Q1 2025 M&T Bank Corp Earnings Call
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Speaker Change: Welcome to the M and T Bank first quarter 2025 earnings conference call. All lines have been placed on a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask a question at that time. Please press Star then the number one on your telephone keypad if at any point your question.
Speaker Change: It's been answered you may remove yourself from the queue by pressing star two when posing your question. We ask that you. Please pick up your headset to allow your optimal sound quality Lastly, if you should require operator assistance. Please press star zero. Please be advised that today's conference is being recorded and I would now like to turn the conference over to <unk>.
Speaker Change: The window Bell Senior Vice President Investor Relations. Please go ahead.
Speaker Change: Thank you Margo and good morning.
Speaker Change: Thanks, everyone for participating in <unk> first quarter 2025 earnings conference call, both by telephone and through the webcast.
Speaker Change: If you have not read through the earnings release, we issued this morning.
Speaker Change: You may access it along with the financial tables and schedules by going through our website MTBE Dot com.
Speaker Change: Once there you can click on the Investor Relations link and then on the events and presentations link close captioning has been provided for webcast participants.
Speaker Change: Also before we start I'd like to mention that today's presentation may contain forward looking information.
Speaker Change: Scenario statements about this information are included in today's earnings release materials.
Speaker Change: Then the investor presentation, as well as our SEC filings and other investor materials.
Speaker Change: Presentation also includes non-GAAP financial measures as identified in the earnings release and Investor presentation.
Speaker Change: Opiate reconciliations to GAAP are included in the appendix joined.
Speaker Change: Joining me on the call today does that mean to your senior executive Vice President and CFO Daryl Bible.
Speaker Change: Like to turn the call.
Speaker Change: Thank you, Steve and good morning, everyone first I will begin with a perfect on slide three.
Speaker Change: Our purpose is to make a difference in People's lives, we are committed to serving not only.
Speaker Change: Customers, but also supporting communities, where we live and work and it's firing of 22000 employees and delivering for our shareholders.
Speaker Change: And Renee is annual shareholder letter.
Speaker Change: We operate in an environment in which changes the only constant.
Speaker Change: In these uncertain times and makes you start from a position of strength with strong liquidity capital levels and capital generation.
Speaker Change: Yes.
Speaker Change: Strength reflects our consistent adherence to the fundamentals and liquidity management capital allocation and transparency.
Speaker Change: The strength of this operating model allows <unk> to continue to before through the peaks and valleys of the macroeconomic cycles and support our customers and communities in the moments that matter most.
Speaker Change: As highlighted on slide four we continue to receive notable recognition, including 13 Greenwich Coalition of awards for our small business and middle market segments.
Speaker Change: And we were included in Fortune's, most admired and most innovative company less.
Speaker Change: Turning to slide six which shows the results for the first quarter.
Speaker Change: First quarter results represent a strong start to the year with several successes to highlight.
Speaker Change: Net interest margin increased eight basis points, reflecting our efficient balance sheet and the strength of our deposit franchise.
Speaker Change: <unk> at $662 million in share repurchases as we continue toward an 11% CET one ratio in 2025.
Speaker Change: So growing tangible book value per share by 2%.
Speaker Change: Fee income grew 5%.
Speaker Change: Since the first quarter of 'twenty, four or 10% if you exclude last year's BRG distribution.
Speaker Change: Asset quality continued to improve with it.
Speaker Change: $516 million reduction in commercial criticized balances.
Speaker Change: 50 million reduction in non accrual loans net.
Speaker Change: Net charge offs of 34 basis points, well below our full year expectations of 40 basis points.
Speaker Change: Now, let's look at the specifics for the first quarter.
Speaker Change: Diluted GAAP earnings per share were $3 32 down from $3 86 from the prior quarter net.
Speaker Change: Net income was 584 million compared to $681 million in the linked quarters.
Speaker Change: <unk> first quarter results produced an ROA of.
Speaker Change: 114% and 836% respectively.
Speaker Change: Slide seven includes supplemental reporting <unk> results on a net operating or tangible basis.
Speaker Change: <unk> net operating income was $594 million compared to $691 million in the linked quarter.
Speaker Change: <unk> net operating earnings per share were $3 38 down from $3 92.
Speaker Change: In the prior quarter.
Speaker Change: Net operating income yielded an <unk>.
Speaker Change: At Aro TCE of 121% and 12 five 3%.
Speaker Change: Next let's look a little deeper into the underlying trends.
Speaker Change: <unk> generated our first quarter results, please turn to slide eight.
Speaker Change: Excellent client net interest income was $1 71 billion.
Speaker Change: A decrease of three 2% from linked quarter.
Speaker Change: The lower NII was primarily driven by two fewer days and lower average, earning assets, partially offset by a favorable deposit costs.
Speaker Change: Net interest margin was 366% an increase of 80 basis points from the prior quarter.
Speaker Change: The primary drivers I think increased your margin include continued securities graph and lower wholesale funding and time deposits.
Speaker Change: And favorable deposit pricing interest bearing deposit costs declined 27 basis points.
Speaker Change: Turning to slide 10 to talk about average loans.
Speaker Change: Average loans and leases decreased <unk> 9 million to $134 8 billion.
Speaker Change: Our CRE balances were partially offset by the growth in C&I consumer and residential mortgage.
Speaker Change: C&I loans grew 1% to 61 billion driven by continued strength in our corporate institutional and fund banking.
Speaker Change: Okay.
Speaker Change: CRE loans declined 6% to $26 3 billion, reflecting payoffs and paydowns and muted origination activity with increased market competition.
Speaker Change: Residential mortgage loans were relatively unchanged at $23 2 billion.
Speaker Change: <unk> grew 1% to $24 $3 billion, reflecting increases in recreational finance in indirect auto loans.
Speaker Change: Loan yields decreased 11 basis points to six 6%.
Speaker Change: And lower rates on variable islands, and lower non accrual interest was partially offset by fixed rate loan repricing and a.
Speaker Change: A smaller drag on our cash flow hedges.
Turning to slide 11, our liquidity remains strong at the end of the first quarter investment securities and cash, including cash held at the fed totaled $57 9 million representing.
Speaker Change: Representing 28% of total assets.
Speaker Change: Average investment Securities increased <unk> 8 billion a year.
Speaker Change: On the investment Securities increased 12 basis points to 4% as the yield for new purchases exceeded the yields on maturing securities.
Speaker Change: In the first quarter, we purchased $2 6 billion and debt securities at an average yield of four 9%.
Speaker Change: The duration of the portfolio at the end of the quarter was three six years and the unrealized pretax loss on the available for sale portfolio was $8 million or less than one basis point CET one drag if included regulatory capital.
Speaker Change: Turning to slide 12 average total deposits declined three 4 billion or 2% to $161 2 billion.
Speaker Change: The sequential decline included $27 million decline in broker deposits.
Speaker Change: While the remainder of the decline was concentrated in commercial and business banking, partially reflecting seasonally lower balances.
Speaker Change: Average noninterest bearing deposits declined $1 1 billion to $45 4 billion.
Speaker Change: Good morning broker deposits average noninterest bearing deposit mix in the first quarter was relatively unchanged at 32%.
Speaker Change: Just bearing deposit costs decreased 27 basis points to three 7%.
Speaker Change: We saw favorable deposit declines across business lines.
Speaker Change: Higher level of broker and retail time deposit maturities in the quarter also contributed to the deposit cost decline.
Speaker Change: Continuing on slide 13.
Speaker Change: Noninterest income was 611 million compared to $657 million in the linked quarter.
Speaker Change: We saw continued strength across fee income categories with increases in mortgage banking service charges trust and brokerage fee.
Speaker Change: Recall that the fourth quarter included an $18 million net gain on the sale of noncore Securities and a 23 million BRG distribution.
Speaker Change: Excluding these items from the prior quarter.
Speaker Change: Noninterest income declined by $5 million sequentially.
Speaker Change: Mortgage banking revenues were $118 million compared to $117 million in the fourth quarter.
Speaker Change: Residential mortgage banking revenues increased $6 million sequentially to $82 million, reflecting the partial quarter benefit from new sub servicing we.
Speaker Change: We expect to reach the full run rate on this sub servicing in the second quarter.
Speaker Change: Mortgage banking revenues decreased 5 million to $36 million, reflecting lower gains on the sale of commercial mortgage loans.
Speaker Change: Other revenues from operations decreased 34 million to $142 million, mostly reflecting the fourth quarter 23 million Vod distribution.
Speaker Change: Turning to slide 14, we continue to execute on our expense plan.
Speaker Change: Noninterest expenses were 142 billion, an increase of $52 million from the prior quarter.
Speaker Change: Last year's fourth quarter included $35 million in notable expenses related to the redemption of certain <unk> trust preferred obligations expenses associated with corporate real estate optimization, partially offset by pension related credits.
Salary and benefits increased $97 million $887 million, mostly reflecting a 110 million seasonally higher compensation expense related to stock based compensation.
Speaker Change: Payroll related taxes, and other employee benefit expenses.
Speaker Change: As usual, we expect seasonal factors to decline significantly as we can in the second quarter.
Speaker Change: Other cost of operations decreased $50 million to $118 million.
Speaker Change: Primarily reflecting the previously mentioned fourth quarter notable items.
Speaker Change: The efficiency ratio was 65% compared to 56, 8% in the linked quarter.
Speaker Change: Next let's turn to slide 15 for credit.
Speaker Change: Net charge offs for the quarter totaled $114 million or 34 basis points decreasing from 47 basis points in the linked quarter.
Speaker Change: Jos for relatively granular in the first quarter with.
Speaker Change: With the five largest charges amounting to less than $30 million in total representing both C&I and CRE credits.
Speaker Change: Nonaccrual loans decreased $150 million or 9% to one 5 billion.
Speaker Change: Nonaccrual ratio decreased 11 basis points to 114% driven largely by payoffs charge offs and upgrades out of nonaccrual.
Speaker Change: In the fourth quarter, we recorded a provision of $130 million compared to the net charge offs of $114.
Speaker Change: The allowance to loan ratio increased two basis points to 163% reflecting growth in certain consumer loan portfolios as well as a modest deterioration in the macroeconomic forecast.
Speaker Change: The increase was not related to changes in the underlying credit performance, which is mostly in line with expectations.
Speaker Change: Please turn to slide 16.
Speaker Change: We estimate that the level of criticized loans will be $9 4 billion compared to $9 9 billion at the end of December.
Speaker Change: <unk> from the linked quarter was driven by $667 million decline in <unk>.
Speaker Change: CRE criticized balances.
Speaker Change: Partially offset by a $150 million increase in C&I.
Speaker Change: Within C&I the increase in criticized was concentrated in our motor vehicles recreational finance dealers.
Speaker Change: CRA criticized declined was primarily within multifamily office healthcare construction and was driven by payoffs paydowns and upgrades to past status.
Speaker Change: Improved leasing occupancy and cash flows and healthcare and multifamily helped drive the improvement in the CRE criticized.
Speaker Change: Turning to slide 19 for capital <unk> CET, one ratio at the end of the first quarter with an estimated 11, 5% compared to 11 six 8% at the end of the fourth quarter.
Speaker Change: Acquired in the CET, one ratio reflects increased capital distributions, including $662 million in share repurchases.
Speaker Change: Actually offset by continued strong capital generation.
Speaker Change: <unk> impact on the CET, one ratio from available for sale securities and pension related components.
<unk> would be approximately a positive six basis points. That's included in regulatory capital.
Speaker Change: Now turning to slide 20 for the outlook.
Speaker Change: First let's begin with the economic backdrop.
Speaker Change: Economic backdrop remains dynamic in light of the developments over the past several weeks.
Speaker Change: Recent economic data is mixed with strong job gains are moderating wage growth. Our recent reading show weakening in business and consumer sentiment and easing inflation they.
Speaker Change: The ultimate impact on tariffs on the broader economy remains unknown at this point.
Speaker Change: That uncertainty is reflected in recent equity market and rate volatility.
Speaker Change: We ended the first quarter well position for our dynamic economic environment, our strong liquidity strong capital generation and a CET one ratio at 11, 5%.
Speaker Change: Or that economic backdrop, let's review, our noninterest income outlook.
Speaker Change: We expect taxable equivalent net interest income to be 7.05 to 715 billion with net interest margin increasing through the year and averaging in the mid to high 300 <unk>.
Speaker Change: We expect the full year average loan and lease balances to be 135 to 137 billion.
Speaker Change: Power alone outlook reflects Florida, CRE balances with elevated payoffs and Paydowns and muted originations.
Speaker Change: Full year average deposit balances are expected to be 162 to 164 billion.
Speaker Change: We remain focused on growing customer deposits at a reasonable cost.
Speaker Change: Also considering loan growth.
Speaker Change: Turning to fee income, we expect noninterest income to be at the high end of that $2 5 million to $2 $6 billion range.
Speaker Change: It remains dynamic however, our diversified product set should help provide relative stability from our fee income businesses, continuing with expenses, we anticipate total noninterest expense, including intangible amortization to be five 4% to $5 5 billion.
Speaker Change: Our basic science remain focused on closely managing their expenses, allowing the bank to continue to target investments in projects and business opportunities that support our enterprise priorities.
Speaker Change: Regarding credit we continue to expect net charge offs for the full year to be near 40 basis points.
Speaker Change: So expect criticized loans to continue to decline in 2025.
Speaker Change: As it relates to capital.
Speaker Change: The CET one ratio to reach 11% from 2025.
Speaker Change: But we will monitor the economic backdrop and adjust as needed.
Speaker Change: Share repurchases will vary with RW a graph.
Speaker Change: As shown on slide 21, we remain committed to our four priorities, including growing our new England and long island markets optimizing our resources through simplification, making.
Speaker Change: Making our system to resilient and scalable and continuing to scale and develop our risk management capabilities.
Speaker Change: To conclude on slide 22.
Speaker Change: Underscoring optimistic investment thesis MFC has always been a purpose driven organization.
Speaker Change: Our successful business model that benefits all stakeholders, including shareholders.
Speaker Change: A long track record of credit outperforming through all economic cycles, while growing within the markets we serve.
Speaker Change: Remain focused on shareholder returns and consistent dividend growth. Finally, we are disciplined acquirer and prudent steward of our shareholders' capital.
Speaker Change: Now, let's open the call up to questions before which.
Marco: Marco will briefly review the instructions.
Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star Q and.
Speaker Change: Once again that is star one we'll take our first question from Ken Houston with autonomous.
Speaker Change: Economists research. Please go ahead.
Speaker Change: Very much good morning Darryl.
Speaker Change: So one question just on the NII, you mentioned that the environment's meaningfully changed and we see a smaller balance sheet here offset by a little bit better, but our NIM output are you noticing anything in terms of the deposit flow activity more specifically in terms of how much more mix shift you might expect and how much more you might be able to also.
Speaker Change: Continue to work down that higher cost liability side. Thanks.
Speaker Change: Yeah, we are definitely we did lower the guidance on deposits, but no I think we feel pretty comfortable that we'll probably be at the higher end of that deposit range. So having really good growth of our businesses across the board, whether it's commercial small business consumer our Ics.
Speaker Change: This kind of grows as activity in the marketplace is growing so I think we're we feel pretty positive on the deposit growth and we use those additional deposits. If we don't have loan growth to either pay out higher liabilities in the marketplace that we have on the balance sheet, just cheaper funding or we'll put it at the fed and just got more liquidity on hand.
Speaker Change: What are the other but we feel good about on the deposit side.
Speaker Change: Okay and second one on fees in the first quarter 611, or so, but you're still talking about the high end of two six I noticed there I don't believe that was there a bayview distribution in the first quarter.
Speaker Change: Pushed and how can you just talk about the ramp that you get from here going forward.
Speaker Change: And your confidence in getting towards that higher end <unk>.
Speaker Change: Yeah, So you're right, we did not get a distribution first quarter.
So we kind of took it out for the rest of the year, we may or may not get a distribution from bayview, they're working on some things internally. So we will do but if you look at all of our other businesses that we're having we're having really good growth across.
Speaker Change: I would expect our fee businesses to grow from where we are in the first quarter I think significantly in the second third and fourth quarters, we have a lot of momentum across all of our businesses. Our trust businesses. Our strong if you look at Ics.
Speaker Change: We're doing really well and their structure going agency businesses and activity also bringing in deposits from activity. So that's really positive.
Speaker Change: Service charges are actually performing really well right now a mortgage banking perspective.
Speaker Change: If rates come down and then who knows which way a yield curve is going to go but we are.
Speaker Change: <unk> to have really good.
Speaker Change: Mortgage revenues, both on the commercial and residential side from originations you.
Speaker Change: You did see the increase in our numbers now in this quarter from the additional sub servicing that could have other opportunities for growth potentially is that kind of continues to grow brokerage services are strong. So I think net net overall I think we're pretty positive on our fees.
Speaker Change: Okay. Thanks Darryl.
Speaker Change: Thank you. Thank you we'll take our next question from Ebrahim <unk> with Bank of America. Please go ahead.
Speaker Change: Hey, good morning, guys.
Ebrahim: Good morning, guys.
Ebrahim: Remarks, you mentioned that if uncertainties were reflected in the stock markets and.
Ebrahim: Interest rates.
Ebrahim: If you don't mind talk to us about.
Ebrahim: Any anecdotal sort of feedback from your customers.
Ebrahim: Over the last week or two around that is are you seeing capex decisions being pulled back just would love any color. There and then how is that informing your outlook on C&I growth.
Ebrahim: Yeah Yeah.
Ebrahim: That's fair.
Ebrahim: I think if you look at it overall you saw sentiment numbers for both weak on the consumer and on the business side.
Ebrahim: If you start with the consumer.
Ebrahim: From just looking at our debit card activity or spending patterns are still pretty much intact. There. So I think we're pretty consistent we are seeing and that could just be short, but in our indirect channels on the consumer side, a lot of loan volume coming in auto Marine and RV, maybe people are rushing before.
Ebrahim: Higher prices.
Ebrahim: So, but that's really good volume there.
Ebrahim: And the Twain the bottom, 20% consumer has been struggling for the last several years and we'll continue to probably continue to struggle.
Ebrahim: Business wise.
Ebrahim: Our customers actually.
Ebrahim: Really wanted to make a lot of investments they wanted to do acquisitions.
Ebrahim: Or just really on pause right now.
Ebrahim: I think its just lack of confidence they don't know what the rules of the road are right mouse things keep changing in the D C and until that settles out.
Ebrahim: But I think they're going to be on hold until they come through that said you know we've been able to grow our C&I business. We grew nicely. If you look at it and our middle market space. We had good growth there, we had growth and fund banking corporate institutional or a dealer commercial services grill.
Ebrahim: So we're growing really well in that space, it's really our CRE portfolio Thats really where the challenges are and that's really the portfolio, that's having us shrink in lower our line loan guidance for the most part.
Speaker Change: That's helpful and I guess, maybe the other thing on capital you mentioned CET one.
Speaker Change: 11%, depending on <unk> could you just give us how price sensitive you are I mean, they think the stock's come down.
Speaker Change: Yeah.
Speaker Change: We repurchased during the first quarter.
Speaker Change: Like how quickly could we see if customers remain on pause the damage he gets to 11%.
Speaker Change: Yeah, and you mentioned also opportunistic buyer.
Speaker Change: With regards to capital are there any deals to be done given just all the macro uncertainty right now thanks.
Speaker Change: So with the volatility in the marketplace.
Speaker Change: I emphasize in the prepared remarks, we really do have strong capital and liquidity.
Speaker Change: Our capital is the real capital our Aoc I'd actually has a positive six for six basis points.
Speaker Change: So we really feel good about that we will monitor.
Speaker Change: Market conditions.
Speaker Change: We still plan to start our share repurchase back on Wednesday, when we come out of.
Speaker Change: I got it.
Speaker Change: And we're just monitoring.
Speaker Change: If we see the economy go into.
Speaker Change: A negative spend down.
Speaker Change: Might slow down or pause.
Speaker Change: But until we see that right now the trends for the most part are pretty pretty.
Speaker Change: An eventful and.
Speaker Change: We're just kind of play it as we go I noticed that good guidance for you, but you guys kind of just have to see how things play out, but we're prepared to start with share repurchases on Wednesday, and just monitor economic conditions.
Speaker Change: Got it thank you.
Speaker Change: We will take our next question from Gerard Cassidy with RBC. Please go ahead.
Gerard Cassidy: Hi, Darryl.
Speaker Change: Hey, Hey, Gerard how are you doing good.
Gerard Cassidy: Good thank you.
Speaker Change: Can you give us some color.
Speaker Change: On your insights regarding the regulatory environment, we're reading a lot about the regulators look too.
Speaker Change: He's up if you will on some of the regulatory requirements. There is a lot of talk about the supplementary leverage ratio and the leverage ratio, but they seem to pertain to our biggest banks the trillion trillion are banks.
Speaker Change: Are you seeing anything on the horizon that would be very beneficial to the regional banks like yourself from the from the regulatory.
Speaker Change: Stuff that you are hearing and seeing.
Speaker Change: Yeah, Yeah, I just wanted to start with you know.
Speaker Change: It really doesn't matter to us who's actually in D C and the administration Republican and Democrat, we perform and do well if you look at our peoples acquisition that was done under the Biden administration. So we can do business either way.
Speaker Change: From a regulatory perspective, I would tell you there's <unk>.
Speaker Change: People that are getting in the seats tend to be much more focused on having our industry help grow the economy and really have an impact positively to it.
Speaker Change: And that with that acting chair any FDIC actually came out this past week. He actually is pulling back on some of the ERP stuff where in the first wave. So we actually had the Stefan already prepared and completed an at will fall back on that so that's a positive.
Speaker Change: They had a supervision Bowman is really looking at tailoring.
Speaker Change: But really good positive for us.
Speaker Change: It would be good.
Speaker Change: OCC and CFPB are also I think very positive. So I think you know generally there are more pro business more trying to grow the economy and you could see some tweaks around the tier one leverage ratio and the SLR stress testing.
Speaker Change: <unk> III I'll see our long term debt RFP.
Speaker Change: And hopefully maybe they pulled back on all our regulatory reporting we've produced thousands of reports to the government officials and I'm sure. We can wait out some of that information as well, so but I think it's an opportunity rich environment to actually make some improvements and be more efficient.
Speaker Change: Very good. Thank you and then as a follow up to your comment about loan growth and how the commercial real estate portfolio is making it more challenging.
Speaker Change: Can you dive into that a little further is it your choice to kind of continue their shrinking or is it just not your customers are paying off and you can't grow at what some of the color behind the challenges within the commercial real estate portfolio.
Speaker Change: So what we've seen in the last quarter or two is that there is a lot more active lenders in this space. So you have a lot more people providing loan capital.
Speaker Change: And if you actually look at it and it's very competitive so people are already being very aggressive on pricing and on structure.
Speaker Change: And you know at <unk>, we are very disciplined in how we make loans and put things on our balance sheet.
We're doing our best to support our customers and all of that but at the end of the day, we're going to put wells on that aren't structured properly from that perspective in the first quarter and you look at the payoffs that we received.
Speaker Change: It was a much higher amount than what we expected about half of them were no maturities that were coming through on that in the first quarter and another 10% was just pulling forward for maturities and later 'twenty five.
Speaker Change: About 40% was really pulling in maturities from 26 and beyond and Thats really where there's a lot of impact going on from that perspective.
Speaker Change: Given that debt down crease, it's not all bad and we've been able to remix our portfolio. So we're actually have a lot less office exposure, which is go ahead.
Speaker Change: We're also reducing a lot of the smaller credits less than $5 million.
Speaker Change: I actually growing areas that we want to grow like multifamily and industrial.
Speaker Change: Not all of that I would say the pipeline is building.
Speaker Change: And we feel good that it.
Speaker Change: It will kind of level out over the next couple of quarters and start to grow.
Speaker Change: And we'll just continue to do that.
Speaker Change: The end of the day, we're having a smaller balance sheet and probably just repurchase back more stock.
Speaker Change: And just quickly on that on those maturities that were being pulled forward and 25% in 2006 that were paid off was that due to the competition that you referenced.
Speaker Change: Auditor was competition you know some of it was some of our REIT customers decided that prepay early and all that it was mixed.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah. Thank you.
Speaker Change: Yep.
Speaker Change: We'll next go to Matt O'connor with Deutsche Bank. Please go ahead.
Matt O'connor: Good morning, you guys added a little bit to the loan loss reserves, even though the loans were down and the credit metrics were better can you just talk about how you tweak your macro outlook too.
Matt O'connor: The higher reserves.
Matt O'connor: Yes, we did.
Matt O'connor: Tweak it just because of what's going on in the marketplace, Matt I think that that's correct our provision probably would've been close to 110.
Matt O'connor: If we did not have the tweaks, but we just wanted to wait the lower.
Matt O'connor: We have three scenarios that the scenario that has.
Matt O'connor: The downward pressure.
Matt O'connor: Just increase that proportionately more so that you have higher.
Matt O'connor: Unemployment rates and you have lower GDP rates, we didn't have it go into a recession, but we had a close just above that.
Matt O'connor: 0.1% positive so we were reflecting it obviously, if we do go into a recession, we'll probably would continue to add to the reserves appropriately as needed, but we just felt comfortable that that was the right thing to do given everything that's going on and uncertainty in the marketplace.
Speaker Change: Okay. That's helpful and then separately, maybe I missed it but what are the interest rate assumptions that you have within your net interest income guide and then just remind us just sensitivity to rate changes on both the short and long run into the curve. Thank you.
Matt O'connor: Yeah.
Matt O'connor: Yeah, So hey.
Matt O'connor: Our Alco team.
Matt O'connor: And Treasury has been working hard because rates keep changing the curve keeps changing so it's out there.
Matt O'connor: Dynamic environment for sure.
Matt O'connor: We have as a baseline with our forecast has four drops the last one being in December which is very significant and we have a yield curve that we had on April seven which is a relatively lower yield curve.
Matt O'connor: From that you know the way I would look at it there's a lot of puts and takes here.
Matt O'connor: Okay.
Matt O'connor: Our net interest margin perspective, just high level if rates on the curve continue to flatten out if they go down that would be a negative for margin.
Matt O'connor: We get more deposits like Ken asked earlier you know.
Matt O'connor: That could be good for NII, but maybe lower for margin if we deploy that.
Matt O'connor: Our liquidity portfolio.
Matt O'connor: Our higher margin I'd say, probably they say a steeper curve would be helpful. And if we can can you maybe start to grow our loan book again and with CRE starts to come online that I think that would be possible at all that so theres a lot of puts and takes there.
Matt O'connor: That said overall I feel really good with margin trajectory you know mid to high 300, <unk> think overall profitability of the company is going to be really started off really strong capital generation. So I think we feel really good and we can weather whatever the economy gives us I think very well.
Matt O'connor: Okay, and then just to summarize that so like as we think about the net interest income dollars.
Matt O'connor: How are your asset sensitive relatively neutral again, all things else being equal, but if rates are a little bit lower than you expect.
Matt O'connor: How does that impact the dollars just call it a parallel shifts down to keep it simple.
Matt O'connor: Yeah.
Matt O'connor: So our short and we are definitely pretty neutral.
Matt O'connor: It really does not impact us much one way or the other what direction. The fed does on rates I think we're relatively good and you saw our deposit betas.
Matt O'connor: Our 50 plus percent so they're reacting like we thought they would react so all of that is coming in really well with a yield curve flattening.
Matt O'connor:
Matt O'connor: We still have positive.
Matt O'connor: Ron.
Speaker Change: So like in the consumer loan portfolio, it's probably repricing right now maybe 100 to 150 basis points more.
Speaker Change: If rates flattened down it's kind of still reprice positive, but maybe only 50 basis points better. So we're still get the benefit. It's just less of a benefit I think the thing to really emphasize though is we have a lot of unknowns in our balance sheet, which kind of gives us the comfort we're going to have strong margin strong NII. We know for a fact that we have $4 billion of Sig.
Speaker Change: <unk> coming off at EUR, three and a half.
Speaker Change: Depending on what the yield curve looks like.
Speaker Change: Going to reprice higher maybe four and a half maybe five and a half, but it's called up consumer loans I just talked about that's going to continue to reprice higher strong beta deposit beta is good and then on the swap book, we know for a fact that our swap book is going to go up and create more overtime.
Speaker Change: The 30 basis points, we should be in that 370 <unk> by the end of the year in early 2000 <unk>. So all of those are known and all of those are going to happen and that's baked into our numbers and all of that so it gives us confidence that we're going to perform well and then tweaking around the edges either way.
Speaker Change: If we're going to outperform or maybe be a little bit less but net net overall earnings will be strong.
Speaker Change: Thank you.
Speaker Change: Well next go to <unk> <unk> with Morgan Stanley. Please go ahead.
Speaker Change: Hi, good morning Darryl.
Speaker Change: Just to follow up on your point on the security side, just given that the long end is itself has been so volatile how are you thinking about putting on more securities here and what kind of duration would you be willing to take.
Speaker Change: Yes, so we are very disciplined.
Speaker Change: And how how we're doing this we're in it for the long term, it's kind of how we approach it so.
Speaker Change: So our strategy is really haven't changed we are investing obviously, we cleansed our portfolio last year. So all we have is a government backed securities in our portfolio, but our treasuries agencies or municipalities. We don't have any non agency stuff in the portfolio. So it's all like what the 35 billion.
Speaker Change: We've been buying about half of our purchases are basically non convex. So we're buying treasuries and <unk> in the marketplace. Obviously, we don't have the attractive yields that you do in the sea MBS, but you know you are going to keep them over the Hyatt whole maturity and then the other half is by going into <unk>.
Speaker Change: <unk> CMO and seasoned MBS.
Speaker Change: Our average duration. If you go back maybe two years ago. We were four we're now in the three and a half range and we stay in the three and a half range and feel really good about how our position is that portfolio for liquidity and we're going to continue to use it for that if we need it.
Speaker Change: Got it.
Speaker Change: <unk>.
Speaker Change: Maybe on loan growth you are actually the other side of the loan growth question is credit.
Speaker Change: And you've had some nice loan growth in C&I over the past few quarters I think C&I is up 7% year on year, and that's clearly well above that so how are you thinking about the credit performance of that book, if we get.
Speaker Change: The weakening macro environment from here.
Speaker Change: And I ask because I noticed that the declines in CRE criticized were actually in line with last quarter, but then you had some offsets in the C&I side.
Speaker Change: Yeah.
Speaker Change: Our CRE portfolio has been performing really well, we've stress tested looked at it backwards and forwards and feel really good on the trajectory of that portfolio.
Speaker Change: That said you know what we have maybe a little bit of exposure in the greater D. C area, a couple of hundred million nothing significant but.
Speaker Change: Things to watch out for in certain areas, but net net overall, we show CRE is going to perform and continue to perform very very well from that perspective, our C&I went up it was really just idiosyncratic one customer.
Speaker Change: A large credit a couple of hundred million dollars basically had some issues with a roll up strategy for the big trucks that you see.
Speaker Change: On the road and all of that and we think that's going to play out positively as the year. So we don't think theres any losses. There. So net net overall, we still think that we will continue to lower our criticized.
Speaker Change: Throughout the year not at the pace that we did in 'twenty, four but still at a measured pace.
Speaker Change: If things get really bad.
Speaker Change: And the economy, which I don't think it's going to happen, but if they do then we can adjust accordingly, but right now I think we're just seeing a slow down for the most part.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: And next we'll go to John <unk> with Evercore ISI. Please go ahead.
John: Good morning, Joe.
Speaker Change: Good morning, John.
Speaker Change: Just back to the loan growth I know you gave some good color on the commercial real estate balances that are coming down and also seeing some growth selectively in C&I.
Speaker Change: Within that average loan guidance of $1 35 to $1 37 can you talk to US maybe can you break down the.
Speaker Change: Incremental CRE decline that you expect and where you expect that could bottom just given what youre seeing right now and then perhaps maybe help us with how we should think about the piece of C&I loan growth as we look out through the.
Speaker Change: The remainder of the year.
Speaker Change: Yeah. So we expect right now our CRE portfolio the bottom out.
Speaker Change: On an average basis, probably by the fourth quarter.
Speaker Change: We think that pipeline is going to start to build and its ability now and it just has to go through.
Speaker Change: Basically you get on the books a lot of the new production and the pipeline is construction. So our construction loans won't actually start to fund up meaningfully for probably 12 to 15 months from that standpoint.
Speaker Change: CRE is I think kind of work its way through and start to grow momentum and.
Speaker Change: And grow positively for us, it's all about making sure it's for serving our client selection the best customers out in the marketplace, making sure that the loans are structured really well that helped us through some down periods, we won't lose that so structure is really important to us.
Speaker Change: We will compete on price if everything else falls into place from that perspective.
Speaker Change: So we're just see but our C&I book.
Speaker Change: Portfolio I think is gaining momentum consumer has gone really well.
Speaker Change: We're actually we're going to try to grow a little bit ahead in residential mortgage as well to help offset it that said you know.
Speaker Change: Portfolio, but we'll just see how it plays out overall.
Speaker Change: We're doing everything we can but we're going to make sure we emphasize and really but loans on our books that we know won't be issues in the next couple of years long.
Speaker Change: Long term assets for us.
Speaker Change: Okay, Great and then it sounds like it's probably not the case, but are you seeing on that topic are you seeing any line utilization or line drawdowns.
Speaker Change: Out of them.
Speaker Change: Precautionary concerns by borrowers given the recessionary environment any evidence of that at this point.
Speaker Change: No not really I mean, you look at the utilization this past quarter commercial was down.
Speaker Change: Got it down about 1% in <unk>.
Speaker Change: Really nothing hit our screens that showed any big draws or anything from that.
Speaker Change: Satellite Covid, where it was having draws everyday.
Speaker Change: All your capital ratio is coming down it's not like that at all and there's really almost no additional activity behaviors have been pretty consistent to be honest with you.
Speaker Change: And what we went through in the last downturn with Covid.
Speaker Change: Right, Okay, that's good to hear.
Speaker Change: And then I'm sorry, just one more on deposits. It looks like you saw some pretty good end of period growth where balances were above the average.
Speaker Change: And particularly in noninterest bearing any read into that or should we pay attention more so to the average deposit trajectory.
Speaker Change: First quarter is always a low seasonal quarter for us. So it always drops in January February then starts to build back in March.
Speaker Change: You also remember we have a lot of escrow deposits because of our mortgage servicing businesses that we have so again tend to gains for the first half of the month and then it kind of drops off in the second half of the month.
Speaker Change: And our Ics business and trust.
Speaker Change: A lot of activity in that kind of comes and goes depending on what we have there and we had some ics deposits on the balance sheet at the end of the quarter as well, but now that's all good funding to have and it helps us.
Speaker Change: Manage our balance sheet and helps with NII overall.
Speaker Change: Okay, great. Thanks Daryl.
Speaker Change: We'll next go to Christopher <unk> with Wells Fargo. Please go ahead.
Speaker Change: Yeah.
Christopher: Hi, good morning. Thanks.
Speaker Change: Just a quick question on long term debt just what is your perspective on like with sluggish loan growth and I guess youre you seem to be somewhat optimistic on deposits.
Christopher: Like long term loan to deposit ratio and where do you see long term that kind of settling out.
Speaker Change: So our long term debt.
Christopher: We are really focused on trying to.
Christopher: We just kind of broker deposits federal home loan bank advances.
Christopher: Deposits around seven or $8 billion right now so they're down from the peak from a year and a half ago.
Christopher: And if you look at federal home loan bank advances in only one or $2 billion. So I think we're pretty much through that long term debt, we will issue as needed depending on.
Christopher: But our customer growth is and what our loan growth is all that being said so we're access it accordingly, I think theres some sub debt down the road in the next year or so that you might have to issue down.
Christopher: Again, our total capital ratios, where they need to be but net net overall will do long debt. When it makes sense, we've had spreads come in for us versus our peers relatively well this past year or so.
Christopher: Obviously with some volatility in the marketplace spreads have gapped out, but it's consistent it's consistent with everybody else in the marketplace from that point you can get you can get deals done now it's just at a higher cost and all that and right now we really don't need a lot of <unk>.
Christopher: Lending our liquidity is really strong.
Speaker Change: Okay. Thank you and then as a follow up on.
Speaker Change: The expenses and what degree of flexibility on your guide range.
Speaker Change: Low hanging fruit within with some specific examples of your simplification efforts and May be also then some potential savings on regulation. Thank you.
Speaker Change: Yes, I would say for the last couple of years that I've been part of <unk>, our businesses and leaders have done a great job controlling their expenses and this year is no exception to that they are doing a great job for that.
Speaker Change: If we actually did get into.
Speaker Change: A bad recession period, where revenue was fairly challenged.
Speaker Change: There are things, we could do to pull on expenses, but right now I'm still thinking we're going to drive positive operating leverage for the year I think we still have a shot at that so growing NII and fees and shop modest increase on the expense side.
Speaker Change: That said if you look at our strategic projects. There are some strategic projects that we have to just get finished because we've been doing them for sale.
Speaker Change: The GL or data centers cyber and our commercial.
Speaker Change: CDA program all of those need to finish out you know, we're really close on a lot of these should get those done.
Speaker Change: The ones that are more newer so if you really had to you could slow some of that down from an expense perspective for.
Speaker Change: We're also really focusing on working on.
Speaker Change: How we can just deliver our product our products and services more efficiently and the back office. So I think youll see a lot of realignment some automation in some workforce strategies potentially need it if we had to do something like that.
Speaker Change: So net net overall I think we have flexibility on expenses, but really don't believe we have to pull the trigger now still half of shooting for positive operating leverage.
Speaker Change: Thank you.
Speaker Change: We'll next go to Peter Winter with D. A Davidson. Please go ahead.
Peter Winter: Thanks, Good morning.
Peter Winter: I was just wondering given given the increase in uncertainty are there any portfolios, maybe youre watching a little bit more closely or any portfolios.
Speaker Change: Causing you to tighten underwriting standards a little more.
Speaker Change: Yes, there is a list of portfolios, obviously that we are looking for and monitoring really well.
Speaker Change: If you look at it our retail trade is one manufacturing.
Speaker Change: You look at anything from.
Speaker Change: Construction.
Speaker Change: Wholesale trade so all of those tend to be areas that we're watching very closely.
Speaker Change: From Dodge and the U S eight perspective.
Speaker Change: We have seen some stress in our government contractors actually we've had two smaller credits.
Speaker Change: And you'll get downgraded in those areas and we're also monitoring our nonprofit portfolio nonprofit we've had one day, they get downgraded and focused.
Speaker Change: Especially on immigration and all that so areas that we're funding as adjusted for and how they're reacting to it could have some impacts there that said none of that is really meaningful to date that we've seen but we're monitoring all these portfolios very closely.
Speaker Change: We'll just see how the economy plays out.
Speaker Change: Got it.
Speaker Change: Just one housekeeping on the margin I just want to clarify.
Speaker Change: You said that the exit rate.
Speaker Change: Around 370 this year.
Speaker Change: Is that correct.
Speaker Change: No I did not say that I said that.
Speaker Change: Guiding for mid.
Speaker Change: $360 to high three six days and that we have a good upward trajectory on our net interest margin.
Speaker Change: Okay.
Speaker Change: Thanks, Joe.
Speaker Change: We'll next go to Erika Najarian with UBS. Please go ahead.
Erika Najarian: Hi, Larry Yes, hi, sorry, they just took away our physical phones and so old people like me have to figure out.
Speaker Change: Yeah.
Speaker Change: Just a few follow up questions.
Speaker Change: So.
Speaker Change: Yes.
Speaker Change: Clearly there are near term.
Speaker Change: Sort of a headwind to gross but as we think about everything that you described your balance sheet to be positioned.
Speaker Change: And everything that you've said about growth it does feel like.
Speaker Change: Again as a follow up to the questions on the exit rate. It does feel like the NII trajectory should be upward from here. If we just sort of dissect your guide and what you reported could youll get the day count back in the second quarter than it feels like we will get to the one we have to get to the one eight.
Speaker Change: For the low end of your guidance can be achieved and if you have a smaller balance sheet that would imply.
Speaker Change: A 370 <unk> exit NIM as well.
Speaker Change: Yeah, I mean, it's.
Speaker Change: We talked earlier one of the analysts are talking about what happens with.
Speaker Change: What interest rate environment, and what the yield curve is like the fed actions really Dell.
Speaker Change: And also what the size of the balance sheet on the loan and deposit side. There's just a lot of puts and takes out there is it possible. We can get into 300, seventy's, yes, but it's not in our base forecast right now what we're basically just trying to balance what we see today with all of the risks and uncertainty we have in the marketplace.
Speaker Change: And that gave me a rate scenario I'll give you my best estimate of what that rate scenario is at from a margin perspective on that I think your NII comment is positive and I think I think that NII should continue to move in an upward direction I think that's right.
Speaker Change: Fair enough, we've gotten whipsawed by the curve and.
Speaker Change: The Florida for sure.
Speaker Change: And then a follow up question first is if you could.
Speaker Change: Tell us sort of in the CSO model what your unemployment.
Speaker Change: <unk> is underpinning your current reserve and then as a follow up somewhat related question you are participating in the stress test. This year you did opt in.
Speaker Change: I'm wondering since the fed has put out.
Speaker Change: Their own language in their own press release.
Speaker Change: Indicating that changes the administrative law is requiring them to.
Speaker Change: Reexamine the test itself.
Speaker Change: Have you.
Speaker Change: Noticed any changes in the process yet in terms of the stress test.
Speaker Change: Or was it more transparency more feedback and additionally.
Speaker Change: Does the if you receive a smaller or a lower stress capital buffer does that.
Speaker Change: Change the way you were also thinking about capital allocation in the go forward.
Speaker Change: Yes, let me start with the stress testing when we submitted our information at the end of March early April and really have not heard anything from the side, it's kind of a normal year from a processing perspective at least to date that what we've seen.
Speaker Change: We are optimistic obviously that opt in we thought we would have a lot of our stress capital buffer or CFR correct with that.
Speaker Change: And all of that for US I think it just it is meaningful that we can continue to drive that.
Speaker Change: Last year, we were one of three banks at a 30 that we're able to have a decrease we were down two tenants.
Speaker Change: But we're still at the higher end of our stress capital buffer versus most of our peers in the industry. So we're just trying to see if our balance sheet.
Speaker Change: Basically derisking of what we have is working and.
Speaker Change: Moving closer to the middle or maybe.
Speaker Change: Earlier.
Speaker Change: We have a top quartile or whatever of our peer group. So that's really what we're trying to do there obviously other constituencies kind of look at that and can weigh in on what impact that has.
Erika Najarian: Long term Erika it might make an impact, but I don't think immediately given all the uncertainty in the marketplace that's going to have.
Speaker Change: Much of an impact.
Speaker Change: What we're trying to do from a capital perspective, we're in a really just really monitor to see if we actually go into a recession or not right now.
Speaker Change: As far as CFO goes and I would tell you that we're our unemployment rate averaged out now to be right around 5%.
Speaker Change: Proximately, so I think thats probably.
Speaker Change: For 10, 7% higher than what we were higher than that before we made the adjustment. It's obviously not a recessionary type unemployment rate, but it did move up.
Speaker Change: Because of the changes that we've made.
Speaker Change: Great.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you and that does conclude our questions I would like to now turn the call back over to Steve window for closing remarks.
Steve Window: Again, thank you all for participating today and as always if clarification is needed. Please contact our Investor Relations Department at 700 684 to 5138. Thanks.
Steve Window: Thank you and ladies and gentlemen that does conclude today's program. We thank you for your participation you may disconnect at any time.
Steve Window: Hum.
Steve Window: [music].
Steve Window: Hum.
Steve Window: Hmm.
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