Division championship.

Now, let's turn to the results for the quarter.

Diluted GAAP earnings per common share were $3 37 for the fourth quarter of 2021 compared to $3 69 in the third quarter of 2021.