The M&T Bank Fourth Quarter and Full Year 2023 Earnings Conference Call began with an introduction from Brian Klock, Head of Market and Investor Relations. He reminded participants that the call was being recorded and handed over to Daryl Bible, Senior Executive Vice President and CFO. Bible highlighted the bank's purpose, mission, and operating principles, which have contributed to their success. He also mentioned how the bank has shown up for communities in times of need, such as in Vermont and Lewiston, Maine.

The speaker discusses the company's commitment to supporting small businesses and their charitable foundation. They also highlight the success of the People's United franchise and their growth in New England. The company's capital and liquidity levels remain strong, and they have reduced asset sensitivity while protecting shareholder capital. However, they acknowledge that their work is not done and they are focused on creating value and stable revenue and earnings in the long term. Overall, the company had strong results in 2023 with positive operating leverage, loan growth, improved expense control, and strong returns.

In the fourth quarter, our pre-tax pre-provision revenue increased by 22%, and we saw positive operating leverage of 3.9%. Net charge-offs were in line with our expectations and our GAAP net income was $2.7 billion. Adjusted diluted earnings per share were $15.72, up 11% from the previous year. Our adjusted returns were strong with a return on assets of 1.33% and return on common equity of 11%. In the fourth quarter, PPNR declined slightly from the previous quarter, but C&I and consumer loan growth remained strong. Our expenses decreased by 2% from the previous quarter and were down each consecutive quarter in 2023. Our taxable equivalent net interest income was $1.7 billion, down 3% from the previous quarter, and our net interest margin was 3.61%, down 18 basis points.

The decrease in margin was primarily due to an unfavorable deposit mix shift, higher rates on customer deposit funding, and carrying additional liquidity on the balance sheet. Average investment securities decreased slightly, while interest-bearing deposits at the Fed increased. Average loans and leases also increased slightly, with growth in C&I and consumer loans offsetting declines in CRE and residential mortgage loans. The liquidity position remained strong, with investment securities and cash totaling 27% of total assets. The bank continues to focus on growing customer deposits, with a $2 billion increase in average deposits.

In the fourth quarter, customer deposits accounted for 3/4 of the quarterly growth, with a decline in average demand deposits due to a shift towards higher-yielding products. Non-interest income increased by 3%, driven by strong commercial mortgage banking revenues and trust income. Non-interest expenses decreased by 2%, resulting in an adjusted efficiency ratio of 53.6%. Full year net charge-offs were in line with historical averages.

The net charge-offs for the quarter increased by 15 basis points due to office and C&I charge-offs. Non-accrual loans have decreased each quarter since 2023 and continued to do so in the fourth quarter. The allowance for loan losses has increased by $200 million since the end of 2022, resulting in an allowance to loan ratio of 1.59%. The provision for the quarter was $225 million, leading to an allowance build of $77 million. The level of criticized loans is estimated to be $12.6 billion, with thorough reviews conducted on over 60% of all CRB loans.

The increase in criticized CRE loans was due to reviews and potential maturities in 2024. The growth in criticized C&I loans was not tied to a specific review, but rather an annual review cycle. The top 10 downgrades were from various industries, with common themes being higher interest rates and labor costs. Healthcare, multifamily, and retail CRE loans accounted for the majority of the increase in criticized loans. Loan-to-value ratios remain strong for these loan types. Modifications at maturity have been successful in supporting these assets and have not led to growth in non-accruals. The majority of criticized accrual loan balances and non-accrual loans are still paying as agreed.

M&T's CET1 ratio is expected to increase at the end of 2023 due to a pause in share repurchases and strong capital generation. The economic outlook is for a soft landing scenario with a possibility of a mild recession. Consumer spending is expected to continue driving growth, but inflation is above the Fed's target due to rents and home prices. M&T's net interest income is expected to be in the $6.7 to $6.8 billion range, with a net interest margin of 350. The company has a high level of liquidity and plans to shift some cash into securities in 2024.

The company expects to protect against the risk of lower interest rates through hedging actions, but this may result in a decrease in net interest income in 2024. They anticipate growth in C&I and consumer loans but a decline in CRE and residential mortgages. Deposit levels are expected to remain stable, with a focus on growing customer deposits at a reasonable cost. Non-interest income is expected to be solid, driven by lower rates and higher valuations. Expenses are expected to remain flat, with a focus on investing in the franchise and key priorities. Net charge-offs are expected to be 40 basis points, and the taxable equivalent rate is estimated to be 24.5%.

M&T's strong balance sheet and responsible management of capital have been key factors in differentiating the company. While share repurchases are currently on hold, the company will consider resuming them in the future after evaluating various factors. The company has made enhancements to its financial reporting, including reclassifying loans and changing operating segments to better reflect management decisions and performance assessment. Additionally, certain categories have been adjusted in the expense base for better accuracy.

The speaker concludes by stating that M&T is a purpose-driven organization with a successful business model that benefits all stakeholders. They have a track record of outperforming peers and remain focused on shareholder returns and consistent dividend growth. They are also disciplined, inquirer, and prudent with shareholder capital. The integration of People's United is complete and they are confident in their future potential. The speaker then opens the call to questions, and one question is asked about M&T's comfortable level of CET1 on a longer-term basis. The speaker responds that it would depend on the environment and whether or not they are doing a transaction, but they typically operate with a buffer of 50-100 basis points over what is required by regulations. Another question is asked about M&T's credit losses, and the speaker responds that their credit losses are generally below peers based on their experience.

Daryl Bible, of M&T Bank, is confident that the bank will continue to have a low loss history due to their disciplined approach to client selection and underwriting. He believes that the recent increases in criticized loans are a reflection of market conditions rather than a change in their underwriting standards. He also notes that the increase in multifamily loans is driven by interest rates and that overall, construction loans are performing well. The healthcare sector is facing reimbursement issues.

The speaker discusses the impact of rising costs on reimbursement rates in the healthcare sector and the stability of their office, retail, and hotel properties. They also mention their NII guide and how it may be influenced by future rate cuts and their decision to move towards a neutral position through investments in securities and interest rate swaps.

The speaker discusses their strategy for managing interest rates and deposit betas in order to produce stable and predictable earnings. They also mention that their credit reviews for commercial real estate do not take into account the forward curve, but if rates fall significantly, it could have a positive impact on their credit costs. They did not disclose their updated office reserves.

The office sector is facing structural challenges that will play out over time, but the company has a longer maturity perspective and strong reserves to mitigate risk. The current reserve for office is 4.4%, and the company has a lot of time for leases to mature and resizing risk to occur. The recent reserve build was mainly driven by increases in criticized loans in healthcare, multifamily, and hotel, as well as loan growth in C&I and consumer loans. The company does not anticipate significant losses due to the loan-to-value ratios and collateral in these transactions.

In response to a question about the reserve and criticized assets, Daryl Bible from the company Evercore ISI explains that they have done a thorough review of their CRE portfolio and have seen an average decrease of 20% in valuations. He also mentions that they continue to have quarterly reviews and are being cautious with their reserves. He also mentions that they have completed a criticized scrub but there may still be some adjustments in the future as they receive new information.

Daryl Bible, the speaker, is discussing the company's current level of risk and how they have taken it into account. He hopes that in the future, they will be able to say they are at the top. The next question is from Ebrahim Poonawala from Bank of America, who asks about the growth in criticized loans and whether it will lead to more non-accruals. Daryl explains that the increase in criticized loans was mainly due to interest rates and labor costs, and there was a mix of industries in the top 13 credits. He also mentions that only 6% of criticized loans have gone into non-accruals and they feel good about their client selection. They expect some of the criticized loans to become non-accruals, but they believe they have classified them correctly.

M&T has not seen significant losses and therefore has not had to increase reserves. They have a history of acquisitions, but only if it makes sense culturally and financially. They recently acquired Peoples and are still working on integrating it. They are open to future acquisitions, but are currently focused on their top priorities.

Daryl Bible, CFO of Fifth Third Bancorp, discusses the considerations for restarting share repurchases, with the stress test being the last trigger. He also mentions the bank's focus on becoming less reliant on balance sheet and growing other businesses. He promises to do share repurchases when appropriate. Additionally, he talks about deposit costs stabilizing and the level of non-interest-bearing balances, which have reached around 30% of total deposits. He also mentions trust balances and their impact on the change in non-interest-bearing balances.

The speaker discusses the stabilization of DDA balances in the fourth quarter and their impact on net interest income. They also mention the growth of their CD book and the need to price it correctly. They plan to shrink their broker CDs over time, but this will have a minimal impact on their trust perspective. The speaker then answers a question about their current assumption for downside beta and states that their betas are in the low-50s range but would be in the mid-40s without the broker piece. They anticipate starting in the 40s for downside betas as well.

Daryl Bible, CFO of U.S. Bancorp, discusses the potential impact of interest rate decreases on the company's loan portfolio. He predicts a decline in beta impact and a potential increase in the ACL ratio, but states that the company feels confident in their current reserves. He also mentions ongoing discussions with commercial clients and the potential for loan growth in a soft landing scenario.

Daryl Bible, speaking on behalf of the company's clients, believes that a slight decrease in interest rates by the Federal Reserve will lead to increased investment and lending, which will benefit the company's fee income. He also mentions a recent increase in activity in their commercial mortgage area due to a move in the yield curve in treasuries. When asked about the reserve rate trajectory in commercial real estate (CRE), Bible explains that the company uses a model based on macro variables and credit ratings to calculate reserves, and it is difficult to predict exactly when they will be adjusted.

Daryl Bible, the speaker, is addressing a question about deposit margins in relation to beta and interest rates. He explains that while deposit costs are currently high, they will likely decrease as the Fed cuts rates. He also notes that he is satisfied with the current level of interest rates.

The speaker discusses the possibility of interest rates staying in the 3-4% range, and how as long as assets and deposits are priced appropriately, there is potential for healthy net interest margins. They also mention the importance of discipline and asset mix changes in managing margins. The previous speaker had predicted a normalized range of 3.6-3.9% for NIM, and the current speaker agrees with this estimate. They also mention the success of their predecessor in predicting charge-offs and their optimism for future growth.

During the earnings call, Daryl Bible discusses the bank's position on net interest margin (NIM). He mentions that they operate within a range of 3.6 to 3.9 and that they may operate lower due to carrying more liquidity. However, he feels confident in their ability to maintain a top quartile NIM due to their strong pricing of assets and growth of operating accounts. The increase in liquidity has cost them 6 basis points this quarter, but does not significantly impact NII.

The speaker mentions feeling positive about the current interest rate environment and the bank's focus on managing their balance sheet and serving their customers and communities. They also discuss their approach to managing commercial real estate loans, with a focus on working with building owners and expecting them to support their loans. The speaker also mentions a 4.4% reserve for office loans, which is primarily a general reserve but may have some specific credits included. They also note that charge-offs in the past year were primarily due to financial and institutional issues, and that they are seeing some pressure on debt service coverage ratios in their commercial real estate loans.

Daryl Bible, the CFO of Wells Fargo, explains that the majority of their criticized assets are between 1 and 1.1 and he expects them to improve over time. They have increased their projected losses for 2024 due to normalization in the consumer portfolio and working out a few more credits. In terms of the securities book, they plan to move $3-5 billion from cash to non-convex securities with a duration of 3 years. They also have $9 billion in U.S. treasuries with an average yield of 2% that will be re-priced at a higher rate.

The securities portfolio has seen an increase, while the auto and RV portfolios have also grown with higher yields. The majority of the loan book is floating, with fixed portfolios showing higher yields. The mortgage portfolio will also see some growth, but at a slower pace. The bank is working on getting more production off balance sheet and generating fees instead of NII.

A question is asked about the ideal commercial real estate concentration on the loan book, to which Daryl Bible responds that they plan to bring it down by $3 billion per year and that it will likely be lower than the current 25%. He also mentions that the efficiency ratio target has not been updated in a while and that it will likely settle in with the normalized NIM, but may start to grow in late 2024.

The speaker discusses the company's positive operating leverage and their efforts to control expenses. They are investing in key projects, but the goal is to have revenue grow faster than expenses. The speaker is confident that they can manage a few percent growth in expenses in 2025 and 2026, and lists several areas where they can reduce costs, such as procurement, real estate, and automation. They also mention a focus on simplification in 2024.

The speaker discusses the transformations taking place in the company and how they will result in fewer processes and simpler ways of getting things done. Prioritization is key, and focusing on certain projects will help control expenses and generate positive operating leverage. The speaker also mentions an estimated number for Bayview for the year. The call is then turned over to Brian Klock for closing remarks.

This summary was generated with AI and may contain some inaccuracies.