Good day and welcome to the M&T Bank Second Quarter 2023 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Thank you, Todd, and good morning everyone. I'd like to thank everyone for participating in M&T's second quarter 2023 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules by going to our website www.mtb.com. Once there, you can click on the Investor Relations link, and then on the Events and Presentations link. Also, before we start, I'd like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the Investor presentation as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and Investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning are M&T's Senior Executive Vice President and CFO, Daryl Bible; and Senior Executive Vice President and Former CFO, Darren King. Now I'd like to turn the call over to Daryl Bible.

Thank you, Brian, and good morning, everyone. I would like to start by thanking Darren for his help with my transition. I'm very appreciative of his guidance and support. I'm also grateful for everyone across the bank that has welcomed me and helped me get up to speed quickly, including my incredibly talented finance team. Like me, I'm sure all of you are extremely happy that we now have an earnings presentation. So thank you to investor relations, corporate communication and corporate reporting teams for making this a reality. I'm very excited about the work we are doing and the transition has gone even smoother than I could have anticipated. I'm proud to be part of M&T's strong financial history, consistent operating philosophy, and conservative community-focused banking principles. I'm even prouder to be part of a company that is tied to its purpose to make a difference in people's lives. I would like to thank our over 22,000 M&T colleagues for all their hard work each and every day. You are driven by the idea of delivering on our purpose and guided by our set of core values. It is because of you that M&T continues to make a difference in our customers' lives and continues to produce strong results for our shareholders. Please turn to slide three. Let's start with our purpose, mission, and operating principles. Our purpose is to make a difference in people's lives by focusing on communities we serve. Our purpose drives our operating principles. We believe in local scale with 28 community-led regional presidents who make decisions about loans and community activities. This local scale has led us to superior credit performance, top deposit share, and higher operating and capital efficiency. Our performance is fueled by a relentless focus on customers, talent, and communities. Moving to slide four. We deliver for customers. We have seasoned talent, diverse boards, and new capabilities that provide solutions that make a meaningful difference to our customers. Please let's turn to slide five. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investments in enhancing customer experience and delivering impactful products have fueled organic growth. A significant milestone this year was a designation of over 119 multicultural banking branches across our footprint, with more to come in our expanded communities. These branches are community assets dedicated to the cultural fluency for our customers. We also believe in supporting small business owners who play a vital role in our communities. Despite operating only in 12 states, we rank as the number six SBA lender in the country and rank highly in ten of our 16 markets. Our commitment to supporting the communities we serve extends to affordable housing projects with over $2.3 billion in financing and over 2,600 home loans for low and moderate-income residents. Additionally, M&T Bank and our charitable foundation granted over $47 million to support our communities in '22 alone. Please turn to slide six. Here we highlight our commitment to the environment. We have invested over $230 million in the renewable energy sector and significantly reduced our electricity consumption since 2019. Our ESG report will be published soon, but I encourage you to review this slide for some of the highlights. Turning to slide eight. Our second quarter results reflect the strength of our core earnings power, balance sheet, and liquidity position. Adjusted to exclude the $225 million pre-tax gain from the sale of the Collective Investment Trust or CIT business in April, second quarter revenues have grown by $395 million or 20% compared to last year's similar quarter. This translates to a 10% positive operating leverage year-over-year. On the same basis, pre-provision net revenues have increased 35% since last year's second quarter to $1.1 billion. Credit remained stable. Net charge-offs increased in the second quarter, but year-to-date still remain below our historical long-term average. Net income for the quarter was $867 million, up 24% from linked-quarter. Diluted GAAP earnings per share were $5.05 for the second quarter, up 26% sequentially. Now let's review our net operating results for the quarter on slide nine. M&T's net operating income for the second quarter, which excludes intangible amortization, was $879 million, up 23% from linked-quarter. Diluted net operating earnings per share were $5.12 for the recent quarter compared to $4.09 in this year's first quarter. Tangible book value per share increased 3% to $91.58. On slide ten, you will see that, on a GAAP basis, M&T's second quarter results produced an annualized return on average assets and return on average common equity of 1.7% and 14.27% respectively. Results for the second quarter of this year included an after-tax $170 million gain on the sale of the CIT business in April. Excluding this gain, adjusted GAAP earnings per share were $4.11 and adjusted return on average assets and average common shareholder equity were 1.39% and 11.6%. Next, let's look a little bit deeper into the underlying trends that generated our second quarter results. Please turn to slide 11. Taxable equivalent net interest income was $1.81 billion in the second quarter, slightly below linked-quarter. This decline was driven by higher volumes of non-core funding and unfavorable mix change caused by disintermediation, partially offset by higher interest rates and one additional day. The net interest margin for the past quarter was 3.91%, down 13 basis points from linked-quarter. The primary driver for the decrease in the margin was partially impacted from the mix change to the higher-cost funding, which we estimate reduced the margin by 18 basis points. Higher yields on earning assets, net of rates on deposit funding, benefited the margin by four basis points. Turning to slide 12. Capital levels remained strong with the CET1 ratio at the end of the second quarter at 10.58%. Average earning assets increased by $1.9 billion or 1% from the first quarter to the second quarter due largely to the $1.5 billion growth in average loans and $1 billion increase in average investment securities. Turning to slide 13, we talk about the drivers on the loan growth. The total average loans and leases were $133.5 billion during the second quarter, up $1.5 billion compared to the linked-quarter. Looking at the loans by category on an average basis compared to the first quarter, commercial and industrial loans increased by 5% to $44.5 billion. We continue to see growth in our dealer and specialty businesses, plus we are adding new customers as we grow market share in legacy and new markets. During the second quarter, average commercial real estate loans decreased by 1% to $44.9 billion. The decline was driven largely by lower construction loan balances. Average residential real estate loans were $23.8 billion, essentially flat compared to the first quarter of this year. Average consumer loans were down 1% to $20.3 billion, driven by lower activity due to rising interest rates. Turning to slide 14. Average investment securities increased to $28.6 billion during the second quarter due in large part to purchases late at the end of the first quarter. The duration of the investment securities book at the end of June is 3.9 years and the unrealized pre-tax loss on the available-for-sale was only $441 million. At the end of June, cash and interest-bearing deposits at the bank and the investment securities totaled $56.9 billion. Turning to slide 15. Deposit outflows during the second quarter on an average basis accounted for $2.1 billion or 1.3% in line with industry trends. Consistent with our experience prior to rising rates, the increased competition for deposits and customer behavior is leading to a mix shift within the deposit base to higher-cost deposits. Comparing the second to first quarters, average demand deposits declined by $5.7 billion. Savings and interest-bearing checking deposits decreased by $843 million while time deposits increased by $4.4 billion. The decline in average demand deposits resulted predominantly from a $1.1 billion decline in the corporate trust balances due in part to lower capital markets activities. The movement to sweep products as customers sought higher yields with $1.8 billion on balance sheet and $2.4 billion shifted off balance sheet sweep accounts during the second quarter. Average time deposit growth was driven by $2.3 billion in brokered CDs and $2.1 billion growth in consumer time deposits. We remain focused on growing and retaining deposits. In the period, deposits grew by $3 billion or 1.9% from the end of the first quarter. The growth was largely driven by broker CD balances, which increased by $4.1 billion compared to the end of the linked-quarter. However, since the end of May, our customer base for wholesale deposit balances have stabilized and started to grow with an increase of $523 million, driven largely by growth in commercial and consumer deposits. Now let's discuss non-interest income. Please turn to slide 16. Non-interest income totaled $803 million in the second quarter compared to $587 million linked-quarter. As noted earlier, the second quarter included a $225 million gain from the sale of our CIT business. Recall that M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $20 million in this year's first quarter. Excluding these two items, second quarter non-interest income increased by $11 million compared to the first quarter. Mortgage banking revenues were $107 million in the recent quarter, up 26% from linked-quarter, driven by $18 million in additional servicing revenues, representing the full quarter impact of the bulk of the MSR purchase completed at the end of March. Service charges on deposits were $119 million or up 5% compared to the first quarter. Trust income of $172 million in the recent quarter declined from $194 million in the first quarter, due largely to a $31 million decline in fee income resulting from the sale of the CIT business, partially offset by the impact of the seasonal tax preparation fees. Our revenue from operations adjusted from the gain from the CIT sale and the distribution at Bayview Lending Group in this year's first quarter was $137 million, down $2 million sequentially. Turning to slide 17 for expenses. Operating expenses, which exclude the amortization of intangible assets, were $1.28 billion in the second quarter of this year, down $64 million from the linked-quarter. As is typical for M&T's first quarter results, operating expenses in the first quarter included approximately $99 million of seasonally higher compensation costs. Excluding the seasonally higher compensation in the first quarter, operating expenses increased by $35 million sequentially. That increase was due to $31 million in higher compensation and benefit costs reflecting higher average headcount. The full impact of the annual merit increases and severance costs, $20 million in higher other operating expenses related to the bulk of the MSR purchase. These increases were partially offset by lower CIT related expenses, including $22 million of lower sub-adviser expenses and lower advertising and marketing and deposit insurance expenses. Given the prospect of slowing revenue growth, we remain focused on diligently managing expenses. The efficiency ratio, which excludes the intangible amortization and merger-related expenses from the numerator and the security gains and losses from the denominator was 48.9% in the recent quarter compared to 55.5% in 2023's first quarter. Excluding the gain from the sale of the CIT business in the second quarter, the efficiency ratio was 53.4%. Next, let's turn to slide 18 for credit. The allowance for credit losses amounted to $2 billion at the end of the second quarter, up $23 million from the end of the linked-quarter. In the second quarter, we recorded a $150 million provision for credit losses compared to $120 million in the first quarter. Net charge-offs were $127 million in the second quarter compared to $70 million in this year's first quarter. The reserve build was largely due to anticipation of declining commercial real estate values and loan growth. At the end of the second quarter, non-accrual loans were $2.4 billion, a decrease of $122 million compared to the prior quarter and represent 1.83% of loans, down nine basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $127 million. The increase in net charge-offs was driven by four large credits: three office buildings in New York City and Washington, D.C., and one large health care company operating in New York State. Annualized net charge-offs as a percentage of total loans were 38 basis points for the second quarter, compared to 22 basis points in the first quarter. This brings our year-to-date net charge-offs to 30 basis points, which is below our long-term average of 33 basis points. As we have noted previously, we expect net charge-offs to be lumpy on a quarter-to-quarter basis. This is the result of the unique nature of each property and borrower. In order to identify emerging issues that could lead to loan grade adjustments, we continue to perform ongoing rate risk, resizing risk, tenant sensitivities on commercial real estate portfolios on a quarterly basis. This work is reflected in our criticized loan portfolio. Loans 90 days past due on which we continue to accrue interest or $380 million at the end of the first quarter compared to $407 million sequentially, and total 43% of these loans 90 days past due were guaranteed by the government or government-related entities. Turning to slide 19 for capital. M&T's CET1 ratio at the end of June was an estimated 10.58% compared to 10.16% at the end of the first quarter. The increase was due in part to higher net income and repurchasing shares in the second quarter. In June, tangible common shareholder equity totaled $15.2 billion, up 3% from the end of the prior quarter. Tangible book value per share accounted at $91.58, up 3% from the end of the first quarter. In late June, the Federal Reserve released results from the annual bank stress test. While this was an off year for Category IV banks, given the timing of the People's United acquisition, M&T participated in the stress test this year. Our preliminary stress test capital buffer or SCB is estimated to be 4%. Using the SCB, which is in effect from October 1st, 2023 to September 30th of 2024, we will be subject to an 8.5% CET1 ratio. Now turning to slide 20 for the outlook. As we look forward to the second quarter of this year, we believe we are well positioned to navigate through challenging economic conditions. However, the rapidly changing interest rate expectations, combined with continued pressure on funding, affect our outlook for the full year 2023. The 2023 outlook reflects the impact of the sale of the M&T insurance agency that closed in October of last year and the sale of the CIT business that closed in April of this year. First, let's talk about net interest income outlook. We expect taxable equivalent net interest income to trend toward the lower end of the $7 billion to $7.2 billion range, which reflects a flat to modestly higher loan and deposit growth and incorporates a 125 basis point hike in August of this year. We noted on the first quarter call, a key driver of net interest income in 2023 will be the ability to efficiently fund earning assets. We expect continued intense competition for deposits in the face of industry-wide outflows. Full-year average deposit balances are expected to be up low single-digits compared to 2022. We continue to expect the deposit mix to shift towards higher-cost deposits, with declines expected in demand deposits and growth in time deposits and on-balance sheet sweeps. This is expected to translate through the cycle interest-bearing deposit beta through the fourth quarter of this year to the low to mid-40% range. This deposit beta excludes broker deposits. Next, let's discuss the outlook for average loan growth, which should be the main driver of earning asset growth. We expect the full-year average loans and leases balances during 2023 to be relatively stable. The mix of C&I, CRE, and consumer loans inclusive of consumer real estate loans is almost one-third each as of the end of June. We expect this trend to shift slightly to C&I growth outpacing CRE. As we have seen over the past four quarters, higher levels of interest rates are expected to slow down the growth of our consumer loan book over the remainder of 2023. Turning to fees. We expect non-interest income to be in the range of $2.25 billion to $2.3 billion. This outlook for non-interest income reflects lower trust revenues resulting from the sale of the CIT business in April as well as the incremental income from the bulk purchase of residential mortgage servicing rights at the end of this year's first quarter. Remember, the outlook does not include the $225 million gain from the sale of the CIT business. Turning to expenses. We anticipate expenses excluding intangible amortization to trend near the higher end of $5 billion to $5.1 billion. In addition, this outlook for net operating expenses includes the impact of the previously mentioned sale of the CIT business and the bulk mortgage servicing purchase. Intangible amortization is expected to be in the $60 million to $65 million range. Turning to credit. We expect loan losses to be near M&T's long-term average of 33 basis points. Although the quarterly cadence could be lumpy, provision expense over the year will follow the CECL methodology and be affected by changes in the macro outlook and loan balances. For 2023, we expect the taxable equivalent rate to be in the 25% range. Finally, as it relates to capital, this is a very clear differentiator for M&T. Our capital, coupled with our limited investment security market, has been a clear strength during these turbulent times. M&T has proven to be a safe haven for our clients and communities. The strength of our balance sheet is extraordinary. We take our responsibilities to manage our shareholders' capital very seriously and will return more when it's appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. Given the uncertainties related to the new capital rules that are coming out, we believe now is not the time to be repurchasing shares. That said, we are best positioned to use our capital for both organic and inorganic growth along with buybacks in the future, which will always be part of our core capital distribution strategy. In the meantime, our strong balance sheet will continue to differentiate us with our clients, communities, regulators, investors, and rating agencies. To conclude on slide 21. Our results underscore an optimistic investment thesis. Our economic uncertainty remains high, and that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with a successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with more than two times growth relative to peers. Our strong shareholder returns include 15% to 20% return on average tangible common equity and robust dividend growth. Finally, we are disciplined acquirers and prudent stewards of shareholder capital. Our integration of People's United is complete, and we are confident in our ability to realize our potential post-merger. Now let's open up the call to questions before which Todd will briefly review the instructions.

Thank you. We'll take our first question from Manan Gosalia with Morgan Stanley.

Hey, good morning.

Good morning.

I had a question on NII. I noticed you took your deposit balance guide up along with the deposit beta guide but kept the NII guide the same. So can you talk about the puts and takes there? I guess the question is why hold more liquidity and hold more in interest-bearing deposits in an environment where you're not growing loans that much? Is it more a function of any upcoming LCR rules or anything the regulators are asking you to do?

Thank you for the question, Manan. We begin each day focused on maintaining strong liquidity on our balance sheet, which we consider a crucial strength as we navigate these challenging times. We believe we are well-positioned to grow our deposits and increase our market share. We're actively seeking deposits from both existing clients and new customers. The deposit beta did increase, which is influenced by the balance of funding we receive from core deposits versus broker deposits. At the onset of the crisis in March, we reduced our Federal Home Loan Bank advances last quarter and utilized the broker CD market in the second quarter, which we considered a strategic move. Accessing the broker CD market raised our deposit beta, which was recorded at 40% this quarter. However, if we exclude the broker CDs, that figure drops to 34%. Our guidance indicates a move to the low to mid-40s, specifically excluding broker deposits since we cannot predict future issuance. It will depend on the composition of Federal Home Loan Bank advances, broker deposits, and market debt issuance. This decision rests with our treasury team, and currently, maintaining liquidity and expanding our client services remain priorities for us.

So you took cash up this quarter, and it sounds like you're going to keep it at a high level for some time?

Yes. Yes, we're going to continue to keep really strong liquidity and continue to stay where it is. And it's one of the strengths that we have in the marketplace right now.

Got it. Okay. And then just as a follow-up, the debt markets seem to be opening up. Can you talk about how you're thinking about issuance for the remainder of the year? Just keeping in mind the possibility that TLAC rules could apply to banks of your asset size?

Yes. When you look at the three sources that I just talked about, whether it's broker deposits, Federal Home Loan Bank Advances, or debt, early on, when you're going into a crisis, it makes sense to access the home loan bank first because it's there available and you get really fast in size. Broker markets, I think, were a good use this past quarter. And over time, you will see us issue unsecured debt and basically pay off some of the home loan bank advances and probably some of the broker deposits over time. And that's just normally how we would fund the bank overall. But we start with really having really good core funding and making sure our core funding is growing and doing what it needs to from that perspective.

Great. Thanks so much.

Thanks.

Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank.

Hi. Good morning. Just, I guess, first, a follow-up on the capital. Obviously, strong built quite a bit, and you talked about letting it continue to build as you wait for new capital rules, but I guess how high are you willing to let it get, I think, under kind of any rules, it seems like you have access and obviously, a good outcome from CCAR GFS. So this first question is how high are you willing to let it go and then maybe just kind of review the priorities in terms of capital deployment as you think about the next couple of years?

Yes. So let me start with capital deployment question. First and foremost, we want to make sure we serve our clients and our communities. So organic growth is number one on how we deploy capital. And during turbulent times like this, we want to make sure that all of our customers and potential new customers that we want and want to join M&T that we have the capital there to serve, and that's first and foremost when we start. Dividends, obviously, the second, second is dividend growth. And we have a long history of our dividend policy and keeping really strong dividends at M&T, and we really value a strong dividend from that perspective. Share buybacks have always been part of our history of repurchasing shares. From time to time, we might do any acquisitions if that makes sense and it's a good shareholder value from that perspective. But long-term, there's really not a change. Just right now in these turbulent times, we're keeping extra capital, and we think it's prudent to do that. As we get more information from the rules that come out from the regulators, but right now, we are doing really well. Our business is performing well. We're getting new clients in, in the commercial area, business banking, wealth, corporate trust, I mean, our businesses are growing because we are strong. So I think it's an advantage right now to have a lot of capital.

And then just separately, last fall, Darren threw out this kind of long-term NIM range, I think it was 3.6 to 3.9 that kind of spooked folks a little bit, but obviously, you guys were kind of ahead of the curve in messaging the over-earning on deposits. And you did get to the high end of that NIM range this quarter. Wondering if you still think that's kind of a good long-term range? And do you get below that range at some point in the cycle, if you had to guess? Thanks.

Yes. So I want to give Darren a lot of credit. He was definitely ahead of the industry in talking about margin and the impact of the margin, and he saw it coming, and I think he was a leader in telling people where everything was going. So it was really, really good guidance from that perspective. I would say that we will continue to have margin pressure just because of the cost of what we're seeing on the funding side. We have in disintermediation. And if you look at it, our DDA was down $5.7 billion. We retained all the clients. Some of the balances went to on-balance sheet sweeps. Some of them went into off-balance sheet sweeps. If you look at our consumer book, we are moving balances from non-maturity buckets to CDs. But if you go back 20 plus years and you look at the deposit that we had back then, CDs were 20% plus of our funding base. Right now, we're at 10%, and we're probably going to be in the mid-teens before it's all said and done. It really depends on how long rates stay higher. And that's just the normal mix of how we run our retail bank. I mean it's the right thing to do. It's the right thing for our clients. It's the right thing for our bank. We can adjust our rate sensitivities with CDs on the books and manage that really well. So it's just basically learning things that when you ran banks 20 years ago, we're doing the same thing right now and doing it the same way. But we feel really good about our businesses. Our margin pressure is going to continue to come down, and I think we've given you some guidance for this year. I don't really want to get into '24 right now until we get working on our plan, which would be later this quarter.

Okay. Thank you very much.

Yeah. Thanks, Matt.

Thank you. We'll take our next question from Steven Alexopoulos with JPMorgan.

Hey, good morning, everybody.

Good morning, Steve.

And thank you for the earning slide deck.

You got to thank the team.

Appreciate it.

Yeah. The team did a great job.

I want to start on the noninterest-bearing deposits. So when I look at the decline this quarter, it's still perplexing to me that this mix shift is not basically done by now, right? If you're a commercial customer, you have a treasury function. I'd imagine you've done the analysis and you've already moved those balances, but you guys are now guiding you expect more decline in DDA. When you look at your client base, can you walk us through why is this taking so long? I mean, it's been quite a few quarters, right, the two years has been above 3% or 4%. And what's still to happen to cause this mix shift?

Yes. Thank you for the question, Steven. First and foremost, if you look at M&T and you look at pre-COVID and going into COVID, M&T had one of the largest increases of surplus balances of all the banks out there, proportionately. So we're starting at a really high strength. I think our DDA percentage of total deposits was 48%. So it was really high to start with. And if you look at how we run this company, as I learn about this company, I am just amazed at how well we are getting primacy, getting the operating accounts. We are really good in the consumer business, in our business banking, business, and commercial businesses. We lead with getting operating accounts, so we have a disproportionate amount of operating accounts there. So that said, to answer your question, it just means that we're going to continue to have mix shift changes. It does seem to be slowing down a bit. But we're still seeing some mix change happen, and it's going to continue to put a little bit pressure on funding, but we're still serving our clients at the end of the day. We're gaining new clients, too. So I think all-in-all, I think we're doing good. We still have a pretty high margin overall if you look at others in the industry even with this coming down. So I think we feel really good at what we're doing and how we're executing.

Okay. That's helpful. And then just a question on the reserve. What's the unemployment rate you're assuming in the total reserve? And then I know you increased the reserve a bit. You called out commercial real estate. What's the reserve on the commercial real estate portfolio? Thanks.

We're right around 4%. If you really look at the reserves, Steve, there's four drivers there that we have. The one that really impacted our increase in our allowance was really the commercial real estate value that went from a negative 5% to 11%. The other three variables, unemployment was around mid-4s. GDP was basically right around 1% didn't change a whole lot. And HPI was right at mid-6s didn't change a lot. So what really drove the change was the commercial real estate value on the allowance side.

Got it. I'm sorry, I missed it. What was the specific reserve now on commercial real estate loans?

Commercial real estate, when the macro variable value that we used in the model went from 6 to 11, and if you look at the allowance, we increased more to office overall. We had decreases in hotel and multifamily.

Got it. I'm still not following what the specific reserve is on CRE, but I could follow up with Brian after. Thanks.

Yeah. I didn't hear that well. Okay. All right.

We'll take our next question from Gerard Cassidy with RBC.

Hey, Daryl.

Hey, Gerard.

Good luck with the new position for you. And ditto on the slide deck to you, Brian, and your colleagues, it's a very strong slide deck. So thank you. Daryl, can you share with us these proposals that we're hearing about for Basel III end game may include banks as low as $100 billion in assets and so when you guys talk about what could happen, and then I believe earlier this week, Bloomberg kind of story, that there may be higher risk-weighted asset assumptions for residential mortgages, which seem to be a new twist to these capital requirements. How are you guys approaching what could happen in terms of greater RWA increases for your organization and the capital needed to support them?

Yes. Thanks for the question, Gerard. Obviously, we are very eager to get these new rules and see what's out there and make comments. That's going to go through those normal processes there. So it's going to take time, probably get most of these things implemented. On your specific question of RWA and mortgages, we'll wait and see how that comes out. We are in the residential mortgage space. We exited the correspondent space last quarter. So we're really just focusing on meeting the needs of our clients of the company. And we're basically selling all the conforming into the marketplace and we're balance-sheeting all of our wealth clients and clients that are low and moderate income are the ones that really are going on the balance sheet. So we're going to stay in our core businesses because we're serving our clients. If it's a little bit higher capital, the market will probably adjust and just raise pricing to accommodate for that would be my best guess from that. As far as the other changes out there, there's a lot of proposals there. If it's like long-term debt or TLAC, we're waiting to see what that happens. M&T really, we don't have a whole lot of debt outstanding. So it's something that we will have to just manage. It's probably going to be holding company. If it's not holding company and allow bank will probably end up with a mix of holding company and bank because you still want to have a strong parent company from a source of capital perspective there, but we'll just optimize it. But with us using now Federal Home Loan Bank advances, broker deposits, I think we have, right now, ability where we can pay those off, issue unsecured debt and really not blow the balance sheet from that and still have a really strong liquidity position from that. So we're waiting to see. I think you know our AOCI comes in, looks like that's coming in were 55 basis points, that's 55 basis points negative adjustment at the end of this quarter includes all three pieces. It's the AFS securities, cash flow hedges as well as pension. That's probably one of the lowest that we have in the industry. So it's not a real big impact for us. So that's the strength as well.

Very good. As a follow-up question, you mentioned the charge-offs in the quarter related to lower values for commercial real estate. In a slide deck you provided earlier in the second quarter, there was detailed information about your commercial real estate portfolio regarding location and loan-to-values. Could you share if the higher loan-to-values required write-downs, or are you also seeing weaknesses in some of the lower loan-to-values? Additionally, regarding your review of the portfolio, could you tell us what percentage you have completed? Are you 50%, 75%, or 20% through the review?

Yes. Thank you for the question. So on your first question, CRE is really just you have to look at it on a case-by-case basis just because of the unique quality and pieces of how it is each borrower has different implications. You have tenant things, you have market conditions, and interest rate. So that is a case-by-case basis. So you really go through the deep dives there. On your question on portfolio review. Yes. So we are 50%, 60% plus through it. All the loans that we have in the criticized bucket are reviewed every quarter. We stress test those really well. And if I look at what we're doing versus my prior places, I would say we're doing as much if not more. What I've seen done in our credit process. So we're staying on top of this. Our teams are doing really well. Valuations are coming in, and we're doing the best we can with the information we have. But I would say we feel good at where we are and we're just continuing to monitor where everything is.

Very good and good luck again in your new role. Thank you.

Thanks, Gerard.

Thank you. We'll take our next question from Brent Erensel with Portales Partners.

Good morning and, Daryl, welcome to Western New York.

Thank you, Brent.

So specifically on the CRE drilling down to the Manhattan real estate or New York City real estate, I was wondering, could you walk us through what you do? You said you were taking charge-offs there. So you take possession, do you restructure? What happens when you have a CRE Manhattan, I guess it's an office building? What do you do here in that situation?

Yes. So in New York City, New York City is a big marketplace, and every place is a little bit different. Right now, it seems like the downtown area might be a little weaker than the middle part of Manhattan. So the charge-off that we took in Manhattan was in the downtown district there. But I would say we do all the above. I mean we really work with our clients. It really for us starts from a client perspective. Client is really, really important client selection. And in the CRE business, we make loans in the larger cities like New York, D.C., Boston, and in those markets, I would say 75% of those are very long-term oriented clients and really good clients. Once you get outside of these major market cities, it's almost all of our clients are really long-term oriented. But as far as which notes we would sell or whatever, it's probably more the financially oriented clients that we have, where they've had their returns, and they are putting any more equity into the deal is really how we would handle that.

To follow-up on that, you're seeing strong-handed borrowers, some of these big names, just mailing in the keys. Are you experiencing that as well? Where your long-term strong-handed CRE borrower is actually not so strong-handed after all.

I would say what we're seeing right now is our long-term clients. It really comes down to client selection, but they're really holding in there. You have to look at their portfolios that they have, and they might have one troubled property, but they have a lot of others that are really performing well and they move cash over to support and put equity into those transactions. So we feel good about that. And we've been in this business for a long time. I get a lot of comfort when I look at Bob and his team, there's a lot of gray hair there. They've been through this many, many times and it gives me a lot of confidence. And like I said earlier, the processes we're using are as good or better than what I've seen in the past.

Thank you.

Thank you. We'll take our next question from Ken Usdin with Jefferies.

Thanks. Good morning, everyone.

Hey, Ken.

Okay. So I think that's right. And it does exclude broker because we may pay off some of the broker deposits to really dependently access the unsecured market or not. So I would say, if you look at core, I think that's the right assumption to use, Ken. And that was going to be my follow-up, Daryl. So can you explain that just to broker deposit beta is completely outside of that mid-40s beta comment?

Yes. So if you look this quarter, our beta on total interest-bearing deposits was 40% and we issued $4 billion of broker deposits during the quarter. If we back out those broker deposits, we were at 34% deposit beta. Our decision to issue broker deposits was one versus looking at it from issuing Federal Home Loan Bank Advances or doing unsecured debt, we chose that. As we move forward, the treasury team will basically do what's best for the company and what we need to do. And we'll probably use all three pieces. And when it actually goes into deposits, it impacts the deposit beta. So we tried to give you, excluding the broker piece, what deposit beta is, what Darren said the last several quarters on deposit betas if you back out the broker, he's spot on still where we're performing. So I mean the guide there, we just kind of mixed it up by issuing these broker deposits.

Understood. Can you share how much of the $103 billion in total interest-bearing deposits is made up of brokered deposits?

I think our broker deposits are about $10 billion in total. And I would say $8 billion of it is CDs and $2 billion of it money market.

Okay. I get it. That helps. Thanks a lot, Daryl.

You're welcome.

Thank you. Our next question comes from Ebrahim Poonawala with Bank of America.

Hey, Daryl, good morning.

Good morning, Ebrahim.

Good morning. Just a follow-up on Ken's question around broker to $10 billion at the end of the quarter. Is there a target that the MAX that we should think about how much brokered deposits can get either on a dollar basis or as a percentage of total deposits that we should keep in mind when we're thinking about betas and the outlook there?

Yes. Probably just a few more billion from Ken is probably as high as we want to go there. So we don't want to be outsized in the use of that. Like anything else, we want to be diversified and kind of use all of our funding tools just kind of you want to just make sure you use them all and you have access to all of them. So but I'd say a couple more billion is all we're going to use in the broker space, but you might actually see that come down if we issue more unsecured debt.

Got it. I have a follow-up regarding the commercial real estate appraisals. If I understood correctly, you mentioned that 50% to 60% of the portfolio has been reviewed. How challenging is it to obtain an accurate appraisal for a commercial real estate property at this time? I am trying to understand the risk of being caught off guard regarding reserve levels in the next two or three quarters, especially if fair values change significantly. How transparent is the appraisal process, and how cautious is the bank in addressing this issue proactively?

Yes, that's a great question. So what I would tell you is there aren't a whole lot of sales in the marketplace right now. So we don't have a lot of specs when we do have when we use them. But a lot of the valuations we're using, we use the discounted cash flow method. And when we look at just a couple of pieces of the discounted cash flow method, when we're looking at properties and the properties vacant, we assume a three-year vacancy for it to get sold up when something is coming due and it's turning over, we assume with 12-year vacancy or 12 months vacancy. So from a cash flow perspective, we're factoring in three amenities to get people in leases. So all that cash flow adjusted in the discounted cash flow model. So it's really impacting the valuation that you have. Cap rates really haven't changed a whole lot; it's really the assumptions you're using on the cash that you're generating in these properties is really what's driving down the values.

Got it. And welcome to the new role. Good to hear you on the call again. Thanks.

Thank you. We'll take our next question from Frank Schiraldi with Piper Sandler.

Thanks. Good morning.

Good morning.

Daryl, I missed your comments on the mix shift of noninterest-bearing accounts. You mentioned the possibility of achieving a more normalized balance sheet, with CD balances returning to the mid-teens. Should we view the shift towards noninterest-bearing accounts as primarily coming at the expense of interest-bearing accounts? It seems we might see a notable increase in noninterest-bearing accounts, especially considering potential positive trends in the trust business as transactional volume picks up. I'm curious about your thoughts on where noninterest-bearing balances may head from here.

Yes. No, I think those are all great questions. If you look at our noninterest-bearing to total deposits this quarter, we were at 35%. But if you actually back out the broker deposits that you put in there, we were at 38%. So that here again, broker is kind of playing something with the numbers from that perspective. We probably have that going down, though, by the end of the year, maybe 2% or 3% with a mix change that we have. So I think from that, Corporate Trust is definitely a great business for us. It's a business that's growing for us. As market activity increases in that sector, it will be a big contributor to our balances that we have on the noninterest-bearing side. So that is a really important piece. Right now, the activity just is down some. So there's a lot of market activity. But right now, we're just giving an outlook for a couple of quarters, but as market activity picks up, Corporate Trust will definitely be a big benefit for us in having that mix change.

Okay. Great. And then just on the other side of the balance sheet, back to the loan growth outlook and I guess, consumers continuing to slow and fourth quarter balances maybe being down overall. Just on the C&I side, should that growth decelerate here as the floor deal planning stabilizes? And ultimately, where do you think CRE kind of flushes out or stabilizes in terms of the total loans?

Right now, if you look at our projections for total loans, it's relatively flat to maybe up slightly. If you look specifically at the commercial side, C&I is growing. This past quarter, it was really driven by dealers, floor planning as far as we're getting on the lots. Some of our specialty businesses and fund or sponsor are kind of the growth areas there. As you move forward, I think as CRE, we're going to serve our clients in CRE. But with the businesses that we have, some of it where we will basically lend to them and sell it back out, so that's more fee business. So that overall business is going to become a smaller percentage of the balance sheet and C&I will continue to be a larger percentage. On the consumer side, it's I think performing well. We might do some asset sales or securitizations just to test the plumbing later this year. So that's really impacting some of those balances if that actually happens.

Okay. All right. Great. Thank you.

Thank you. We'll take our last question from Mike Mayo with Wells Fargo Securities.

Hey, Daryl.

How are you doing, Mike?

Welcome to the North. Just a big picture question. I mean, you've been in the Midwest, U.S. Bancorp and you've been in the South, BB&T and Truist and now you're at M&T. And just how do you view M&T when you pull the lens back, having been on the inside at so many different firms and so much perspective over a few decades? Why did you choose to go to M&T, what do you see as the potential that's not unrealized? And what do you think that you can bring extra to the table, which you probably brought up when you spoke to management?

Yes, Mike, thank you for the question. I would tell you, first and foremost, I am ecstatic to be here and to be part of the leadership team at M&T. I was actually, my neighbor, Tracy, one of my peers, I walked into her office one evening, and I told her, I think it's better than I expected it to be just the reception of the people and the work ethic and we run a really good company here, and it is really performing well. I'm just blessed to be on the team to try to continue that performance. To me, it reminds me a lot of a bank that's getting larger. And as we get larger, you have to adjust to meet certain requirements and from regulations and basically actually running a larger company. For me, the big balance that we have to keep is the magic that happens in the communities each and every day. We empower our regional presidents and people to make decisions out in the field and really do a great job with client touch and how we serve clients. And we want to make sure that, that stays intact. But running a larger company, we also have to have controls and processes in place, so we know what's going on and we can manage the risk as we continue to get larger. So I think it's just a balancing act from that perspective, Mike. And I see a lot of opportunity where I think I can help us perform and get things in working better potentially as we kind of move forward just because we're a bigger company. But I can't say, I can't tell you how much the work ethic here, just how well we run the company and everything. We do a great job, and it really starts with the community and serving our clients. And from that, it kind of all falls down. Working for Rene, somebody that I've really respected and known over the industry, I would tell you, it is just a dream come true for me in my career. So I am really blessed to be here, Mike.

And just one follow-up. Qualitatively, I think that makes sense, helping a bank manage through becoming bigger and all the regulatory and complexity that involves, but if there was one quantitative metric where you say, you know what, three years from now or maybe five years from now, this financial measure should be better and I'm going to take ownership of that. What would that one financial metric be or maybe a couple?

I would say we have a good strong performance, if you look at our investor deck and you look at our investor thesis, our return on average tangible common equity at 15% to 20% is pretty darn good to do that consistently. I think that's good. If you get well over 20%, you're either growing too fast or taking more risk, so you have to be careful for some of that. So I think that that would be a really good target. We are really focused by how we run the company to really, at the end of the day, give a great return to our shareholders. We are really prudent with how we manage our capital, whether it's through buybacks, dividends are definitely key and acquisition. The acquisitions we do and you just look at the Peoples acquisition, I mean, we have great returns off that acquisition. I went through some of the metrics earlier in my prepared remarks. So that's going well. And I would continue to see probably more acquisitions in our future over time. It's kind of in the pace of how we absorb it. When you do these acquisitions, it really takes us a good two, three, or four years to get the performance up to the M&T standard. So just buying people last year, we probably don't expect people's performance to really be at the M&T performance until we get a couple of years under our growth there. But as we grow into that, we could have potentially other opportunities to do more of that over time. So it's good, and it will continue to change and evolve as the industry changes, but people here are fully dedicated to the mission. Everybody is 110% all in, and I'm just excited to be on the team.

All right. Thank you.

Thank you. We'll take our last question from Erika Najarian with UBS.

Hey, just one last question. I'm sure everybody is hopping on their 9 o'clock call. But Daryl, could you give us a sense of how you think if you are going to do $7 billion in NII, how is the cadence unfurls for the second half of the year. More importantly, what fourth quarter looks like? And is the $183 million impact on a down 100 basis point scenario, from your last Q still sort of in the ballpark of your rate sensitivity to the downside?

Yes. Let me begin with the sensitivity question, Erika. As we assess our hedging strategies, we are becoming less asset sensitive. Currently, if the Fed raises rates one or two more times, we will see a slight benefit. However, if there is a 25 basis point increase over the next year, our net interest margin will likely only increase by one or two basis points. On the downside, we are becoming less negatively affected, and if rates decrease by 25 basis points, our net interest margin will probably only decline by three to five basis points. We aim to keep it as close to zero as possible. It is a large balance sheet, so precision is tough, but minimizing rate risk is important, and our treasury team is doing a great job managing this. Regarding guidance, we are facing funding pressures and expect some additional pressure in the third quarter compared to the fourth due to the repricing of liabilities. As things normalize, we are beginning to see higher spreads on the asset side, and if liability side conditions stabilize, we could potentially maintain margins in the mid-3s as we move forward, but we will have to evaluate that in the next quarter and beyond. Hopefully, this clarifies things.

That really helps. Thanks, Daryl, and look forward to working with you again.

Yes. Thanks, Erica. Appreciate it.

Thank you. We'll take our last question from John Pancari with Evercore.

Good morning and congratulations, Daryl, on your new role. I have a couple of quick questions. Regarding the noninterest-bearing mix of 34%, where do you think it might bottom out? Could it drop below 30%? Are we around the level that we were at before the pandemic, and how much further could the noninterest-bearing mix decline?

Yes, I mentioned earlier, John, that due to the broker deposits we've added, those have diluted our percentages. So the comparison isn't straightforward from that angle. Our best estimate is that we might decrease by about 2% or 3% by the end of the year. Our focus is on serving clients with higher rates. We began with a strong foundation as we have substantial surplus deposits and prioritize operating accounts. This gives us significant resources to manage. Ultimately, M&T will continue to maintain one of the highest ratios of noninterest-bearing to total deposits among our peers. The current situation is influenced by a high rate environment, which may change if rates decline in the future.

Got it. All right. And then lastly for me. On the deposit side, your outlook does imply modest growth in the second half of this year? What is that primarily going to reflect? Is that a lot of the incremental broker that you expect? Or maybe a little bit of color there?

Yes. It's not broker. We really saw this quarter in the middle of the quarter start to stabilize and start to grow. So we're hopeful that we'll be able to get some growth out of our core businesses, whether it's retail, business banking, and commercial. And maybe towards the end of the year, maybe we'll get higher activity out of the capital markets area in our corporate trust space as well and wealth areas. So I'm hoping that all those business lines will continue to modestly grow throughout the year as we compete for deposits.

Okay. Great. Thanks for taking my questions.

Yes. Thanks, John.

Thank you. At this time, I'll turn the floor back over to Brian Klock for any additional or closing remarks.

Again, thank you all for participating today. And as always, clarification of any items on the call or news release is necessary, please contact our Investor Relations Department at area code 716-842-5138. Thank you, and have a great day.

This does conclude today's M&T Bank Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.