M&T Bank Corp Q3 FY2023 Earnings Call

Thank you, Angela and good morning. I’d like to thank everyone for participating in M&T’s third 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 in the investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T’s Senior Executive Vice President and CFO, Daryl Bible. Now I’d like to turn the call over to Daryl.

Thank you, Brian and good morning everyone. Let’s start with our purpose, mission and operating principles on Slide 3. I would like to thank our more than 22,000 M&T colleagues for all their hard work, whether serving our customers or our communities, our employees continue to deliver on our purpose, making a difference in people’s lives. This purpose drives our operating principles. We believe in local scale, that is combining local knowledge and hands-on customer service of Community Bank with the resources of a large financial institution. Our 28 communities are led by on-the-ground regional presidents. Their knowledge allows us to better understand and meet the needs of our customers and communities. Importantly, this approach continues to produce strong results for our shareholders. Our local scale has led to superior credit performance, top deposit share and high operating and capital efficiency over the long-term. Moving to Slide 4. Our seasoned, talented and diverse board are keys to gaining in-depth understanding of our customers’ needs and expectations. We have sound technology solutions, coupled with caring employees, which provide a differentiated client experience. Please turn to Slide 5. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investment in enhancing the customer experience and delivering impactful products has fueled organic growth. We also believe in supporting small business owners who play a vital role in our communities. Despite operating in only 12 states, we are ranked as #6 SBA lender in the country, the 15th consecutive year M&T has ranked in the nation’s top 10 SBA lenders. For the first time, we have finished as the top SBA lender in Connecticut, an important milestone following our acquisitions of Peoples United. Our commitment to supporting the communities we serve extends to affordable housing projects, with almost $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 in support of our communities in 2022 and approximately $30 million so far in 2023. Please turn to Slide 6. Here we highlight our ongoing commitment to the environment. Last year, we invested over $230 million in the renewable energy sector and have significantly reduced our Scope 1 and Scope 2 emissions since 2019. Our ESG report was published in July, but I encourage you to review this slide for some of the highlights. M&T’s ESG ratings have improved at Moody’s, MSCI and Sustainalytics. Turning to Slide 8. There are several successes to highlight this quarter. We continue to see growth in auto dealerships as well as specialty businesses. We continue to grow customer deposits despite increasing competition, and building on the strong liquidity position and comparative strength of our financial position in the industry allows us to continue lending in support of communities and local businesses. We remain focused on diligently managing expenses. Our third quarter results continue to reflect the strength of our core earnings power. Third quarter revenues have grown 4% compared to last year’s third quarter. Pre-provision net revenues have increased 4% to $1.1 billion. Credit remained stable. Net charge-offs decreased in the third quarter and year-to-date, we still remain below the historical long-term average. GAAP net income for the quarter was $690 million, up 7% versus the like quarter in 2022. Diluted GAAP earnings per share was $3.98 for the third quarter, up 13% from last year’s similar quarter. Now, let’s review our net operating results for the quarter on Slide 9. M&T’s net operating income for the third quarter, which excludes intangible amortization was $702 million and diluted net operating earnings per share was $4.05. Net operating return on tangible common equity was 17.41% and tangible book value per share increased 3% compared to the end of June. On Slide 10, you will see that diluted GAAP earnings per share was down 21% from the linked quarter. Recall our results from the second quarter of last year indicated an after-tax $157 million gain from the sales of the CIT business in April. Excluding this gain, GAAP net income and diluted earnings per share were down 3% compared to the linked quarter. On a GAAP basis, M&T’s third quarter results produced an ROA and ROE of 1.33% and 10.99% respectively. Next, we will look a little deeper into the underlying trends that generated the third quarter results. Please turn to Slide 11. Taxable equivalent net interest income was $1.79 billion in the third quarter, down $23 million from linked quarter. This decline was driven largely by higher interest rates on consumer deposit funding. An unfavorable funding mix change is partially offset by higher interest rates on earning assets and one additional day. The net interest margin for the past quarter was 3.79%, down 12 basis points from the linked quarter. The primary drivers of the decrease in the margin were an unfavorable deposit mix shift, which reduced margin by 7 basis points; the net impact from higher interest rates on customer deposits, and the net benefit from higher rates on earning assets which we estimate caused a reduction of margin by 6 basis points. The remaining 1 basis point was due to higher non-accrual interest, net of the impact of one additional day. Turning to Slide 12. Average earning assets increased by $1.5 billion from the linked quarter, largely due to the strong deposit growth that drove the $3 billion growth at the Fed. Average loans declined by $928 million and average investment securities decreased by $630 million. Turning to Slide 13 to talk about average loans. Total loans and leases averaged $132.6 million for the third quarter of 2023, down 1% compared to the linked quarter. Looking at loans by category, on an average basis compared to the second quarter, C&I loans increased slightly to $44.6 billion. We continue to see growth in dealer and specialty businesses. During the third quarter, average CRE loans decreased by 2% to $44.2 billion. This decline was driven largely by our continued strategy to reduce on-balance sheet exposure to this asset class. We have chosen to modernize our suite of products and services to offer more alternatives to better serve customers and to do so in a more capital-efficient manner possible. Average residential real estate was $23.6 billion, down 1%, largely due to portfolio pay-downs. Average customer loans were down slightly to $20.2 billion. The decline was driven by lower auto loan and HELOC balances, partially offset by the growth in recreational finance and credit card loans. Turning to Slide 14. Average investment securities decreased to $28 billion during the third quarter. The duration of the investment securities book at the end of September was 3.9 years and the unrealized pre-tax available-for-sale portfolio was only $447 million. At the end of the third quarter, cash held at the Fed and investment securities totaled $59.2 billion, representing 28% of total assets. Turning to Slide 15. We continue to focus on growing deposits with our customers and are pleased with the growth in both average and end-of-period customer deposits. Average total deposits grew by $3.3 billion. However, consistent with our experience in prior rising rate environments, increased competition for deposits and customer behavior continues to cause a shift within the deposit base to higher cost deposits. Average customer deposits increased by $1 billion. The customer deposit mix to migrate to average demand deposits declined by $2.3 billion in favor of commercial sweeps and customer money market savings and time deposits. Average broker deposits increased by $3.2 billion, while federal home loan bank advances decreased by $2.2 billion. On average, brokered money market deposits have now increased by $800 million. Brokered time deposits increased by $1.5 billion. Broker deposits represent just one of the several funding vehicles that we can employ in our management of the balance sheet. At September 30 of this year, broker deposits represented 8% of our outstanding deposits and short-term borrowings. The pace and reduction in demand deposits seemed to have decreased during the quarter. Our determined focus on retaining and growing customer deposits yielded positive results during the quarter. Next, let’s discuss non-interest income. Please turn to Slide 16. Non-interest income totaled $560 million in the third quarter compared to $803 million in the linked quarter. As noted earlier, the second quarter included $225 million from the sale of the CIT business. Excluding this gain, third quarter non-interest income decreased by $18 million compared to the second quarter, driven predominantly by $15 million related to one month of the CIT trust revenues included in the previous quarter. Other revenue categories were largely unchanged from the linked quarter. Turning to Slide 17 for expenses. Non-interest expenses were $1.28 billion in the third quarter of this year, down $15 million from the linked quarter. That decrease in expense was due to $11 million in lower compensation and benefit costs, reflecting lower average headcount, lower expenses for contracted resources and overtime. There was $6 million lower in other costs of operations, largely reflecting lower sub-advisory fees as a result of the sale of the CIT business, and lower legal-related expenses, partially offset by losses associated with certain retail banking activities. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and security gains or losses from the denominator, was 53.7% in the recent quarter compared to 53.4% in the linked quarter after excluding the gain from the sale of the CIT business. Next, let’s turn to Slide 18 for credit. The allowance for credit losses amounted to $2.1 billion at the end of the third quarter, up $54 million from the end of the linked quarter. In the third quarter, we recorded a $150 million provision in credit losses, which was equal to the second quarter. Net charge-offs were $96 million in the third quarter compared to $127 million in the linked quarter. The reserve build was primarily reflective of softening CRE values and the variability in the timing and the amount of CRE charge-offs. At the end of the third quarter, non-accrual loans were $2.3 billion, a decrease of $94 million compared to the prior quarter and represent 1.77% of loans, down 6 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $96 million; significant charge-offs were tied to four large credits, three large office buildings in Washington, D.C., Boston and Connecticut, and one large healthcare provider operating in multiple properties in Western New York and Pennsylvania. Annualized net charge-offs as a percentage of total loans were 29 basis points for the third quarter compared to 38 basis points in the second quarter. This brings our year-to-date net charge-off rate to 30 basis points, which is below our long-term average of 33 basis points. We continue to assess the impact on future maturities and our investor real estate portfolio due to the level of interest rates, the impact of value declines and emerging tenancy issues. Continued targeted deep portfolio values in office, healthcare, and multifamily portfolios are being done to identify any new emerging issues. When we file our upcoming Form 10-Q in the few weeks, we will estimate the level of criticized loans to be up to the mid to high single-digit percent compared to the end of June, largely due to increases in investor real estate. Reflective of the financial strength and portfolio diversification of the CRE borrowers, almost 90% of the criticized loans are paying as agreed. Loans 90 days past due on which we continue to accrue interest were $354 million at the end of this quarter compared to $380 million sequentially, and a total of 76% of these 90 days past due loans were guaranteed by government-related entities. Turning to Slide 19 for capital. M&T’s CIT ratio at the end of September was an estimated 10.94% compared to 10.59% at the end of the second quarter. The increase was due in part to the continuation of the pause of repurchasing shares. At the end of September, based upon the proposed capital rules, the negative AOCI impact on the CET1 ratio from variable-for-sale securities and pension-related components would be approximately 36 basis points. Now turning to Slide 20 for outlook. With three quarters in the books, we will focus on the outlook for the fourth quarter. First, let’s talk about the economic outlook. The economic environment was supportive in the third quarter, and we were cautiously optimistic heading into the last quarter of this year. In the third quarter, the overall economy continued to expand, thanks to the strong consumer spending and steady capital expenditures by businesses, though the housing market continues to struggle in the high-rate environment. Encouragingly, inflation continued to slow in labor markets, while still tight improved substantially with steady hiring while wage pressures dissipated. Looking ahead to the fourth quarter, we are cautiously optimistic that the economy will continue to grow, but at a slower rate. We expect that this slower growth will continue reducing inflation pressures. The Federal Reserve has probably reached the end of its hike cycle, given slower inflation and the recent run-up in long-term rates. With that economic backdrop, let’s review our net interest income outlook. We expect taxable equivalent net interest income to be in the $1.71 billion to $1.74 billion range. As we noted on the previous calls, a key driver to net interest income continues to be the ability to efficiently fund earning asset growth. We expect the continued intense competition for deposits in the face of industry-wide outflows. We remain focused on growing customer deposits. For the fourth quarter, we expect average deposits to be about the same level, with growth of interest-bearing customer deposits but a continued decline in demand deposit balances. This is expected to translate into a through-the-cycle interest-bearing customer deposit beta through the fourth quarter this year to be in the mid-40% range. This deposit beta excludes broker deposits, and including broker deposits would add 6% to the beta. While the percent of the cumulative beta is slowing, we anticipate it will continue rising into the first half of next year. Next, let’s discuss the outlook for the average loan growth, which should be the main driver of earning asset growth. We expect average loans and lease balances to be slightly higher than the third quarter of $1.33 billion level. We expect growth in C&I but anticipate declines in CRE and residential mortgages; for our consumer loan balances, they should be relatively flat. Turning to fees, we expect non-interest income to be essentially flat compared to the third quarter. Turning to expenses, we anticipate expenses, excluding intangible amortization and the FDIC special assessment to be in the $1.245 billion to the $1.265 billion range in the fourth quarter. Intangible amortization is expected to be in the $15 million range and the FDIC special assessment is anticipated to be $183 million. Given the prospects of slowing revenue growth, we remain focused on diligently managing expenses. Turning to credit. We continue to expect loan losses for the full year to be near M&T’s long-term average of 33 basis points, which implies fourth quarter charge-offs could be higher than the third quarter. For the fourth quarter, we expect tax equivalent tax rate to be in the 25% range. Finally, as it relates to capital, our capital, coupled with limited investment security marks, has been a clear differentiator for M&T. M&T has proven to be a safe haven for clients and communities. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders’ capital very seriously and return capital when it is appropriate to do so. Our businesses are performing very well, and we are growing new relationships each and every day. We are still evaluating the proposed capital rules so that we believe that now is not the time to be purchasing shares. That said, we are positioned to use our capital for organic growth. Buybacks have always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us from our clients, communities, regulators, investors and rating agencies. To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, 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 growth about 2x that of peers. Our strong shareholder returns include a 15% to 20% return on tangible common equity and robust dividend growth. Finally, our disciplined acquirer and prudent steward of capital, our integrated Peoples merger is complete. We are confident in our ability to realize our potential post-merger. Now with that, I’ll turn it back to our caller to briefly review the instructions.

Our first question comes from Manan Gosalia with Morgan Stanley. Please proceed.

Hi. Good morning.

Good morning, Manan.

You spoke about a mid to high single-digit increase in criticized loans this quarter. I was wondering how is the mix changing between hotel, healthcare, and office. It also looks like non-accrual loans took lower this quarter. So can you talk about what the drivers are there? Whether there are loan sales or any other underlying drivers? And if that had any benefit to net interest income this quarter?

Yes, happy to do that. So on the criticized increase, it’s really just more of the same that we’re seeing. It’s more increases just in our IRE portfolio, primarily on the office side for the most part. So nothing really different from trends that we’re seeing. As far as non-accrual, there was one large property that was sold in New York that was a primary driver for the non-accruals. We actually had an impact that helped margin probably by about $5 million in the quarter.

Got it. Thank you. And then maybe just on the buybacks. What is the criteria to resume the buybacks from here? Because it seems like we have more clarity on regulation at this point. Is it a function of M&T issuing more in the debt markets and then starting buybacks? Is it tied to credit rating agencies? Any color you can throw there would be helpful, especially given how much excess capital you have at this point?

Yes. I definitely agree with you, Manan, in that we do have excess capital. But right now, the economy is still kind of unpredictable, and rates are higher for the long term. We will probably continue to have stress on clients over the next couple of quarters if that actually comes to fruition. We’re just trying to be conservative and cautious at the same time. It’s also for us to actually have an opportunity to continue to grow organic growth in our commercial and consumer books and our trust folks as well. I think we’re just trying to be cautious, and we know when the economy gets a little bit more comfortable, we will consider repurchases there. It is true to our long-term strategy, the capital distribution back to the shareholders. It’s not going anywhere, but we just want to continue to make sure that we’re strong and can grow and serve our customers right now.

Great. Thank you.

Thank you.

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Hi, good morning.

Good morning.

I guess just want to follow-up Daryl, in terms of – so your NII guidance for fourth quarter is fairly clear, but we are hearing from some of your peers around potential for the margin NII bottoming in the fourth quarter especially if the Fed is done. Give us your thought process around – is there something about your balance sheet, why that might get pushed out because of just deposits have been related to the price or the dynamics on your balance sheet or your markets? Any color there would be appreciated.

Yes. Manan, it’s really the biggest driver for the net interest margin for us right now is really what happens to our non-interest-bearing deposits. We were down $2.3 billion that was better than what we thought it would be. And we think that it’s slowing down. We will see how that plays out in the fourth quarter. But that is probably the biggest determining factor. When you look at our balance sheet, though, I’m actually pretty pleased with how the assets are repricing. If you look at the reactivity rate of some of our fixed portfolios, if you look at this quarter, like our consumer loan portfolio was up 22 basis points. We have home equity in there that is prime-related, but that’s a smaller percentage. We have really good repricing in other consumer portfolios like auto was up approximately 300 basis points in what was rolling off versus what was rolling on. If you look at our RV and loan portfolio, that was up approximately 250 basis points of what was rolling off from on, so I think once we get more stability in the disintermediation of deposits, I’m favorable on the margins stabilizing. I think the asset side is actually performing pretty well.

Noted. And I guess just moving maybe give us a mark-to-market in terms of commercial real estate, what you’re seeing around there is some concern whether if we go into next year, given what the yield curve has done, we might see some more pressure flow beyond CRE office into multifamily. So one, give us a sense of like on CRE office, has the visibility improved around the level of marks that you might have to take as some of this works through the system and whether or not you’re seeing more pain beyond the office complex?

Yes. So on the office side, I would tell you, our credit team we feel really on top of what’s going on there. I think we are actively looking at any credit that could be and have any issues whatsoever. We’re looking at it. I’m trying to put the right valuation in there. We traditionally run with a higher level of criticized assets because we have a lot of long-term clients that have been with M&T for a long time period. They have other sources of cash flow to help carry the loans and are willing to put in equity to help support the loans. When we do find loans that there is no support around, we will probably move to exit those. As far as the valuations go, there is still not a whole lot of specifics out there. We did have that one sale for us that actually was a little bit better than what we had at mark there, but that was one – one big loan. So I wouldn’t say that’s a trend by any stretch right now. But I think we feel pretty good with where we are. As for the other asset classes, I think we – just with rates higher for longer, just puts more pressure on some of our customers. Multifamily is an area that we are looking at as well. Nothing really is popping out of anything very superior there yet. But we’re just trying to stay ahead of what potentially could happen and kind of be preemptive if we see anything. So we’re just preparing our credit team is very experienced. We’ve been very good with commercial real estate for a long time, and we are on top of where we are.

Okay, thank you.

The next question comes from Erika Najarian with UBS. Please go ahead.

Hi, good morning. I just wanted to clarify sort of the responses to Ebrahim’s question, Daryl. I’m just wondering as you think about the forward curve as we see it, at what point do you expect net interest income to trough based on what we know about the curve and what we know about the various puts and takes for growth and deposit actions.

Yes. From a framework perspective, it’s really when the intermediation slows down. When distribution slows down, I think on the asset side, is performing well and will continue to reprice higher because I think we’re going to have a steeper curve for a longer period of time. Hopefully, that will happen in the next couple of quarters, but it’s really hard to know right now we think it’s slowing but I think we will just see how that plays out. I’ll give you guidance next earnings call on the fourth quarter on that. Conditions could be slowing down with what we’re seeing right now, but one quarter is not a trend. I just want to get a couple of quarters under our belt before we really say net interest margin is going to stabilize.

Got it. And as a follow-up to that, your period-end cash balance rose to $30 billion, Daryl, which is awesome dry powder. And as we think about the quarters ahead on one hand, potentially the Fed is peaking, right? And you seem to be rather asset-sensitive. On the other, you have all these new rules on liquidity that we don’t have yet as well as treatment of AFS for regional banks. So how should we think about an absence of stronger net loan growth? The puts and takes of what you’re – are you just going to continue to build cash and be a little bit more asset-sensitive even though we’re peaking in rates as we figure out what the final rules look like on both capital and liquidity.

I think we have the strong position at the Fed that’s intentional for us right now. We want to be really conservative with our cash and liquidity position. Like I said earlier, the economy is doing okay, but slowing down and maybe hopefully not getting into a recession, but we just want to be really careful and cautious from that perspective. So I think it’s an intentional decision for us to stay there. Will we invest some of that? Obviously, we would love to do that to support our customers, but we are not widening our credit box whatsoever. We’re going to grow what the market will give us, but we do think there are opportunities to grow relationships and to potentially grow balances in some of our loan categories. So we will see how that plays out. As far as deploying some of the cash into the securities portfolio, I would just say that over the next year, you might see us move a little bit to the investment portfolio, but it will be on a gradual basis.

Thank you.

The next question comes from Matt O’Connor with Deutsche Bank. Please go ahead.

Good morning. First, sorry if I missed it, but did you comment on what your reserves are against your office book?

We haven’t made that probably, Matt, but it continues to increase where we are right now. So we had an increase in our allowance; we had a little over $50 million. I’d say about half of it went to the CRE portfolio and half of it went to the C&I portfolio. I think we were adding it where we think it’s appropriate based upon our models and performance.

Okay. Yes, that would be helpful. Again, over time, I know everybody’s book is a little bit different, but many of your peers are disclosing, so that would be helpful as you think my disclosure is obviously an area of focus. Maybe switching gears, like, as you think about all the capital that you have and liquidity and the balance sheet flexibility, what areas of lending are you leaning into, not just kind of looking at one quarter for the next few quarters? And is it kind of doing more business with existing customers or also trying to grow the customer footprint?

I mean this past quarter we had growth in our dealership businesses. As the strike was starting to happen, I think a lot of dealers actually stocked up on used cars, and that actually drove an increase in utilization in that one sector a little bit earlier than normal there. That will probably continue to play out, I think, into the fourth quarter, while would be one. Our large corporate banking, I think has some growth opportunities where we are positioned there. Specifically on fund banking, I think we are growing there nicely. It’s a very conservative portfolio, very short-term oriented, lower risk areas. So, I would say most of the growth that we are seeing is in the C&I space. Those are the highlights right now. It is very competitive in middle market C&I. We are trying to be competitive there. But right now, the higher interest rates are just putting a lot of our commercial clients to be a little bit more cautious. But when they are willing to borrow, we are trying to help them when that’s – when we are able to do that, so.

Okay. Thank you very much.

The next question comes from Bill Carcache with Wolfe Research. Please go ahead.

Thank you. Good morning. Hey Daryl. I wanted to follow-up on your comments around a higher for longer rate environment being tougher for your customers. As you look across your portfolio, do you have a good handle on the degree to which some of your customers had put on swaps maybe when we were still under CRE two years to three years ago, so they haven’t yet felt the pressure of higher rates? Curious about whether the rolling off of those swaps is something you worry about, not really not just in CRE, but really across all loan categories.

Yes. I think obviously, Bill, I mean people that did swaps 3 years ago are really fortunate that they did, but it depends on the maturities when they roll off. When they do roll off, it does put pressure on some clients that basically just have higher interest payments there. So, that is impacting much broader than just office, broader than just CRE. It’s impacting, I think all of America right now, to be honest with you. I mean just higher rates for longer. I think the Fed wants to slow the economy down, and we are definitely having that impact, and they are accomplishing what they are trying to achieve there. But we – like I said earlier, we are on top of the portfolios where we see maturities coming up. We are looking at what we have to do, if anything, do they have other support on it. So we are trying to stay ahead of what’s coming down the pipe. Most of the maturities and swaps are lined together so that they are pretty much in balance. So when things come close to maturity on loans is when we see if there is anything that needs to happen from a lending perspective. But I think the Fed is accomplishing what they are trying to do is slow the economy down, bring inflation down, and it’s definitely having that impact.

That’s really helpful, Daryl. Thank you. If I could follow-up, as you continue to take actions to shift more of your focus to fee income as you reduce the credit risk associated with on-balance sheet CRE. How are you thinking about your sort of longer-term CET1 target before I guess all the developments of the last several quarters? We were sort of thinking of M&T being able to get to sort of that 9% CET1 target. But I guess the inclusion of OCI volatility and regulatory capital has led to some debate over whether category for banks will now have to run with a little bit larger buffer versus history, would appreciate any thoughts there.

Yes. I think as the new rules play out and as we get comfortable working within the rules, we obviously start with a higher cushion at first. Then as you get used to managing the book and everything, I think we will tighten it up over time. But my guess is that we probably have a higher buffer coming out of the blocks. You have to really adjust your investment portfolio since the AFS is going to now go through the regulatory capital ratios to probably run with shorter durations either outright or invest longer with hedges that bring in the durations one way or the other, just so you have less volatility there. So, it’s really just getting used to how we manage all that process. Our teams are working on that now, and we will start operating that way probably well before we get the rules actually implemented from that perspective.

Understood. Thank you for taking my questions.

Thanks, Bill.

The next question comes from Brent Erensel with Portales Partners. Please go ahead.

I was going to follow-up on that stock buyback question. Thank you and good morning.

Good morning.

If you were to like incrementally invest the capital that you are generating at 7%, you would generate half the returns that you could by buying back stock. So, you need double-digit returns to equate that, if that question makes sense. So, the question I guess is when – at what point will the corporate finance math drive you to resume buybacks?

So, the corporate finance math is screaming that it’s favorable right now. It’s really more of our cautious position and conservative nature that we have to make sure that we have really strong capital, strong liquidity to really weather what comes our way. I mean if the Fed stays at higher rates, let’s say, for 3 years or whatever, that could really have a big impact on the economy. We just want to be really cautious about all that. So I think we are just trying to be prudent with it. Like I said earlier, the capital has not gone anywhere. I promise you we will deploy it in a really shareholder-friendly manner. But right now, we have strong capital and liquidity, which has been really helpful for us since the March-April timeframe, and we will continue to operate and be a strong supporter of our customers and communities that we serve.

Just is there a bell that’s going to go off when you guys are going to change your mind, or how should we – do we just wait and see?

I will tell you, once we make that decision to go, my guess is you will find out very quickly when that decision is made.

Thank you.

The next question comes from Gerard Cassidy with RBC. Please go ahead.

Hi Daryl.

Hi Gerard.

Daryl, over the years, M&T has been very effective in making acquisitions, obviously, the People’s dealers the more recent acquisition that is now completely integrated. We understand in talking to your peers and others that the interest rate marks make it very difficult for M&A today. So, I got a two-part question for you. First, just what is your view on M&A for M&T over the next 12 months to 24 months of traditional depositories? And then second, some of the P&C, in particular, was recently bought some assets from the FDIC, I see some loans. Are you guys looking at any assets that might be for sale from the FDIC from the failed banks that we had earlier in this year?

Yes. So, we didn’t do a press release on it, but we did buy two loans from that same purchase that P&C did. I think it was a total of about $300 million in commitments, it was fund banking. So, we did participate there and we were able to get a couple of those loans as well. But we are constantly looking at where we can grow our customer base that are good, long-term customers that fit. We just don’t want to do asset purchases. We want relationships is really what we are looking for to drive our organic growth from that. As it relates to acquisitions, it’s just – you and I have been doing this for a long time. When I started, we had 18,000 banks in the early ‘80s. Now, we are up to about 4,000 banks, and it’s going to continue to shrink. I think M&T has a great track record of acquiring banks over time. That strategy hasn’t changed. Our strategy is really to control and have lots of density in the markets that we serve. So, I think if and when we do purchase acquisitions, it probably won’t be a surprise in where we are going and what we are trying to do from that perspective. So, the strategy is there and it will happen at some point down the road. The interest rates definitely make it a little bit more challenging now just because of the impact on capital. But like anything, things change over time, and we will be there when we need to and do what we have been really good at before, and we will continue to do that.

Very good. And then the second part, a different question as a follow-up. When M&T, of course has developed a reputation as being a very strong underwriter, you got the numbers to prove it. And so we are not necessarily concerned about what you guys are doing specifically, but we just worry about the competitors doing foolish and stupid things that then end up having a second derivative effect on your sound underwriting decisions. Can you frame out for us granted, I know it’s not in 2005 and 2006 craziness out there. But are there any concerns that you see non-bank lenders or other bank lenders doing or have done things in the last 18 months to 24 months on the lending side that make you a little nervous, or are we just in a new playing field. Everybody is very rational, and we are not going to see anything really implode because of what some foolish lenders are doing?

Yes. We have a long history of working with our clients. Client selection is really huge for us and how we look and underwrite, specifically in the CRE portfolio. We deal with people that have been in the business for a very long time that aren’t just looking at that real estate investment as an investment but more as a long-term strategy for their company and their family. So, I really don’t look at trying to exit out of the criticized loans. If somebody is not going to support it, we will probably exit over time. I don’t really view how we are approaching it. I think it’s a great way to develop and keep relationships over the long-term. It’s the right way and a fair way to do it, as long as they are willing to support their properties and loans with us from that perspective. I think overall, though I think the industry is much safer than what it has been over the last couple of decades. I think everybody is trying to do the right thing. We have the benefit that we have some really long-term customers that have been with M&T for a long period of time, and we try to bank the people that are really top in market in all the markets that we serve.

Very good. I appreciate the color. Thank you.

The next question comes from John Pancari with Evercore ISI. Please go ahead.

Good morning Daryl.

Good morning John.

Just a follow-up around the loan loss reserves. I know you had talked about the – that the reserve addition was 50% for CRE and half going to C&I. I am just trying to frame out like what about the developments in the quarter drove the need for additional reserve additions beyond what would have already been baked into there under CECL? And then separately, can you maybe talk about the likelihood of further reserve build here just as you continue to dig through the CRE portfolio, I know you said a couple of times that there is ongoing efforts to sift through the exposures in that book.

Yes. So, if you look at the macro factors, our macro factors when we run our allowance models, basically were pretty steady. In fact, the CRE environment has actually improved a little bit. But the other economic statistics are pretty stable versus the prior period. What really drove the increase was really softness in some of the asset values in the CRE portfolio is what we were seeing and thought it made sense to add some more reserves in those. As we get more examples of what valuations are that could help drive more or may actually – I think we feel really reserved where we are today, but we just want to continue to have a really robust allowance for the needs of our borrowers and ensure we comply with all the rules that we have there. But it was really just a little bit of softness in some valuations.

And is that softness surprising you negatively? And is that level not already in the CECL reserve?

There is just not a lot of activity going on in some of these markets right now. So, you are basically, there is a big market dislocation. A lot of the markets we are doing as conservative as they are with a net present value cash flow perspective. And I think I went through it last time, but if something is not leased today, we assume it’s not leased for 3 years. If something is coming off lease within the next year, we assume that there is a 1-year gap period before it gets released. Those types of cash flow adjustments are kind of what we are marking to, but we don’t have anything to look at. When you get a certain example, I would say then we can make an adjustment. Our best guess though right now is that there is a lot of money waiting on the sidelines potentially that when the Fed does decide to keep rates more stable and maybe signal rates going down at some point, I think there will be a lot of money that will jump back into the system. Right now, there is just not a lot going on, and there is a very wide bid-ask spread.

Okay. That’s helpful. Thanks. And I have one last follow-up, if I could, also on credit. I know your charge-off guidance for the fourth quarter; you expect it to be low – above the 29 basis point level for the third quarter and then full year ‘23 near the long-term 33 bps. Can you maybe help us think about what that would imply in terms of as you look into 2024? Maybe help us, I know you are not giving formal guidance yet on ‘24, but how should we think about where the loss trajectory could be versus that longer-term 33? How much above that could it be?

Yes, that’s a good question. For the fourth quarter, is just our gut feel that it might be higher. It could actually be the same or lower, to be honest with you right now. But just knowing what’s going on there, it might be higher, but we really aren’t sure about that yet. Next year, we aren’t really giving guidance, but from a framework perspective, our allowance will build when either market economic conditions allow for it or you see some deterioration in customer behavior from that perspective. But right now, I think we are really on top of what it is, any areas that we potentially could have a risk in our credit teams are all over it, looking at the reviews and the analysis that we have. Right now, what we feel is our reserve is adequate, and we are in good touch with where the risks are.

Got it. Alright. Thanks. I appreciate it.

It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional remarks.

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