Q2 2023 M&T Bank Corp Earnings Call
Hello.
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Good day and welcome to the M and T Bank second quarter 2023 earnings Conference call.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to Brian Clark head of market and Investor Relations. Please go ahead.
Thank you Todd and good morning, everyone I'd like to thank everyone for participating in <unk> second quarter 2023 earnings conference call.
By telephone and through the webcast.
Yeah, Randy earnings release, we issued this morning, you may access it.
Along with the financial tables and schedules by going to our website.
Have you W. W Dot MTBE dotcom.
There you can click on the Investor Relations link and then on the events and presentations link.
Also before we start I'd like to mention that today's presentation may contain forward looking information.
Additionally statements about this information are included in today's earnings release materials and in the Investor presentation, as well as our SEC filings and other investor materials.
The presentation also includes non-GAAP financial measures as identified in the earnings release and Investor presentation.
Appropriate reconciliations to GAAP are included in the appendix.
Joining me on the call. This morning are <unk> senior executive Vice President and CFO Daryl Bible.
Senior Executive Vice President and former CFO , Eric <unk>.
Now I'd like to turn the call over to Daryl Bible.
You, Brian and good morning, everyone I would like to start by thanking Darren first help with my transition I'm very appreciative of his guidance and support.
I'm also grateful for everyone across the bank and its welcome me and help me get up to speed quickly.
My incredibly talented finance case.
Like me I'm sure. All of you are extremely happy that we now have an earnings presentation.
So thank you to Investor relations.
Corporate communication and corporate reporting teams for making this a reality.
I'm very excited about the work we are doing and that transition has gone even smoother and I could have anticipated.
I'm proud to be part of <unk> strong financial history, consistent operating philosophy, and conservative humidity focused banking principles I'm, even prouder to be part of a company that is tied to its purpose to make a difference in people's lives.
I would like to thank our over 22000 M and T colleagues for all their hard work each and every day you are driven by the idea of delivering on our purpose and guided by a set of core values. It is because of your MSR.
<unk> continues to make a difference in our customers' lives and continues to produce strong results for our shareholders.
Please turn to slide three let's start with our purpose mission and operating principles. Our purpose is to make a difference in people's lives by focusing on the communities. We serve our purpose drives our operating principles. We believe in local scale with 28 humanity wet regional presidents who make decisions.
Well and community activities. This local scale has led us to superior credit performance.
Top deposit share and higher operating and capital efficiency. Our performance is fueled by our relentless focus on customers and.
And communities.
Moving to slide four we deliver for our customers. We have season pallet diverse board and new capabilities that provide solutions that make a meaningful difference to our customers.
Let's turn to slide five.
Slide showcases how we activate our purpose through our operating principles when our customers and communities succeed. We also see our investments in enhancing customer experience and delivering impactful products are fueled organic growth.
A significant milestone this year was the destination of over 119, multicultural banking branches across our footprint with more to come and our expanded communities. These branches our humanity assets dedicated to the cultural fluency for our customers.
We also believe in supporting small business owners, who play a vital role in our communities.
Operating only in 12 states.
Rank as the number of <unk> SBA lender in the country and ranked highly in 10 of our 16 markets.
Our commitment to supporting the communities, we serve extend to affordable housing projects with over $2 3 billion in financing and over 2600 home loans for low and moderate income residents. Additionally, <unk> keybanc and our charitable foundation granted over $47 million to support our.
Humanities in 'twenty two allowance.
Please turn to slide six here, we highlight our commitment to the environment, we have invested over $230 million and renewable energy sector and significantly reduced our electricity consumption since 2019.
<unk> report will be published soon but I encourage you to review this slide for some of the highlights.
Turning to slide eight.
Our second quarter results reflect the strength of our core earnings power balance sheet and liquidity position.
Adjusted to exclude the 225 million pre tax gain from the sale of the collective investment trust or <unk> business in April .
Second quarter revenues have grown 395 million or 20% compared to last year similar quarter.
This translates to a 10% positive operating leverage year over year.
On the same basis pre provision net revenues have increased 35% since last year's second quarter to one 1 billion credit remains stable net charge offs increased in the second quarter, but year to date still remain below our historical long term average net income for the quarter was 860.
$7 billion up 24% from linked quarter.
Diluted GAAP earnings per share was $5 five for the second quarter up 26% sequentially.
Now, let's review our net operating results for the quarter on slide nine EM and Ts net operating income for a second quarter, which excludes intangible amortization.
With 879 million up 23% from linked quarter.
<unk> net operating earnings per share common share four or $5.12 for the recent quarter compared to $4.09.
In this year's first quarter tangible book value per share increased 3% to 91.58.
I buy 10, you will see that on a GAAP basis <unk> second quarter results produced an annualized return on average assets and return on average common equity of one 7% and $14 two 7% respectively.
Results for the second quarter of this year included an after tax $170 million gain on the sale of the Ci team assess and April excluding this gain adjusted GAAP earnings per share was $4 11, and adjusted return on average assets and average common shareholder equity was $1 three 9% and 11, 6%.
Yeah.
Next let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11.
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Noninterest income was 1.81 billion in the second quarter slightly below linked quarter. This decline was driven by higher volumes of noncore funding and unfavorable mix change caused by disintermediation, partially offset by higher interest rates and one additional day.
Net interest margin for the past quarter was 349, 1% down 13 basis points linked quarter. The primary driver was the decrease to the net margin was partially impacted from the mix change to the higher cost funding, which we estimate reduced the margin by 18 basis points higher yields on earning assets.
That have rates on deposit funding benefit.
And by four basis points, turning to slide 12 capital levels remained strong with a CET one ratio to the end of the second quarter at 10.58%.
Average, earning assets increased 1.9 billion or 1% from the first quarter.
To the second quarter due largely to the $1 5 billion in growth in average loans and 1 billion increase in average investment securities turning to slide 13.
We talk about the drivers on the loan growth.
Total average loans and leases $433 5 billion during the second quarter.
One 5 billion compared to the linked quarter.
Looking at the loans by category on an average basis compared to the first quarter.
Commercial and industrial loans increased 5% to $44 5 billion, we continue to see in our dealer and specialty businesses.
We are adding new customers as we grow market share and legacy and new markets.
During the second quarter average commercial real estate loans decreased 1% to $44 9 billion a decline was driven largely by lower construction loan balances average residential real estate loans were $23 8 billion essentially flat compared to the first quarter of this year.
Average consumer loans were down 1% to $20 3 billion driven by lower activity due to rising interest rates.
Turning to slide 14 average investment securities increased to $28 6 billion during the second quarter.
Due to the large parts to purchases wait at the end of the first quarter.
The duration of the investment Securities book at the end of June is free at three nine years and the unrealized pretax loss in the available for sale was only 441 billion.
At the end of June cash and.
Just bearing deposits I think in the investment securities totaled $56 9 billion.
Turning to slide 15 deposit outflows during the second quarter.
On an average basis accounted for $2 1 billion or one 3% in line with industry trends.
With our experience prior to rising rates.
Increased competition for deposits and customer behaviors, leading to a mix shift with a deposit base to higher cost deposits.
Pairing the second the first quarter's average demand deposits declined $5 7 billion.
Savings and interest bearing checking deposits decreased $843 million, while deposit while time deposits increased $4 4 billion decline in average demand deposits resulted predominantly from.
One quite $1 billion to quiet in the corporate trust balances due in part to all.
Large to lower our capital markets activities and movement to sweep products as customers seeking higher yields with $1 8 billion on balance sheet, and $2 4 billion and shifted off balance sheet.
<unk> accounts during the second quarter.
Average time deposit growth was driven by $2 3 billion in broker Cds and $2 1 billion growth consumer time deposits, we remain focused on growing and retaining deposits end of period deposits grew 3 billion or one 9%.
The end of the first quarter progress is largely driven by broker CD balances, which increased $4 1 billion compared to the end of the linked quarter. However, since the end of May our customer base.
Wholesale deposit balances have stabilized and started to grow with an increase of 523 million.
Driven largely by growth in commercial and consumer deposits.
Now, let's discuss noninterest income please turn to slide 16.
Noninterest income totaled $803 million in the second quarter compared to 587 million linked quarter.
Noted earlier, the second quarter included a 225 million gain on the sale of our <unk> business.
Call that M. A T normally receives an annual distribution from Bayview lending group during the first quarter of the year.
Distribution was $20 million in this year's first quarter. Excluding these two items second quarter noninterest income increased 11 million compared to the first quarter mortgage banking revenues were $107 million in the recent quarter up 26% from linked quarter driven by $18 million in additional servicing revenue.
He is representing the full quarter impact so the bulk of the MSR purchase completed at the end of March.
Service charges on deposits were 119 million or up 5% compared to the first quarter.
Trust income of 172 million in the recent quarter decline from 194 million in the first quarter due largely to a $31 million and lower fee income, resulting from the sale of the Citi business, partially offset by the impact of the seasonal tax preparation fees are.
Our revenue from operations adjusting from the gain from the <unk> sale and the distribution at Bayview lending group in this year's first quarter $437 million down 2 million sequentially.
Turning to slide 17 for expenses operating expenses, which exclude the amortization of intangible assets for $1 $2 8 billion in the second quarter of this year down $64 million from the linked quarter as is typical for <unk> first quarter results operating expenses in the first.
Quarter included approximately $99 million seasonally higher compensation costs.
Excluding the seasonally higher compensation in the first quarter operating expenses increased $35 million sequentially that increase was due to a $31 million.
And higher compensation and benefit costs, reflecting higher average head count.
The full impact of the annual merit increases and severance costs 20 million and higher other operating expenses related to the bulk of the MSR purchase.
These increases were partially offset by lower <unk> related expenses.
Including $22 million of lower sub advisor expenses and.
And lower advertising and marketing and deposit insurance expenses.
Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses.
Efficiency ratio.
Which which excludes intangible amortization and merger related expenses from the numerator and the security gains and losses from the denominator was 48, 9% in the recent quarter compared to 55, 5%.
23, <unk> first quarter.
Excluding the gain from the sale and the CIP business, our second quarter and the efficiency ratio was 53, 4%.
Next let's turn to slide 18 for credit.
The allowance for credit losses amounted to 2 billion at the end of the second quarter at $23 million from the end of the linked quarter.
In the second quarter, we recorded a 150 million provision and credit losses, compared with $120 million in the first quarter net charge offs were $127 million in the second quarter compared to $70 million in this year's first quarter.
The reserve build was largely due to anticipation of defining commercial real estate values and loan growth.
At the end of the second quarter non accrual loans were $2 4 billion, a decrease of 122 million compared to the prior quarter and represented one.
83% of loans down nine basis points sequentially as noted net charge offs for the recent quarter amounted to $127 million.
The increase in net charge offs was driven by four large credits three office buildings in New York City, and Washington D C.
And one large health care company operating in New York State.
Annualized net charge offs as a percentage of total loans were 38 basis points for the second quarter compared to 22 basis points in the first quarter. This brings our year to date net charge offs of 30 basis points, which is below our long term average of 33 basis price.
As we have noted previously we expect net charge offs to be lumpy on a quarter to quarter basis. This is the result of the unique nature of each property and borrower in order to identify emerging issues that could lead to a low grade adjustments, we continue to perform ongoing rate risk resizing risk tenants.
Sensitivities on commercial real estate portfolios on a quarterly basis.
This work is reflected in our criticized loan portfolio.
Loans 90 days past due on which we continue to accrue interest or 380 million at the end of the first quarter compared to $407 million sequentially.
In total 43% of these loans 90 days past due loans were guaranteed by the government or government related entities.
Turning to slide 19 for capital M and T. CET one ratio at the end of June .
Estimated 10.58% compared to 10.16% at the end of the first quarter. The increase was due in part to <unk>.
Net income.
And and.
And repurchasing shares.
In the second quarter.
And Joe tangible common shareholder equity totaled $15 2 billion up 3% from the end of the prior quarter tangible book value per share accounted at 90, $158 up 3% from the end of the first quarter.
In late June the Federal Reserve released results from the annual Bank Street Bank stress test. While this was an off year for category for banks.
The timing of the People's United acquisition M and T participated in the stress test this year, our preliminary stress test capital buffer or SCB is estimated to be 4%.
Using the STB, which has an effect from October one 2023 at September 30, instead of 'twenty 'twenty four will be subject to eight 5% CET one ratio.
Now turning to slide 20 for the outlook.
As we look forward to the second quarter of this year. We believe we are well positioned to navigate through a challenging economic conditions. However, the rapidly changing interest rate expectations combined with continued pressure on funding affect our outlook for the full year of 2023.
The 2023 outlook reflects the impact of the sale of the M. S. I N T insurance agency that closed in October of last year and the sale of <unk> business that closed in April of this year.
First let's talk about net interest income outlook, we expect taxable equivalent net interest income to trend towards the lower end of the seven to $7 $2 billion range, which reflects a flat to modestly higher well in deposit growth incorporates 125 basis point hike in August of this year.
We noted on the first quarter.
Or call a key driver of net interest income in 2023 will be the ability to efficiently fund, earning assets. We expect continued intense competition for deposits in the face of industry wide outflows.
Full year average deposit balances are expected to be up low single digits compared to 2022 to continue to expect the deposit mix the shift towards higher cost.
Deposits with declines expected in demand deposits and growth in time deposits and on balance sheet sweep.
This is expected to translate.
A through the cycle interest bearing deposit beta through the fourth quarter of this year to the low to mid 40% range. This deposit beta excludes broker deposits.
Next let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full year average loans and leases balances during 2023 to be relatively stable.
Mix of C&I.
Sorry, and consumer loans inclusive of consumer real estate loans is almost one third each as of the end of June we expect this trend to shift slightly to C&I growth outpacing CRE.
As we have seen over the past four quarters higher levels of interest rates are expected to slow down the growth of our consumer loan book over the remainder of 2023.
Turning to fees, we expect noninterest income to be in the range of 2.25 to $2 3 billion range. This outlook for noninterest bearing reflects slower trust revenues, resulting from the sale of the Ci teaches us in April as well as the incremental income from the bulk purchase of residential mortgage servicing.
At the end of this year's first quarter remember the outlook does not include the 225 million gains from the sale of the CIT business.
Turning to expenses, we anticipate expenses.
Excluding intangible amortization to trend near the higher end of five to $5 1 billion. In addition, this outlook for net operating expenses.
The impact of the previously mentioned sale of the city business and the bulk mortgage servicing purchase and.
Intangible amortization is expected to be in the $60 million to $65 million range.
Turning to credit, we expect loan losses to be near Mit's long term average of 33 basis points, although the quarterly cadence could be lumpy provision expense over the year were follow the seesaw methodology that'd be affected by changes in the macro outlook and loan balances for.
For 2023 we expect taxable equivalent.
Great to be in the 25% range.
Finally, as it relates to capital.
As a quick very clear differentiator for M N T.
Our capital copper.
Coupled with our investment with our limited investment security Merck's has made it clear strength. During these turbulent times M. A T has proven to be a safe haven for our clients and communities the strength of our balance sheet is extraordinary.
We take our responsibilities to manage our shareholders capital very seriously and we will return more when it is appropriate to do that our businesses are performing very well and we are growing new relationships each and everyday.
Given the uncertainties related to the new capital rules that are coming out. We believe now is not the time to be repurchasing shares that said, we are best position to use our capital for both organic and inorganic growth along with buybacks in the future, which will always be part of our core capital distribution strategy.
<unk>.
In the meantime, our strong balance sheet will continue to differentiate us with our clients communities regulators investors and rating agencies.
To conclude on slide 21.
Our results underscore and optimistic investment thesis.
Our economic uncertainty remains high and that is where <unk> has historically outperformed its peers <unk> has always been a purpose driven organization.
Successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than two times growth relative to peers.
Our strong shareholder returns include <unk>.
20% return on average tangible common equity and robust dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital.
Our integration of peoples, United is complete and we are confident in our ability to realize our potential post merger now lets open up the call to questions.
Before which Todd will briefly review the instructions.
Thank you at this time, if you would like to ask a question. Please press the star and the woman you touched on the phone.
You may remove yourself at any time by pressing star two.
Once again, if you would like to ask a question. Please press star one.
We'll take our first question from Manav Ghazaliya with Morgan Stanley .
Hey, good morning.
Good morning.
I had a question on.
On NII I mean.
Noticed you took your deposit balance guide up along with the deposit beta guys, but kept the NII guide the Sam. So can you talk about the puts and takes there I guess the question is why hold more liquidity.
And the whole morning interest bank deposits in an environment, where they are not growing loans that March is it more a function of any.
Any upcoming LCR rules or anything the regulators are asking you to do.
Yeah. Thank.
Thank you for the question you know what I would tell you is is that we start right now are each and every day and making sure. We have a really strong liquidity on our balance sheet and we want to make sure that is a really good strength as we continue to move through these times.
Our deposits. We believe we are in great position to continue to grow and gain share in our markets that we're serving so we are aggressively gone out and tried to get deposits from our clients and or customer.
Customers out in these marketplaces.
The basic I did go up but it's really a mix of how much funding, we get from core versus broker deposits.
When the crisis first started in March you know, we took down federal home loan bank advances.
This quarter this past quarter in the second quarter.
Access the broker CD market, we thought that was a good use and when we access the broker CD market that automatically increased our deposit beta. So if you look at our deposit beta this quarter. It was 40, but if you back out the broker Cds.
Worth six point, so it was down to 34%.
So the guide is that we gave no go on up to low to mid forties, you know it was.
Really excluding the broker deposits because you don't know if we're going to issue more broker deposits is gonna be a mix between a photo homo make advances broker deposits and actually issuing debt in the marketplace. So it's really a mix and it's really up to our treasury team to figure out what's best to do for our company, but right now having liquidity Israeli.
Important and really gaining share and serving our clients. We think is really important as well.
So you just cash out this quarter and it sounds like are you going to keep it at a high level for some time.
Yes, Yeah, we're going to continue to have really strong liquidity and continue to stay where it is and that's one of the strengths that we have in the marketplace right now.
Got it Okay, and then just as a follow up.
The dead market seem to be opening up.
Can you talk about how you're thinking about issuance for the remainder of the are.
Just keeping in mind, the possibility that the T Lac rules could apply to.
Banks, Oh, sorry, with your asset size.
Yeah.
When you look at the three sources that I, just talked about whether it's broker deposits.
Federal home loan bank advances or debt early on when youre going into a crisis. It it makes sense to access the home loan bank for us because it's they're available when you get up really fast and size broker.
Broker markets I think we're a good use this past quarter.
And over time, you will see us issue unsecured debt and basically pay off some of the home loan bank advances and probably some of the broker deposits over time.
Just normally how we would fund funded bank overall, but we start with really having really good core funding and making sure. Our core funding is growing and doing what it needs to from that perspective.
Great. Thanks, so much.
Okay.
Thank you we'll take our next question from Matt O'connor with Deutsche Bank.
Hi, Good morning, just I guess first to follow up on the capital obviously strong built quite a bit and you talked about letting that continue to build.
Wait for new capital rules.
But I guess, how high are you willing to let it get underway cause any rules that it seems like you have access and obviously a good outcome from from CCAR G. Fast. So this first question is how high are you willing to let it go and then maybe just kind of review the priorities in terms of capital deployment.
As you think about the next couple of years.
Yeah. So let me start with the capital deployment question first and foremost we want to make sure. We serve are our clients and our communities. So organic growth is number one of how we deploy capital and Youre during turbulent times like this we want to make sure that all of our customers.
And potential new customers that we want and want to join M and T that we have the capital there to serve and that's first and foremost or we start dividends obviously the second.
Second is dividend growth and we have a long history of our dividend policy and keeping really strong dividend at MNT, I really really value a strong dividend from that perspective.
You know and share buyback has always been part of our history of repurchasing shares.
And from time to time, we might do.
Any.
Acquisitions, if they make sense and it's a good shareholder value from that perspective, but you know long term theres really not a change right now in these turbulent times.
Keeping extra capital and we think it's prudent to do that and you know as we get more information from our role is to come out from the regulators.
But right now we are doing really well our business is for me, while we're getting new clients in retail and the commercial area of business banking wealth.
Corporate Trust I mean, our businesses are growing because we are strong. So I think it's an advantage right now to have a lot of capital.
And then just separately last fall.
Yeah Darrin throughout this kind of long term memory I think it was three six to three nine but they kind of.
Spooked folks a little bit, but obviously you guys were kind of ahead of the curve and messaging the over earning on deposits.
You did get to the high end of that NIM range. This quarter wondering if you still think that's kind of a good long term range and.
You know do you get below that range at some point this cycle if you have the gas.
So I wanted to get it there in a lot of credit. He was definitely ahead of the industry and talking about margin and the impact of margin and you know he he solid come in and I think he was a leader in helping people wherever everything was going so you know it was really really good guidance from that perspective.
No I would say that we will continue to have margin pressure just because of the cost of what we're seeing on the funding side.
Haven't disintermediation.
You look at it yard EBITDA was down $5 7 billion. We retained all of the clients you know some of the balances went to on balance sheet sweep some of them went into off balance sheet sweeps. If you look at our consumer book.
We are moving balances.
From non maturity buckets to Cds.
But you know if you go back 20, plus years and you look at the deposit that we had back then C DS where 20% of our funding base right now we're at 10% and we're probably going to be in the mid teens before its all said and done it really depends on how long rates stay higher and that's just the normal mix of how we run our retail bank.
It's the right thing to do it's the right thing for our clients. It's the right thing for our bank, we can adjust our rate sensitivities with Cds on the books and manage that really well so it's.
It's just basically learning things are higher when you ran it makes 20 years ago. We're doing the same thing right now and doing it the same way, but we feel really good about our businesses.
Margin pressure is going to continue to come down and I think we've given you some guidance for this year felt really wanted to get into 'twenty four right now until we get a working on our plan, which would be later this quarter.
Okay. Thank you very much.
Thanks, Matt.
Thank you we'll take our next question from Steven Alexopoulos with J P. Morgan.
Hey, good morning, everybody.
Good morning, Steve and thank you for the earnings slide deck.
Yeah, I think the team initiated.
Jim did a great job.
I wanted to start on the noninterest bearing deposits. So when I look at the decline this quarter, it's still perplexing to me that this mix shift is not basically done by now right. If your commercial customer you have a treasury function I would imagine you've done the analysis and you've already moved those balances with us.
Or now Guy do you expect more decline in D D. A.
Look at your client base can you walk us through why is it taking so long I mean, it's been quite a few quarters right at two years been above three or 4%.
What's still to happen two to cause this mix shift.
Yeah. Thank you for the question Steven first and foremost if you look at M. T E.
Look at pre Covid and going into Covid.
He had one of the largest increases.
Surplus balances of all the banks out there proportionately. So we're starting at a really high strengths I think our DDA percentage of total deposits was 40, 48% yeah. So it was really high to start with <unk>.
And if you look at how we run this company as I learn about this company I am just amazed at how well we are getting primacy getting the operating accounts, we are really good and the consumer business and our business banking business and commercial businesses, we lead with getting operating accounts. So we have a.
The amount of operating accounts there so that said to answer your question.
This means that we're going to continue have mixture shift changes it does seem to be slowing down a bit you know, but you know were still seeing some mix change happened and it's going to continue that.
But a little bit pressure on funding, but we're still serving our clients at the end of the day and we're gaining new clients too. So I think all in all I think we're doing good work, we still have a pretty high margin overall, if you look at others in the industry, even with this coming down. So I think we feel really good at what we're doing in our executing.
Okay.
Helpful and then.
Just a question on the reserve.
What's the unemployment rate you're assuming in the total reserve and then I know you increased the reserves that you called out commercial real estate, what's the what's the reserve on the commercial real estate portfolio. Thanks.
Okay.
We're right around 4%.
We really look at the reserves evening, others for drivers there that we have.
The one that really impacted our increase in our allowance with really the crafted a change in the commercial real estate. This quarter that went from a negative 5% to 11%.
The other three variables you know unemployment was around mid fours GDP was basically right around 1% didn't change a whole lot.
H P I always right, but as mid sixes didnt change a lot. So what really drove the change was the crappy on the allowance side.
Got it I'm, sorry, I missed it what was the specific reserve.
Real estate funds.
Commercial real estate went.
That.
Pro valuable the macro variables.
The value that we used in the model went from six to 11.
And if you look at the allowance they allow us we increased more to office overall, we had decreases in hotel and multifamily.
Got it I'm still not following with the specific reserve is on Cree, but I could follow up with Brian after thanks.
Yeah, I didn't hear that that well.
Okay.
Hi.
We'll take our next question from Gerard Cassidy with RBC.
Hi, Darryl.
Sure.
Good luck with the new position for you and ditto on the slide deck to you Brian in your colleagues who has a very strong slide deck. So thank you.
Daryl can you share with us.
These proposals that were hearing about for Basel III end game May include you know things as low as 100 billion in assets and so when you guys talk about what could happen and then I believe earlier. This week Bloomberg had a story that there may be higher.
Risk weighted asset assumptions for residential mortgages, which seem to be a new twist to these capital requirements. How are you guys approaching what could happen in terms of you know greater R. W. A increases for your organization and the capital needed to support them.
Yeah. Thanks for the question Gerard.
We are very eager to get these new roles and see what's out there and make comments that's going to go through that was normal process. There. So it's going to take time.
Probably get most of these things implemented.
On your specific question of <unk> and in mortgages, well wait and see how that comes out we are in the residential mortgage space. We exited the correspondence space last quarter. So we're really just focusing on meeting the needs of our clients the company and for basically selling all the can.
Forming into the marketplace and more balance sheeting, all of our wealth clients and clients.
Clients that are low and moderate income are the ones that really are going on the balance sheet. So we're going to stay in our core businesses are serving our clients.
A little bit higher.
Capital the market will probably adjust and just raise pricing task on comedy for that would be my best guess.
From that well.
As far as the average changes out there there's a lot of proposals. There you know if it's like long term that are T. Lac were waiting to see what that happens M. A T really we don't have a whole lot of debt outstanding.
Oh yeah.
It's.
Something that we all have to just manage.
Probably gonna be holding company.
It's not only company and allow bank will probably end up with a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there.
But we're just optimize it but you know with us using now in federal home loan bank advances broker deposits I think we have a right now.
Already where we can pay those off issue unsecured debt and really not blow up the balance sheet from that and still have a really strong liquidity position from that so we're waiting to see I think you know our.
<unk> comes down it looks like that's coming in.
We're 55 basis points at 55 basis points.
Adjusted at the end of this quarter.
<unk> all three pieces, it's the F S securities cash flow hedges as well as pension that's probably one of the lowest that we have in the industry. So it's not a real big impact for us So that's a strength as well.
Yeah.
Very good and then as a follow up question you touched on and I may have missed some of this the charge offs in the quarter about some lower values for commercial real estate in a slide deck you guys put out earlier in the second quarter. You gave some very detailed information about your commercial real estate portfolio by location.
Loan to values can you share with this weird is you know is at the higher loan to values that were required to be written down or are you actually seeing it in some of the lower loan to values seen some weakness as well and then secondly on top of that when you go through the portfolio where are you in.
In terms of your.
50% through reviewing the portfolio over 75% or 20%.
Yeah. Thank you for the question. So on your first question.
Sorry.
It really just that you have to look at it on a case by case basis, just because of the unique quality and pieces of how it is that with each borrower has different implications.
Implications you have tenants things you have to market conditions, you know interest rates so that.
That is a case by case basis. So you you really go through that deep dive there.
On your question.
On.
Portfolio review, Yeah. So we are 50 60 plus percent through it through it.
All of the loans that we have in the criticized bucket is reviewed.
We reviewed every quarter, we stress test those really well and you know if I look at what we're doing versus you know my prior places I would say, we're doing as much if not more so what I've seen done in our credit.
Yes, so we're staying on top of this our teams are doing really well valuations are coming in and we're doing the best we can with the information we have but I would say we feel good at where we are and we're just continuing to monitor that are where we were everything else.
Very good and good luck again in your new role. Thank you. Thanks Gerard.
Yeah.
Thank you, we'll take our next question from Brent or pencil with Portales partners.
Good morning, and Daryl welcome to Western New York.
Thank you Brett.
So specifically on the CRE drilling down to the Manhattan real estate or in New York City Real estate I was wondering could you walk us through what you do you said you were taking charge offs there.
So you take possession you restructure what happens when you have a CRE Manhattan I guess, it's an office building.
What do you do here and in that situation.
Yeah. So so in New York City in New York City.
It's a big marketplace and every places a little bit different right now it seems like the downtown area might be a little weaker than the.
Metal part of Manhattan. So the charge offs that we took in Manhattan was in the downtown district, there, but I would say we do all the above I mean, we really work with our clients.
It really for US starts from a client perspective client is really really important client selection in the CRE business.
We make loans and in the largest cities like New York D C. Boston and in those markets. You know I would say 75% of those are very long term oriented clients.
Really good clients once you get outside of these major market studies at all it's almost all of our clients are really long term oriented, but as far as which notes we would sell or whatever it is probably more of a financially oriented clients that we have where they've had their returns and they are putting any more equity into the deal is.
How we would handle that.
To follow up on that you see strong handed borrowers you know.
Some of these big names just mailing in the keys are you experiencing that as well.
What are your long long term strong handed CRE borrowers actually not so strong and it after all.
You know I would say what we're seeing right now is our long term clients. When it comes down to client selection, but theyre really holding in there you have to look at their portfolios that they have and they might have one travel report property, but they have a lot of others that are really performing well and they move cash over to support and put equity into those transactions.
<unk>.
So we feel feel good about that and.
We've been in this business for a long time.
I get a lot of comfort when I look at Barber his team, there's a lot of gray hair there they've been through this many many times and gives me a lot of confidence and like I said earlier the processes. We're using are as good or better than what I've seen in the past.
Thank you.
Yep.
Thank you we'll take our next question from Mccann <unk> with Jefferies.
Thanks, Good morning, everyone.
Couple of a couple a couple of clarifications. If you don't mind. So on the on the guide Slide you talk about mid forties.
Interest cumulative interest bearing betas I assume that's what's built into the low end of NII guide for the year end and you because in your comments you said low to mid so I would assume that if you ended up being in the low forties that would be kind of better just one just clarifying what's in the guide I assume it's the mid Forty's. That's on the slide Yeah, I think I think that's right and that does exclude bra.
<unk>.
Pay off some of the broker deposits it really depends if we access the unsecured market or not so I would say if you look <unk> I think that's the right assumption to use.
And that was going to be my follow up Darryl. So can you explain that just to brokered deposit beta is completely outside of that mid Forty's beta comment.
So if you look this quarter.
Our beta on total interest bearing deposits was 40.
And we issued $4 billion of brokered deposits during the quarter.
If we back out those broker deposits.
We're at 34% deposit beta <unk>.
Our decision to issue.
Broker deposits was one versus looking at it from issuing.
Go ahead of federal home loan bank advances are doing unsecured debt, we chose that as we move forward. The treasury team will basically do what's best for the company and what we need to do and you know, we'll probably use all three pieces and when it actually goes into deposits. It impacts the deposit beta. So we tried to give you exclude.
The broker piece, what deposit betas, what Darren said at the last several quarters on deposit betas, if you back out the broker he's spot on sell where we're performing.
So I mean, the guy today or are we just kind of mix it up by issuing these broker deposits.
Understood and then could you just tell us and so on.
Great way to think about 103 billion of total interest bearing deposits just how much of that in aggregate is brokered.
I think our broker deposits are about $10 billion in total.
And I would say 8 billion of it is Cds and $2 billion, but money market.
Okay I got it that helps that thanks, a lot Eric Yeah, you're welcome.
Thank you. Our next question comes from Ebrahim <unk> with Bank of America.
Hey, good morning Kimberly.
Uh huh.
Good morning, I'm just.
A follow up on Ken's question that on the broker to 10 billion.
End of the quarter instead of them.
Is that.
The Max that we should think about how much brokered deposits can get it.
He did.
On a dollar basis sort of as a percentage of total deposits, but we should keep in mind when we're thinking about.
And then the outlook there.
Yeah, probably just a few more 1 billion from 10 is probably as high as we want to go there. So we don't want to be outsized in the use of that.
So we want to be diversified and kind of use all of our funding tools. It's just.
You want to just make sure you haven't used them all and you have access to all of them. So, but I'd say a couple of our billing is all we're going to use in the brokerage space, but you might actually see that come down if we issue more unsecured debt.
Got it and just one follow up on the CRD appraisals.
I think if I heard you correctly, you said, you're at 250% to 60% of the portfolio.
How hard is it to get a kuo, please alone or see any pull to do that now and what I'm trying to get to is what's the risk of being blind sided say they don't hit those levels two or three quarters from now where you need to take a lot more because of my values and I'm just wondering.
The visibility on a pretty good how conservative are you being as a bank and kind of trying to put this is getting ahead of this issue.
Yeah. That's a great question, so, but I would tell you is there aren't a whole lot of sales in the marketplace right. Now. So we don't you don't have a lot of specs when we do have and we use them.
A lot of the valuations were using we.
Use.
The discounted cash flow method.
And then when you look at just a couple of pieces of discounted cash flow method when when we're looking at properties and the properties vacant we assume a three year vacancy for it to get filled up when something is coming due and thats turning over we assume a 12 year vacancy or 12 months vacancy.
So from a cash flow perspective, we're factoring in free amenities to get people in leases. So all of that cash flow adjusts in the end.
And the just.
Just kind of cash flow model. So it's really impacting the valuation that you have cap rates really haven't changed a whole lot. It's really the assumptions you use it on the cash that you're generating in these properties is really what's driving down the values.
Go ahead and welcome to the new it all good to hear you.
Let's call it again thanks.
Okay.
Thank you we'll take our next question from Frank Schiraldi with Piper Sandler.
Thanks, Good morning.
Good morning.
Daryl I missed the I know you talked about the.
Doc just sort of the non interest bearing mix shifts.
You talked about you know, maybe a more normalized sort of balance sheet getting CD balances ultimately back into the mid teens.
Is that kind of is the best way to think about noninterest bearing shift from here as you know basically that.
All comes at the cost of a noninterest bearing so that we could continue to see pretty significant shift out of noninterest bearing because it seems like you could have some some offsetting tailwind from the trust business as well right is sort of that transactional volume maybe picks up or normalized so I'm just wondering if that's the way to think about.
Our noninterest bearing balances could kind of migrate to.
Yeah, No I think those are all great questions. If you look at our noninterest bearing to total deposits. This quarter, we were at 35%.
But if you actually back out the broker deposits that you put in there we were at 38%.
Here again broker, who is kind of playing some something with the numbers from that perspective.
We probably have that going down though by the end of the year, maybe two years to 3% with a mixed change.
That we have.
So I think from that.
Corporate Trust is definitely a great business for us as a business that's growing for us as market activity increases in that sector. It will be a big contributor to our balances that we have on the noninterest bearing side. So that is a really important piece right.
Right now the activity is down some so there is a lot of market activity, but.
Right now, we're just giving an outlook for a couple of quarters, but as market activity picks up corporate trust will definitely be a big benefit for us and having that mix change.
Okay, Great and then just on the other side of the balance sheet.
Back to the loan growth outlook, and again, I guess consumers continuing to slow and for acute balances being down overall, just on the C&I side should that growth decelerate here.
Sure.
Planning is stabilizing.
And ultimately where do you think we kind of flushes out at or stabilizes in terms of the total loans.
So right now if you look at our projections for total loans, it's relatively flat maybe up slightly if you look specifically at the commercial side C&I is growing.
This past quarter. It was really driven by dealers floor planning as far as we're getting on a lot some of our specialty businesses in <unk>.
In fund or sponsor where kind of the growth areas there.
As you move forward I think CRE, we're going to serve our clients in CRE.
But with our businesses that we have some of it will you will basically went to them and sell it back out so that's more fee business.
So that overall business is going to become a smaller percentage of the balance sheet and C&I will continue to be a larger percentage.
On the consumer side, you know, it's I think performing well we might do some asset sales the securitization just to test the plumbing.
Later this year, so that's really impacting some of those balances if that actually happens.
Alright, great. Thank you.
Thank you we'll take our next question from Mike Mayo with Wells Fargo Securities.
Hey, Darryl.
Hi.
Welcome to the north.
Just.
Big Picture question, I mean, you've been in.
The Midwest U S Bancorp and you've been in Lasalle BB&T and truest to now you're a M T.
Just how do you view and then key when you pull the lens back having been on the inside and so many different firms and so much perspective over a few decades.
Why did you choose to go to M T.
What do you see as the potential that's not unrealized and what do you think that you can bring extra to the table that you probably brought up when you spoke to management.
Yeah, Mike. Thank you for the question I would tell you first and foremost I am ecstatic to be here and to be part of the leadership team at <unk>.
I was actually my my neighbor.
Tracy one of my peers I walk into your office, one evening Tonight I told her I think it's better than I expected it to be just the reception of the people and the work ethic and we run a really good company here and it is really performing well.
Blessed to be on the team to try to continue that performance.
To me it reminds me a lot of a bank, that's getting larger and as we get larger you have to adjust.
And to meet certain requirements in.
From regulations, and basically actually running a larger company that.
For me the big balance that we have to keep is the magic that happens out in the communities each and every day.
We empower our regional presidents of people to make decisions out in the field and really do a great job with quiet touch in how we serve clients and we wanted to make sure that that stays intact, but for any of the larger company. We also have to have controls and processes in place. So we know what's going on.
And we can manage the risks as we continue to get larger and.
So I think it's just a balancing act from that perspective, Mike and you know I see a lot of opportunity, where I think I can help us perform and good things in working better potentially as we kind of move forward just because we're a bigger company.
But I can't say I can't tell you how much the work ethic here, just how well we run the company in.
And everything we do.
We do a great job and it's it's really starts with the community and are serving our clients and from that it kind of all falls out.
Working for Renee somebody that I've really respected of known or the industry I would tell you. It is just.
Just a dream come true for me and in my career, So I am very blessed to be here Mike.
And just one follow up.
Qualitatively I think that makes sense, helping our bank manage through becoming bigger than all of the regulatory complexity that involved.
But if there was one quantitative metric where you say you know what.
Three years from now maybe five years now this financial measure should be better and I'm going to take ownership of that what was that one financial metric be or maybe a couple.
Yeah, you know I would say we have a good strong performance. If you look at our investor deck and you look at our.
Investor thesis, our return on average tangible common equity.
At 15% to 20% is pretty darn hard to do that consistently.
I think that's good if you get well over 20, you're either growing too fast or taking more risk. So you have to be careful for some of that so I think that that would be a really good target.
So we are really focused by how we run the company to really at the end of the day give a great return to our shareholders. We are really prudent with how we manage our capital.
It's through buybacks dividends are definitely key and acquisitions the acquisitions, we do and you just look at the peoples acquisition. I mean, we have great returns off that acquisition I went through some of the metrics earlier in my prepared remarks, so that's going well and I would continue to see probably more acquisitions in our future overtime its kind.
And the pace of how we absorb it when.
You're doing these acquisitions it really takes US you know a good two three or four years to get the performance up to the <unk> standard you know so just finding people as last year.
We probably don't expect People's performance to really be at the M. A T performance until we get a couple of years under our belt, there, but as we grow into that we could have potentially other opportunities to do more of that over time.
So it's good and it will continue to change and evolve.
Industry changes, but people here are fully dedicated to the mission there everybody is 110% all in and I'm just excited to be part of the team.
Alright, thank you.
Yeah.
Thank you we'll take our next question from Erika Najarian with UBS.
Hey.
Just one last question I'm sure everybody's hopping onto the nine o'clock call, but yeah.
Can you give us a sense of how you think.
$2 7 billion in MRO.
The cadence.
<unk> for the second half of the year, you know more importantly, what sport.
Right.
183 million dollar impact on the down 100 basis point scenario from your last Skus still sort of in the ballpark of your rate sensitivity to the downside.
Yeah, let me start with a sensitivity question Erika.
As we continue to look at our hedging strategies that we have in place and that we're continuing to offering on we are becoming less and less asset sensitive and right. Now you know when we if the fed increases.
Or two more times will get a little benefit out of it but what I use if you'd go up 25 basis points and over a 12 month pairing with that increase our net interest margin, probably only going to increase one or two basis points because of that.
On the downside, we are getting less negatively impacted as we move forward such that if you go down 25 basis points.
Our deposit betas are not approximated our net interest margin is only going to go down three to five basis points. So it's getting tighter and.
Over time, we just want to try to keep it as close to zero I mean, it's a big balance sheet. So he can't be exact but you want to be as close as you brought you can't you don't really need to take a whole lot of rate pressure and our treasury team is doing an awesome job and manages through that as far as the Guy goes you know right now with the funding pressures if you look at what we.
Have rolling off of what's rolling and we'll probably have a little bit more pressure third quarter versus fourth quarter, just because of the repricing that's occurring on the liability side.
That said as things kind of normalize you know were starting to pick up spreads higher spreads on the asset side and if things stabilize on the liability side you know.
You could actually start to stabilize margin.
Probably in the mid threes as you kind of embark but we'll see how that goes maybe next quarter. When we look at 'twenty four and beyond.
But.
Hopefully that helps.
And that really helps jonesboro and looks like Youre working with.
Yeah. Thanks, Erika I appreciate it.
Yeah.
Thank you, we'll take our last question from John and Terry with Evercore.
Good morning, and congrats Daryl.
And the new rule.
Just a couple of very quick things for me.
Just on the on that mood noninterest.
Noninterest bearing mix of 34% did you.
Where you believe it could bottom could it be below that 30 year.
Your round permanently the level that you were prepaid debit credit how much further below that could be noninterest bearing mix.
Migrate.
I said earlier on another question John you may have missed it but we.
Because of the broker deposits that we put on you know just putting those broker deposits on dilutes, our percentages, so you're comparing apples to apples from that perspective, but you know I would say we're in a very good out probably two years or 3%.
Rest of this year it would be our best guess, it's really yes.
Serving clients to have higher rates, but what I said earlier, we started from a really high place because we got a lot of surplus deposits.
And we really have huge focus of getting primacy on the operating accounts and that basically gives us a lot to deal with and I think at the end of the day and then he will still have one of the highest percentages of noninterest bearing to total deposits of our peer group. So I think it's just playing out.
It's just a higher rate environment and that will change if rates start to go down at some point.
Got it alright. Thank you and then lastly for me on the deposit side your outlook does imply modest growth in the second half.
This year, what is that primarily going into.
Like does that although the incremental brokered that you expect or maybe a little bit of color. There yeah. It's not it's not broker we really saw this quarter in the middle of the quarter start to stabilize and start to grow.
So you know we're hopeful that we'll be able to get some growth out of our core businesses, whether it's retail business banking and commercial.
And maybe towards the end of the year, maybe it will get higher activity out of the capital markets area in our corporate trust space as well and wealth areas. So I you know I am hoping that all of those business lines will continue to modestly grow throughout the year as we compete for deposits.
Okay, great. Thanks for taking my questions, Yes. Thank you John .
Thank you at this time I'll turn the floor back over to Brian Clark for any additional or closing remarks.
Again, thank you all for participating today and as always.
Our vacation of any items on the call. Our news release is necessary. Please contact our Investor Relations Department at area Code 700, 684 to 5138. Thank you.
And have a great day.
Yeah.
This does conclude today's <unk> bank's second quarter 2023 earnings conference call.
You may.
Disconnect. Your line at this time and have a wonderful day.
Yeah.
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