M&T Bank Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 20, 2022

There are 11 speakers on the call.

Operator

Good morning, and welcome to the M&T Bank 4th Quarter and Full Year 2021 Earnings Conference Call. Today's call is being recorded. I would now like to introduce Brian Klock, Head of Market and Investor Relations. Please go ahead.

Speaker 1

Thank you, Britney, and good morning. I'd like to thank everyone for participating in M and T's Q4 2021 earnings conference call, Joining on the call today are Darren King, M&T's Chief Financial Officer and Don McLeod, M&T's outgoing Director of Investor Relations, who will be retiring after our Annual Meeting of Shareholders in April. As he has done for the past 17 plus years, let me turn the call over to Don to read our disclaimers. Thank you, Brian. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, Also before we start, I'd like to mention that today's presentation may contain forward looking information.

Speaker 1

Cautionary statements about this These materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion of forward looking statements and risk factors. These statements speak only as

Speaker 2

of the date made and

Speaker 1

M and T undertakes no obligation to update them. Now I'll turn the call over to Darren King.

Speaker 3

Thank you, Brian and Don, and good morning, everyone. Don, it's hard to believe that it's the end of an era, 17 years at M&T and 40 years in the industry. You've been nothing but a true professional and certainly helped make my transition into the role a lot easier. I've learned a lot from you. I thank you, and we wish you all the best Before we get into the details of the recent quarter's results, I'd like to pause and reflect on a few highlights of the past year.

Speaker 3

While the impact of the pandemic is still being felt by M and T and the rest of the banking industry, the turnaround in 2021 has been remarkable. We've seen a transition from economic contraction and a zero bound interest rate environment to the prospect of persistent inflation and higher interest rates in 2022. Against that backdrop, GAAP based diluted earnings per common share were $13.80 produced returns on average assets and average common equity of 1.22% and 11.54%, respectively. Net operating income, which excludes the after tax impact from the amortization of intangible assets as well as merger related expenses Net operating income per diluted common share was $14.11 For 2021 expressed as rate of return on average tangible assets and average tangible common shareholders' equity was 1.28% 16.8%, respectively. We increased the common stock dividend for the 5th consecutive year to an annual rate of $4.80 per share per year.

Speaker 3

Tangible book value per share grew to $89.80 at the end of 2021, up 11.5% from the end of 2020. And as we build capital In anticipation of the merger with Peoples United Financial, our CET1 ratio increased to an estimated 11.4% pardon me, the year had its ups and downs. It sure felt like another division championship. Now let's turn to the results for the quarter. Diluted GAAP earnings per common share were $3.37 for the Q4 of 2021 Net income for the quarter was $458,000,000 compared with $495,000,000 in the linked quarter and $471,000,000 On a GAAP basis, M and T's 4th quarter results produced an annualized rate of return on average assets participants of 1.15 percent and an annualized return on average common equity of 10.91%.

Speaker 3

This compares with rates of 1.28% and 12.16%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $1,000,000 or $0.01 per common share, little change from the prior quarter. Also included in the quarter's results were merger related expenses of $21,000,000 related to M and T's proposed acquisition of Peoples United Financial. This amounted to $16,000,000 after tax or $0.12 per common share. Results for 20 21's 3rd quarter included $9,000,000 of such charges amounting to $7,000,000 after tax or $0.05 per common share.

Speaker 3

Consistent with our long term practice, M and T provides supplemental reporting of its results on a net operating or tangible basis, From which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses

Speaker 4

participating in the quarter.

Speaker 3

M and T's net operating income for the 4th quarter, which excludes intangible amortization and merger related expenses was $475,000,000 Diluted net operating earnings per common share were $3.50 for the recent quarter Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity were 1.34% and 17.54% in the Q3 of 2021. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non GAAP results, $0.17 per common share. We received a like distribution in the Q4 of 2020. Prior to 2020, we had generally received such distributions in the Q1 of each year. Turning to the balance sheet and the income statement.

Speaker 3

Taxable equivalent net interest income was $937,000,000 in the Q4 of marking a decrease of $34,000,000 or 3% from the linked quarter. The primary driver of that decrease was a $30,000,000 decline in interest income and fees from PPP loans, as that portfolio continues to decline Following forgiveness of those loans by the Small Business Administration. The net interest margin decreased by 16 basis points The lower income from PPP loans, including declines in the scheduled amortization All other factors, including lower benefit from hedges, accounted for an estimated 2 basis points of the decline. Average earning assets increased by $4,000,000,000 compared with the 3rd quarter. This includes a $5,300,000,000 increase in cash on deposit with the Federal Reserve and a $785,000,000 increase in investment securities.

Speaker 3

On average, total loans decreased by $2,100,000,000 or about 2% compared with the previous quarter. Looking at the loans by category on an average basis compared with the linked quarter. Commercial and industrial loans declined by $1,400,000,000 or about 6%. Auto floorplan loans to vehicle dealers, declined by $58,000,000 on an average basis, but grew by $554,000,000 on an end of period basis. All other C and I loans grew about 1% compared with the prior quarter.

Speaker 3

Commercial real estate loans declined $830,000,000 or about 2% compared with the 3rd quarter. We've seen a higher level of pay downs and payoffs of some of the troubled loans Residential real estate loans declined by $89,000,000 or less than 1% as a result of principal repayments as well as the ongoing repooling of loans previously purchased from Ginnie Mae servicing tools. That was largely offset by the retention of new loans originated Consumer loans were up over 1%, reflecting growth in indirect auto loans Average core customer deposits, which exclude CDs over $250,000 grew by $3,600,000,000 Turning to net interest income sorry, non interest income. Non interest income totaled $579,000,000 in the 4th quarter we have begun to retain a significant majority around 85 percent of residential mortgage originations to hold for investment on the balance sheet, which utilizes a portion of the excess liquidity we currently have. This includes the roughly 20% normally held for investment.

Speaker 3

As a result of increasing mortgage rates and the holiday slowdown, residential mortgage loan applications during the most recent quarter amounted to $1,700,000,000 compared with $2,200,000,000 in the 3rd quarter. Of those, we recorded gains on sale Total residential mortgage banking revenues, including origination and servicing activities were $91,000,000 in the 4th quarter compared with $110,000,000 in the prior quarter. The decrease reflects the lower level of loans originated for sale, partially offset by gains from the sale of loans previously purchased from Ginnie Mae servicing pools that based on borrower reperformance Residential servicing revenues improved slightly. Commercial mortgage banking revenues totaled $48,000,000 encompassing both originations and servicing compared with $50,000,000 in the 3rd quarter. Recall that in the 3rd quarter's commercial servicing results, they included an $11,000,000 fee for yield maintenance as a result of prepayment of previously securitized commercial mortgage loans.

Speaker 3

Trust income was $169,000,000 in the recent quarter, improved from $157,000,000 in the previous quarter. Business remains solid with very strong capital markets activity, continued growth in retirement plan assets and higher asset values. Service charges on deposits were $105,000,000 in the recent quarter, unchanged from the 3rd Turning to expenses. Operating expenses for the Q4, which exclude the amortization of intangible assets Salaries and benefits increased by $5,000,000 from the prior quarter. This reflects in part higher levels of branch staffing The $6,000,000 linked quarter increase in advertising and marketing reflects the beginning of the winter marketing campaign combined with incentives paid on new customer accounts.

Speaker 3

The efficiency ratio, which excludes intangible amortization And merger related expenses from the numerator and securities gains or losses from the denominator was 59.7% in the linked quarter At defense, defense wins championships. In banking, credit is the defense. Let's take a look at credit. While some sectors of the economy remain challenged by supply chain and labor constraints, credit trends overall continue to improve even in the most severely impacted sectors. The allowance for credit losses declined by $46,000,000 to $1,470,000,000 at the end of the 4th quarter.

Speaker 3

That reflects a $15,000,000 recapture of previous provisions The allowance for credit losses as a percentage of loans outstanding was 1.58% compared with 1.62% at September 30. Annualized net charge offs as a percentage of total loans were 13 basis points for the 4th quarter, down slightly from 17 basis points in the 3rd quarter. With the advantage of hindsight, It would appear that criticized loans did indeed peak in the Q3 of 2021. And when we file our 10 ks, we expect to report a noticeable decline in criticized loans, a decrease of $182,000,000 from the end of September. Non accrual loans as a percentage of loans outstanding participants were 2.22% compared with 2.4% at the end of the prior quarter.

Speaker 3

Loans 90 days past due on which we continue to accrue interest were $963,000,000 at the end of the recent quarter. Of those loans, dollars 928,000,000 or 96% were guaranteed by government related entities. In a difficult environment, one might argue our credit is the top ranked defense in the league. Turning to capital. M and T's common equity Tier 1 ratio was an estimated 11.4% as of December 31, compared with 11.1% at the end of the 3rd quarter.

Speaker 3

This reflects the impact of earnings in excess of dividends participated in a slightly higher risk weighted assets. As previously noted, we increased the quarterly common stock dividend Now turning to the outlook. As we look forward into 2022, we are pleased to see that the economy is improving, which is impacting our cost structure as well as that of our customers. It has also changed the outlook for interest rates Our outlook considers these macro factors. Also, as we are still awaiting regulatory approval participants for our merger with Peoples United, we will focus our comments on M and T stand alone.

Speaker 3

That said, there are no material changes to our expectations Starting with the balance sheet, there are a number of moving parts that will impact where we're headed. We don't expect the $42,000,000,000 of cash on the balance sheet at the end of 2021 to endure through 2022. Participants, we'd expect interest checking and MMDA accounts balances, excuse me, to decline over the course of the year. Our current plan is to continue securities purchases to increase the proportion by replacing maturities and principal amortization and to increase investment securities by an incremental $1,000,000,000 by the end of the year. On the commercial side, PPP loans on our balance sheet amounted to $1,200,000,000 at year end.

Speaker 3

We expect that a significant majority of those loans will be largely repaid or forgiven in the first half of twenty twenty two. We've seen a meaningful turnaround in vehicle inventory financing. We believe we're past the low point and expect growth in 2022, although not fully back to pre pandemic levels. The remainder of our C and I portfolio experienced growth this past quarter, The pandemic resulted in a slow pace of new commercial real estate transactions over the past 2 years, putting pressure on balance growth. Our efforts to make this portfolio more capital efficient should result in a transition to more fee income, less interest income, As noted earlier, we're retaining a large majority of the mortgage loans we originate, which we expect will grow balances by approximately $2,500,000,000 in 2022 depending on the level of refinance activity.

Speaker 3

Offsetting that growth are $2,800,000,000 of mortgage loans purchased from Ginnie Mae servicing pools on our balance sheet at the end of 2021, more than half of which we believe will qualify for repooling over the course of 2022. On average, we expect the residential real estate loan portfolio will contract during 2020 We expect more of the same in the consumer portfolios with growth in indirect Taking all of this into account, the balance headwinds from PPP and Ginnie Mae buyouts will lead to average balance declines in 2022. However, excluding those impacts, we expect aggregate loan growth to be in the lowtomidsingledigits. We expect net interest income to be down in the low to mid single digits on a year over year basis. Growth in securities, retention of mortgage loan originations and a return to growth in C and I loans will help but not fully offset little change from full year 2021 in the area of 2.75%.

Speaker 3

Our forecast incorporates 3 increases participants are interested in short term interest rates, although the 3rd increase occurs late enough in the year to not have a meaningful impact on either net interest income Turning to fees. As we noted, residential mortgage gain on sale revenues will be diminished in 2022 by our programs to retain for investment a large portion of originations, Although, repooling of Ginnie Mae buyouts should be a partial offset. Commercial originations and servicing as well as residential mortgage We see continued momentum in trust income based on the capital markets activity, continued growth participants in retirement plan assets and possibly higher asset values. We would need to see short term interest rates rise by 50 to 75 basis points before we can fully recover the money fund fees we are currently waiving. Those amount to an annual run rate of approximately $50,000,000 We expect service charges on deposit accounts to be down Non interest operating expenses in 2021 grew at an uncharacteristically high rate, rising 5.6 percent over prior years.

Speaker 3

Lower profitability and growth led to decreased compensation costs in 2020. Our current estimate contemplates low to mid single digit operating expense growth in 2022. In light 2021, Salaries and benefits, data processing and software and advertising are the categories that will drive the majority of the increase. We would expect to see our typical seasonal surge in compensation expense during the year's Q1. That amount last year was approximately $69,000,000 And we're encouraged by the improvement in credit conditions Although it could be somewhat lumpy from quarter to quarter.

Speaker 3

We expect loss provisioning to normalize as loan growth offsets potential declines in troubled credits. Lastly, turning to capital. We've paused our buyback program while we wait to closed the merger with People's United. Since that pause, our CET1 ratio has increased by 140 basis points to 11.4%, leaving us positioned well in excess of what we believe we need to run the combined company. Our focus as always Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, Now let's open up the call to questions before which Britney will briefly review the instructions.

Operator

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

Speaker 5

Don, I wish you all the best in retirement. And, Darren, nice division championship comment you made in your prepared remarks. All the best of luck to your bills Good luck to you this weekend

Speaker 3

and we appreciate the comments.

Speaker 5

Well, we need to read, Pam, but not the cheese per se. But anyway, On the deposit topic, I know you mentioned that checking balances and money market are likely to decline. What is your overall deposit

Speaker 3

So I guess I'll start with the latter. When we look at where we are with rates and the first set of increases, Our expectation is that the reactivity early on is really low and that for the first, probably 100 basis points of increase, For each 25 of the first 100, and then we'll go from there. When we look at the balance growth that we expect over the course of the year, we're really anticipating that Much of the cash that we have on hand, will start to deploy or move off. There's some Escrow balances that are tied to the index that we expect will run off in the 1st part of the year, when you look at the brokered money market balances, those have a term on them and we expect those participants are very pleased to decrease. When you look at kind of the core balances on the balance sheet, we're really expecting fairly modest decreases over the course of the year.

Speaker 3

There's the usual uptick in commercial balances that you see at the end of the year. That's part of what we saw in the 4th quarter, We also saw an uptick, again in the Q4 in trust demand balances, which really reflect in the M and A markets in the agency business. And so those should start to come down a little bit. But at the moment, we're really Not anticipating meaningful rundown in our core operating account balances for 2022.

Speaker 5

Okay, great. That's helpful. Thank you. And then separately, on the Peoples deal, I know you mentioned Your forecast related to the deal are being unchanged. Anything else you can comment on in terms of the expected

Speaker 3

Yes. It's we're kind of in the same boat we were in the Q4, John, where we were pleased to see, As you've noted, the bottleneck clear and that things are happening, and we're hopeful that we'll receive positive news, here in the Q1.

Operator

And we will take our next question from in part, Ken Usdin with Jefferies. Your line is now open.

Speaker 6

Hey, thanks. Good morning, guys. Hey, I wanted to just follow-up on your comments about that Excess equity position and the securities, I think there's a perception that you might have gotten more aggressive. I heard you just say that you're only expecting to build the book by About $1,000,000,000 over runoff. And I guess can you just give us updated thoughts on how you're looking at So mix of earning assets, presuming that those deposits do shrink and with kind of an in and out, as you mentioned in your loan growth guide, how you would For the overall composition of the book to look from like a loan starting assets perspective.

Speaker 6

Thanks, Darren.

Speaker 3

Sure. There's a lot to unpack in the question, Ken. So just starting with the cash and the securities. If you think about uses of the cash, there's 2 that we've been looking at. 1 is retaining our mortgage production, And that's a way to get some duration and some yield.

Speaker 3

And so we're taking that on the balance sheet instead of in the securities portfolio in MBS. And when you look in the securities portfolio, over the last quarter, we've kind of shifted a little bit to shorter duration treasuries, kind of 2 to 3 years as the curve reshaped. And so we'll continue to build that portfolio, but we're participants are being patient because we see where rates are headed. And so we're trying to trade off the incremental spread that you can get by putting more securities on the books with the downside of the mark to market risk that goes through your OCI and affects your tangible book value. And so That's what's on our mind as we look through those balances.

Speaker 3

The other thing to keep in mind as we talk about the brokered Money markets and CDs coming off that will be a use of some of that cash. And we also expect to see some use with Peoples when the two Thanks come together. And so the cash, we're watching it closely. We participants don't love having such excess balances that they don't earn much, but at the same token, we want to make sure we're careful with how we start to deploy it. Decrease in cash, that would be the largest driver of the decrease in earning assets in our forecast of 2022 over 2021, But doesn't have as meaningful an impact on NII, obviously, because they're very low margin.

Speaker 3

When I look underneath and What I get excited about looking into 2022 is that across all of our portfolios, Holding the specials, which I'll get to in a second aside, whether it's C and I, whether it's residential mortgage or whether it's consumer, We're expecting growth in those portfolios. And we do expect a decrease slight decrease in the CRE portfolio over the course of the year, for the reasons that we've talked about as we both reshape our go to market strategy there so that we can actually provide better service to our clients, as well as just the normal course of construction loans, paying down and reaching their end. And so when you take that, which is the core of the bank, It's actually low to mid single digit growth in those portfolios. The what I would refer to or I'd refer to as the specials, one is the PPP loans. And so when you look at those on an average basis, in 2021, they averaged about $4,000,000,000 and that average in 2022 is down to about $500,000,000 and so that's got a meaningful impact on the printed loan growth.

Speaker 3

And then the same thing with the Ginnie Mae buyouts, where on an average basis in 2021, they were around $3,500,000,000 And We think as those repool and we put them back into the servicing portfolio and do the gain on sale Those dropped to about $1,600,000,000 And so when you look at on average, so when you look at the what I would refer to as the specials, You kind of see a decrease in those balances, but that's the things that have happened over the course of Over 2021 2020. And so as we exit 2022, we start to have a more contemporary balance sheet That starts to skew a little bit more towards C and I, and a little less cash on the balance sheet, Which overall should start to see the margin increase and allow us to benefit from the rising rate environment.

Speaker 7

Got it. That was

Speaker 6

a complicated question and great answer. So I'll leave it at that. Thank you.

Speaker 8

Thanks, Ken.

Operator

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

Speaker 9

Hi, Darren.

Speaker 3

Good morning, Gerard.

Speaker 9

I'm with you, a strong defense does win the big games, but when you're behind, You have to have a hurry up offense. So with that in mind and your capital levels being so high, How aggressive can you be after the people's deal in buying back your stock or using that excess capital to bring that CET1 ratio down to a more normal level?

Speaker 3

Well, Gerard, that's a good question. We could debate whether capital is offense or defense. But certainly, To your point, holding 11.4 percent CET1, which I think will post participants, obviously, we believe we need to run the combined organization, given the credit emphasis of both of those organizations. Participants When you look at people's history of strong underwriting and you look at how our results have held up over the course of the last couple of years participants And the improvements we're seeing in the portfolio, we definitely see an opportunity to bring that down, and we will look to bring those ratios down over the course of 2022. Where the actual target and how fast we'll get down there participants will kind of be dependent on when we close and convert the merger.

Speaker 3

But as you think about targets of where we'd like to be and think about where we were kind of pre pandemic. That's a good place to think about where we might end up over the course of The next 6 quarters or something like that once you get through the deal.

Speaker 9

Very good. And then as a follow-up, You touched on credit quality. Obviously, your net charge offs are remarkably low similar to some others in the industry, but That's a hallmark for you folks. Can you share with us what you said about being taken out on some of the Hotel loans in the hospitality and leisure industry?

Speaker 3

Yes, happy to. Well, You'll see the full print when we put 10 ks out. But if you look at where the decrease participants over the quarter, was predominantly in the hotel and retail space. And when you look at the hotel portfolio, What we're seeing is we're seeing a couple of things. We're seeing upgrades because when we look at our at the activity that's happening in the hotel space, When you get to resort oriented hotels or ones that are more suburban and drive up, we've seen occupancy rates come back And being very strong.

Speaker 3

There's still some challenges in the larger city hotels Business travel isn't quite back to where it was, but they're off their pandemic lows. And then some of the when we look at some of the properties that have been refinanced by others, No matter what class it is, what we're finding is there are other institutions that are coming in and offering terms that might be Interest only for 1 or 2 years and not fully amortizing, which for many of these properties is a very attractive alternative. What's kind of interesting about it is if we were to restructure those loans, to a similar thing similar setup, It would be a troubled debt restructure for us, but for someone else, it's a new loan. And so it's one of those things where I guess I'd rather have a payoff than a charge off. And so that's part of what's helping, bring down both the criticized and the non accruals.

Speaker 9

Great. And Don, good luck in your time. And if you're ever in Boston in November for the BAB conference, you're always welcome, Don. So thank you.

Speaker 3

Thank you.

Operator

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

Speaker 2

Thank you. Good afternoon. So my question is just now that you're kind of getting under the hood with Peoples, I mean you took a merger charge this quarter. Is there anything that's going to surprise you on the upside? And also on a related note, Peoples has a larger share of securities participants are much larger than what you have on your balance sheet.

Speaker 2

Is that kind of why you look a little bit more cautious adding more securities on your own portfolio?

Speaker 3

Excellent question and observation, Chris. That's definitely one of the things that is on our mind as we think about the Securities portfolio, not just the size of it, but the composition of it. If you look within the Peoples portfolio, there's a large municipal bond portfolio there, which gives you a little bit different, duration and composition. And so as we think about The cash that we have and how we want to build up our securities portfolio, we're taking that into account. As I mentioned before, we're also taking into account some of the other funding sources that Peoples has on their balance sheet that we would be able to reduce that funding and lower our overall cost of funding with the cash balances that we have.

Speaker 3

Obviously, we're all in the same banking industry, so they're still also seeing some cash balances grow as well and are looking to deploy them. But That's absolutely part of our thought process and patience on putting that cash to work. And I guess as we've gone Through the merger preparation process, we just continue to be excited by the combination of the 2 organizations. The cultures between the two couldn't be more similar. The focus on clients and the focus on geographies, The opportunity to have complementary product sets is encouraging and we're just Between both organizations anxious to be able to go to market as one unified team because everyone can See the potential.

Speaker 3

Is there anything really new from what we saw going in? The answer is probably We continue to be excited about the opportunity to grow the small business segment within the Peoples portfolio and bring some of our Treasury Management into the C and I space. We're both pretty solid at commercial real estate. When you look at what we have from Peoples, there's some unique segments that they participants that we can bring to our client base, their leasing equipment finance, small ticket leasing, some of the fund lending, As well as some of the niche businesses they have like the mortgage warehouse lending. And so we think the combination, we're still excited about it.

Speaker 3

They're very complementary. We love the funding deposit franchise that they have. And so no real big upsides in terms of new things, But certainly, continued enthusiasm for what we saw back almost a year ago.

Speaker 2

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

Speaker 3

Sure. So By law, there's a 15 day cool off period once the approval is granted. And so technically, 15 days is your fastest. Usually, you're within that time period plus or minus a week, depending Trying to manage things like month ends and quarter ends and the like, but that's kind of generally the timeframe. And then once that's done, then you try to lock down a time to do your system conversion.

Speaker 3

And so the complicating factor there is when you're merging with an organization that has a number of outside contracts and outsourcing where some of their technology is provided by a third party. You got to coordinate with that 3rd party to make that happen. And so We think it's probably in the order of 120 to 150 days post legal close that you can do the system conversion and then you Conversion and then you'd probably try and time it around a long weekend to the extent that you can just because it helps derisk That's system integration. But obviously, our mutual desire is for a quick close and as quickly as possible, a conversion so that we can get on to the things that I mentioned before being out, Talking to customers and driving business.

Operator

And we will take our next question from Dave Rochester with Compass Point. Your line is now open.

Speaker 8

Hey, good morning guys.

Speaker 3

Good morning.

Speaker 8

A quick one on the loan side. It sounded like the Floor Plan segment was really strong this quarter. Can you just give an update on the dynamics you're seeing in that market and what your outlook is there? It sounds like maybe you have some more momentum there. So just curious what you're hearing from customers and how much you expect that to contribute to loan growth this year?

Speaker 3

Sure. Yes. On an end of period basis, we saw the floor plan loans up just over $500,000,000 Which typically you would see an uptick in the Q4. There is a pattern to that business that You see balances build in the Q4 and a little bit into the first and then as those inventories get sold And ultimately the dealers clear out there are lots of one model year to prepare for the next. You see a decrease in the Q3.

Speaker 3

And so that pattern had shifted a little bit for the last 18 months, I would say, and it's mainly been a decrease. So we were pleased to see some balances come back, and it's really about the level of production. And so if you looked from a dealer's perspective, for their profitability, but you're seeing the manufacturers ramp up, and that's what was reflected in our auto floor plan growth. We expect That ramp up to continue. The SAAR last year in 2021 was the lowest it's been in a while, a 14 $15,000,000 or $14,050,000,000 vehicle level.

Speaker 3

I think we got as high as $17,000,000 $17,500,000 pre pandemic. And so we'll see that start to come back. One of the things that you're seeing in the dealers is the shift to electric. And so I think there's some changeover that you're seeing compromising that volume in the short term. And so our expectation for floor plan Over the course of the year is that we'll see balances and utilization rates tick up, Not all the way back to what they were pre pandemic, but maybe 2 thirds of the way back in 2022,

Speaker 2

and then

Speaker 3

the rest of the way back Excuse me, about half of the way back in 2022, 75% of the way back in 2023. And then by the time you get to the start of 2024, you're probably back to It's a positive thing to see those volumes going. It's good for clients and good for the economy.

Speaker 8

Yes, sounds good. So you definitely hit the inflection point there on that. That's great.

Speaker 3

Yes.

Speaker 8

And maybe just a real quick one on deal timing. I know you're really limited as to what you can say and Appreciate the color you've given so far. I was just curious if you're still kind of getting requests for information or In an info exchange or whatever with the regulators or if that process is completed and you are just waiting on an answer at this point?

Speaker 3

Yes. It's what I would describe as by and large the normal process with back and forth with questions. And What's abnormal, obviously, is the time and some of the things that are happening around Washington. And we're just Got our fingers crossed and we're waiting. So fingers crossed, it's More dire than it is.

Speaker 3

I think it's just being patient that while Washington gets through the backlog And the optimist is that it's happening, right? We saw some deals get approved and we expect it to continue.

Speaker 8

Sounds good. One last one on the securities purchases. I appreciate all the color you gave there. Just wondering if there's any kind of sensitivity around as it relates to the steepness of the curve. So if we were to see A more material seasoning than you guys are looking for, if maybe that could make you more comfortable with picking up some more volume there.

Speaker 8

And Sorry if I missed it, but can you talk about what your expectation is at this point for the long end of the curve that you've got baked into your NII and margin estimates? That'd be great.

Speaker 3

Sure. We've got, obviously, a lot of liquidity to put to work. And When we think about the securities portfolio, the steepness helps. What we will probably pay a little bit more attention to is not just the steepness, participants are in the market. Where the short end is, when we look at some of the cash we've been deploying, we've been deploying it in mortgages, as I mentioned, through the balance sheet as opposed to through the securities portfolio.

Speaker 3

And so instead of having MBS, we're actually putting mortgages on the balance sheet And getting some duration and yield that way. And so in the securities portfolio, we've tended to skew a little bit recently towards the shorter end of the curve. So kind of in the 2 to 3 year space. And so that's really where we've been watching and looking. And One of the things that we'll pay attention to from a shape of the curve perspective is where the forward rates are.

Speaker 3

And if we start to see, the forward rates move, one of the other ways that we'll start to try and Take some of that asset sensitivity off the table, it might be through the hedging program and restarting the hedging program depending on what we see there. So There's a lot of different avenues that we're thinking about, both to protect and grow net interest income as well as to put the cash to work. And it's just thinking through all the alternatives, not just M and T, but the combined M and T with Peoples and managing the asset sensitivity across the balance sheet, the securities portfolio and hedging and making sure that we're

Speaker 8

And Don congrats on a great career at M and T. Great working with you.

Speaker 3

Thanks.

Operator

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

Speaker 4

Good morning. Good morning. I just wanted to circle back I think you mentioned CRE balances low single digits in 2022. Just if you don't mind, talk to us in terms of If you look beyond 2022, is it possible that this portfolio remains a drag on overall loan growth participants as you move towards the fee driven strategy and give us an update in terms of the growth market on the fee side, how quickly will that start

Speaker 3

Yes. I think as it relates to the CRE portfolio, the way to think about it is the decrease participants are more on a prospective basis as we work with our existing clients as well as new ones, and we're helping them finance their properties, that we'll look to use a mix of both our balance sheet as well as the balance sheet of others. And so what will happen is the rate of growth, new originations will slow and that will be what drives the decline Because there's normal amortization and there's normal payoffs that happen. But obviously, as we make that shift, Then we'll start to grow the fees, and the fee income will come. It will probably lag by slightly the net interest income.

Speaker 3

But the flip side of that is that it reduces the capital required to support that. And so that allows us To both improve the economics of the individual deals, but then to manage our balance sheet and manage our equity levels, and either deployed into other high yielding customer segments and asset types or to deploy it back to shareholders. And so when we think about it, from an EPS perspective and a return perspective, while on a The balances might decline. It is, in our opinion, additive to returns and additive to EPS.

Speaker 4

And is it allowed to be EPS today or is it a year out by the time we get there?

Speaker 3

It will be a year before that stuff starts to happen and it will grow as we go through 2023 and 2024.

Speaker 4

All right. And just a second question on loan growth around retention of mortgages. Is there a certain level that you're targeting in terms of how big that book participants can get relative to the overall portfolio. Just give us a thought process around when you may make the pivot again retention versus

Speaker 3

Yes. I guess, as we look forward, I think It's safe to say that for 2022, we'll be retaining most of those mortgages and perhaps into 2023. We'll look at where gain on sale margins are and what constraints, if any, the mortgages are putting on the balance sheet. We'll think about whether or not we want to hold MBS in the future instead of having the mortgages on the balance sheet. As rates move up, Then you start to reduce some of that convexity risk that sits in the MBS portfolio and we might think about shifting some of the balances there as well.

Speaker 3

If you went back and looked at our balance sheet through time, you would see that the mortgage balances peaked when we acquired Hudson City, And we came down from there. So that would probably be the upper bound. I don't think we'd get to that level. But overall, our objective is to maintain a diversified balance sheet across geographies and customer segments and asset classes. And The mortgage portfolio got a little bit smaller through the course of the last few years and we'll look to build it back up.

Speaker 3

Where Where the ending point is, again, we'll come back with a little bit more detail there. The reason I'm not giving a specific target is Hudson City has mortgages on their balance sheet as well. And when we put the 2 organizations together, Sorry, Peoples, I had a video on my mind. That's all right. I'm having PTSD.

Speaker 3

When we combine with Peoples, they also have mortgages on their balance sheet. So again, like we talked about with the Securities portfolio, we're thinking about not just what we look like by ourselves, but what the combined organization and balance sheet might look like. So we're taking that into account as well.

Speaker 4

All right. Thanks. And Don, congratulations and good luck. Thanks.

Operator

And we will take our next question from Erika Najjarin with UBS. Your line is now open.

Speaker 10

Good afternoon. Just wanted to ask a few follow-up questions. Darren, on the 9 to 12 basis at this point of NIM sensitivity to each 25. I just wanted to make sure I heard it right. That includes

Speaker 3

On a dynamic balance sheet and it's $9,000,000 to $12,000,000 per $25,000,000 for the first 100.

Speaker 10

Right, sorry, yes, yes. And so what's the deposit beta underneath it, dollars 9 to $12 per $25?

Speaker 3

Well, it Depends, and that's why we got the range. There's some part of the deposits that are pegged to the index. And so if it's Just those that move then you're moving down enough kind of a 5% to 10% range of deposit reactivity. If it happens to get all the way up to 25 30%, then you would get to the lower end of that range. But I think we believe much like others that With all the excess deposits in the system and excess liquidity that the reactivity, at least for the first few hikes With the exception of those that are tied to an index, will be pretty low.

Speaker 10

Got it. And Darrin, the stock did turn When you gave your guidance for expenses being up low to mid single digit on a standalone basis and If we want to take the football analogy further, in the 3% to 5%, I guess how much is offense versus defense, Right, in terms of how much are you pulling forward some investment spend versus the cost inflationary catch up. You said 5.2% was not a normal rate of growth for expenses for M and T. It's 3 to 5 the new normal or low to mid single digits the new normal?

Speaker 3

Well, I guess, I'll start with it's hard to say what the new normal is given the inflationary environment we're in. If we step back and we'll give context, If you look at our expense growth, compound annual growth rate over the last 2 years, it's actually under 2%. I think it's about 1.6% or 1.7%. And so what happened was when we took the actions we did in 2020 to adjust Some of our expenses given the environment we are operating in, most notably compensation, that we actually had a decrease in 2020 compared to most others who had an increase. And so it came back in 2022 or 2021, excuse me.

Speaker 3

And so when you look over the course of The average over those 2 years, we're talking 2% expense growth, which in this inflation environment is pretty good And pretty consistent with M and T's long term average. And so when we think about 2022 and the 3 to 5, There's a couple of things going on there. One is just when you look at the changes that happened over the course of 2021 and where we ended the year, participants are in the range of the 4th quarter, bakes in some of growth, just by itself. And then on top of that, as we mentioned, we start to come back to a more normal environment and we see advertising and promotion expenses come back Closer to what they were pre pandemic, although not all the way back. And then as we talk about investments, the software and outside data processing, Outside data processing is largely tied to volume.

Speaker 3

And so as we see fee income growth, we're going to see expense growth. And a lot of the software rather than developing it ourselves and using the cloud that you see some of those expenses move up. And obviously, as we make those investments, they will have countervailing impacts on other parts of the organization, Notably in professional services and salary and benefits costs, but there will be a timing mismatch. And so those should help us occurred in 2021 and then their full year impact in 2022.

Operator

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

Speaker 7

Hi. I want to come back to the balance sheet. And And I know you've touched on a lot of these pieces, but I'm sitting here and I'm hearing deposits down, the only bank I cover where they're talking about deposits Loans down, securities not really growing after you've shrank at kind of 75%. And I get it, right? Like you're the best bank at PPP Relative to your size, there's going to be a drag.

Speaker 7

You probably have the most in any buyouts, which is very profitable relative to your size. It just doesn't feel right kind of where we are in the economy. And I guess I come back and wonder, like are you missing some things on the loan origination side, Like a lot of your peers have gotten into capital markets, which creates some large corporate opportunities in the lending side. They've acquired point of sale. I'm not sure how economically attractive all these things are, but like they're doing things to improve their asset generation.

Speaker 7

And I know you've been very conservative in the past. You talked about playing defense and you tend to do extremely well kind of in a credit cycle. But I'm just wondering Is there something more that's needed on the asset generation side if we get this multiyear recovery that many people think we'll go out?

Speaker 3

Yes. It's I appreciate the clarification. We'll go back through some of the categories. When we look at the C and I portfolio and our expected growth rate there, which would include What we talked about in the floor plan business as well as other C and I, we're actually expecting growth In 2022, on an average and an end of period basis, that's low double digits. When we look at residential mortgage growth as we retain the balances on an average basis, we think that's mid single digit growth And the consumer business is up, upper single digits.

Speaker 3

The only one portfolio where there's some decreases is the CRE portfolio and that's for all the reasons we've talked about. When you put all those together, You've got kind of mid single digit growth in the core portfolio, which I think is participants are consistent with what we're seeing and how we're thinking about the world and taking advantage of the growth that's out there. It's participants The size of the PPP and how well we did in 2020 2021 That is affecting the average and the total. And then the other piece is the Ginnie Mae's. But outside of those things, We're seeing the growth that you're talking about.

Speaker 3

When you talk about deposits, the core deposits and the core operating accounts of our customers, we're not expecting material decreases. It's some of the deposits where they're tied to an index and they would not be what we can consider core operating accounts that we're anticipating some decline and whether that's the brokered money market and brokered CDs as well as escrow balances. And so it's just continuing to look to optimize those balances and deploy that excess cash in a way that 2022, you make it sound dire. Actually, I feel as optimistic as I've been participants in the last 18 months about the prospects for all the reasons that you talked about. It's just the it's a little bit difficult with some of the moving parts on the balance sheet.

Speaker 3

But participants When I look forward at what we've got in front of us, whether it's deploying the excess cash, it's growing the assets as we talked about, deploying the excess capital. There's a number of opportunities and options that we have in front of us continue to grow the bank and make 2022 and beyond the same M and T that you're used to seeing. And so it's just getting through Some of these transitions that are happening on the balance sheet, but underneath, I think things look really good.

Operator

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

Speaker 1

All right. Thank you and thank you all for participating today. And as always, if any clarification of any of the items in the call or news release is necessary, Please contact our Investor Relations department at area code 716-842-5138. Thank you.

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Earnings Conference Call
M&T Bank Q4 2021
00:00 / 00:00