Good day, and welcome to the M&T Bank First Quarter 2024 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 turn the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead.

Thank you, Todd, and good morning. I'd like to thank everyone for participating in M&T's first quarter 2024 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, and 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 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. As you will hear today, our first quarter results were a strong start for M&T Bank. Turning to Slide 3, we started the year with renewed and strengthened commitment to making a difference in people's lives. Along with helping our customers meet their financial goals, we've continued to launch programs to uplift our communities and partners. Let me share with you a few examples of how we put these words into action. Since the beginning of the year, M&T has provided $900,000 to 30 organizations across our footprint to address affordable housing and homelessness in underserved, low to middle-income communities. We launched a new Spanish language small business accelerator program in Prince George's County, Maryland, which will support many small business owners in the region. We continue to invest in New England and Long Island through the second phase of our Amplify Fund. We do this when our communities are successful, so is our business. Turning to Slide 4, we are excited to see how deeply we embedded sustainability across the bank and into our products and services. We have included several sustainability accomplishments from our upcoming 2023 Sustainability Report and look forward to sharing more when we release the complete report this quarter. Turning to Slide 6, which shows the results for the first quarter. The quarter was highlighted by strong C&I and consumer loan growth. PPNR was a solid $891 million. Expense control remains a key focus and was evident as adjusted expenses increased only 0.6% compared to the first quarter of 2023. Diluted GAAP earnings per share were $3.02 for the quarter. If we exclude the additional FDIC special assessment, adjusted diluted earnings per share were $3.15. On an adjusted basis, M&T's first quarter results produced an ROA and ROCE of 1.05% and 8.49%, respectively. The CET1 ratio remains strong, growing to 11.07% at the end of the first quarter and tangible book-value share grew 1% to $99.54. Next, we walk a little deeper into the underlying trends that generated our first-quarter results. Please turn to Slide 8. Taxable-equivalent net interest income was $1.7 billion in the first quarter, down 2% from the linked quarter. The net interest margin was 3.52%, down 9 basis points from the linked quarter. The primary drivers for the decrease to the margin were a negative 6 basis points from lower non-accrual interest and the impact of interest rate swaps, a negative 3 basis points from higher liquidity and cash moving into securities, negative 3 basis points from our deposit mix and pricing, and a positive 3 basis points from all other items, including the benefit of asset repricing in the investment portfolio and consumer loans. Turning to Slide 9 to look at the average balance sheet trends. Average investment securities increased $1.1 billion to $28.6 billion, reflecting the reinvestment of maturing security balances and a measured shift of a portion of our cash balances into investment securities. Average interest-bearing deposits at the Fed increased approximately $0.5 billion to $30.7 billion as our decision to have more liquidity on the balance sheet was largely offset by the previously mentioned investment security purchases. Average loans increased $1 billion, or 1%, to $133.8 billion. Average deposits decreased $648 million, or less than 1.5%, to $164.1 billion. Turn to Slide 10 to talk about average loans. Average loans and leases increased 1% to $133.8 billion compared to the linked quarter. Solid growth in C&I and consumer loans outpaced declines in CRE and residential mortgages. The growth in C&I loans was driven by a combination of increased line utilization in our middle market and dealer business lines, combined with new origination activity in equipment finance, corporate and institutional, and fund banking as we continued to grow existing and new clients. Loan yields decreased 1% to 6.32%, but increased 2 basis points sequentially when excluding the impact of the cash flow hedges on interest income in our CRE portfolio. Within our consumer portfolio, we continue to see the benefit of higher rates on new originations compared to maturing balances. The consumer loans yielding increased 12 basis points to 6.54%. Turning to Slide 11, our liquidity remains strong. At the end of the first quarter, investment securities and cash, including cash held at the Fed totaled $62.3 billion, representing 29% of total assets. Average investment securities grew $1.1 billion, reflecting the reinvestment of maturing securities and a shift of a portion of our cash balances into securities. The yield on investment securities increased 17 basis points to 3.30% as the yield on new purchases exceeded the yield on maturing securities. The duration of the securities portfolio at the end of the quarter was 3.8 years, and the unrealized pre-tax loss on the available for sale portfolio was only $263 million. Turning to Slide 12, we continue to focus on growing customer deposits, and we're pleased with the stabilization of our deposit balances and pricing. Average total deposits declined $648 million, less than one-half of a percent to $164.1 billion, while average customer deposits increased sequentially. We saw average deposit growth in institutional services and wealth management, relatively stable deposits within commercial, and a modest decline in the retail bank. This growth allowed us to roll off some of our brokered CDs. Average demand deposits declined $1.5 billion, partially impacted by seasonal deposit declines in commercial and business banking. The shift toward higher-yielding products continued during the quarter, but at a much slower pace. The mixed average of noninterest-bearing deposits was 30% of total deposits, largely unchanged from last quarter. Excluding broker deposits, the noninterest-bearing deposit mix in the first quarter was 32%. Encouragingly, we saw the pace of deposit cost increases slow through the quarter, with the cost of interest-bearing deposits increasing 3 basis points to 2.93%. This represents the smallest quarterly increase since the start of the tightening in early 2022. Our core non-maturity deposit costs increased only 1 basis point sequentially. Continuing on Slide 13. Noninterest income was $580 million, up slightly from the linked quarter. M&T normally receives an annual distribution from Bayview Lending Group during the first quarter of the year. This distribution was $25 million in 2024 compared to $20 million last year. Excluding the Bayview distribution, noninterest income declined $23 million sequentially. The decrease was largely driven by lower commercial mortgage banking revenues and syndication fees reflected in our other revenues from operations. Both of these fee items posted strong fourth-quarter results. Recall that last year's first quarter included $45 million of fee income from CIT prior to the sale in April. Turning to Slide 14. We continue to focus on controlling expenses. Noninterest expenses were $1.4 billion. This year's first quarter and last year's fourth quarter, each had incremental FDIC special assessments amounting to $29 million and $197 million, respectively. Excluding the special assessment, adjusted noninterest expense increased by $8 million, or 0.6%, compared to last year's first quarter. On a similar basis, adjusted noninterest expense increased $114 million, or 9%, from the linked quarter. This increase was largely driven by approximately $99 million of seasonal higher compensation costs included in the first quarter. This figure is unchanged from last year's first quarter. As usual, we expect those seasonal factors to decline significantly as we enter the second quarter. The adjusted efficiency ratio was 59.6% compared to 53.6% in the fourth quarter. Next, let's turn to Slide 15 for credit. Net charge-offs for the quarter totaled $138 million, or 42 basis points, down from 44 basis points in the linked quarter. CRE net charge-offs declined meaningfully due to a resolution of three office-related credits in last year's fourth quarter. The two largest charge-offs were previously criticized C&I loans and amounted to approximately $31 million in total. One credit was a non-automotive dealer, and the other was in the services industry. Nonaccrual loans increased by $136 million to $3.2 billion. The nonaccrual ratio increased 9 basis points to 1.71%. This was largely driven by an increase in C&I and CRE healthcare nonaccrual loans. Loans 30 to 89 days past due declined sequentially across each portfolio. In the first quarter, we recorded a provision of $200 million compared to the net charge-offs of $138 million. This resulted in an allowance build of $62 million and increased the allowance-to-loan ratio by 3 basis points to 1.62%. The current build primarily reflects a deterioration in the performance of loans to certain commercial borrowers, including non-automotive dealers and healthcare facilities, as well as growth in some sectors of M&T C&I and consumer loan portfolios. Please turn to Slide 16. When we file our form 10-Q in a few weeks, we estimate that the level of criticized loans will be $12.9 billion compared to $12.6 billion at the end of December. C&I criticized loans increased $641 million, while CRE criticized loans decreased $277 million with declines in both permanent and construction. Slide 17 provides additional detail on C&I criticized balances. Total C&I criticized balances increased $641 million. The majority of that increase is concentrated within dealer and manufacturing industries. We are seeing areas of pressure, particularly in certain businesses that may be more acutely impacted by the lag effects of higher rates for those impacted by reduced large-ticket consumer discretionary spending or a shift in spending on goods to services. For example, we saw an uptick in criticized loans to non-auto dealer industries as higher rates have impacted large ticket discretionary consumer spending and earlier COVID-driven buying saturated demand for these types of purchases. Slide 18 includes detail on CRE criticized balances. Total CRE criticized balances decreased $277 million from the last quarter. The decline is across most property types, though we did not see an increase in office and healthcare criticized. We are seeing improvements in occupancy and staffing within healthcare, but reimbursement rate improvement has been uneven, resulting in a modest net increase in criticized balances within the portfolio. Last quarter, we noted an upcoming review of the construction portfolio. Over 80% of that review has been completed, and I am pleased to note that that review resulted in limited incremental downgrades of construction loans into criticized. The remainder of the review generally consists of smaller balanced loans, but we would not expect the outcome of the remainder of that review to be significantly different than the portion already completed. Turning to Slide 19 for capital. M&T's CET1 ratio at the end of the first quarter was an estimated 11.07% compared to 10.98% at the end of the fourth quarter. The increase was due in part to the continued pause in repurchasing shares combined with continued strong capital generation. At the end of the quarter, the negative AOCI impact on the CET1 ratio from the AFS securities and pension-related components would be approximately 20 basis points. Now turning to Slide 20 for the outlook. The economy continues to perform well and the labor market remains strong despite the challenges faced by firms and consumers. The economic outlook that we discussed on the January earnings call remains unchanged. Shifting to 2024 earnings, the outlook is largely unchanged from our update in March with an upward bias to our NII outlook. For NII, recall that the outlook we provided in January considered a range of rate cut scenarios from six cuts to three cuts. As the forward curve has settled closer to two cuts, we expect NII to be $6.8 billion with possible upside. Our outlook for fees and expenses is unchanged. The expense outlook excludes incremental FDIC special assessment incurred in the first quarter. We continue to expect net charge-offs for the full year to be near the 40 basis points. The allowance level will be dependent on many factors, including changes in the macroeconomic outlook, portfolio mix, and underlying asset quality. Our outlook for the tax rate of 24% to 24.5% excludes the discrete tax benefit in the first quarter. Finally, as it relates to capital, our capital, coupled with our limited investment security marks has been a clear differentiator for M&T. We take our responsibility to manage our shareholders' capital very seriously and return more when it is appropriate to do that. Our businesses are performing well, and we are growing new relationships each and every day. While the economic uncertainty is improving, our share repurchases remain on hold. We plan to reassess repurchases after the second quarter and we'll consider a range of factors including the macroeconomic environment, the bank's capital generation, results from the 2024 stress test, the level of commercial real estate loans, and overall asset quality. That said, we continue to use our capital for organic growth and growing new customer relationships. 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 with 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 while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and prudent steward of shareholder capital. Now, let's open up the call.

At this time, we will open the floor for questions. Our first question will come from Manan Gosalia with Morgan Stanley. Please go ahead.

Hi. Good morning.

Good morning.

Daryl, can you unpack the NII guidance for us in terms of the puts and takes in a higher for longer rate environment? I mean, it looks like NIB deposits are holding up well. You're moving some of the liquidity into high-yielding securities. So is the $6.8 billion an easy bar to hit if we only get two cuts? And what would that look like if we don't get any rate cuts this year?

Yes. So let me start with the latter part first, Manan. Thanks for the question. We are really pretty neutral to interest rates right now. So whether we get two cuts, three cuts, or we get no cuts, we're going to probably be pretty comfortable with $6.8 billion plus in that range. I think because of the size of the balance sheet we had this quarter, we were a little bit heavy with liquidity and a margin of 3.52%. I think for the most part, our margin has bottomed out this year and we'll probably be in the mid to high 3.50s the rest of the year. But we'll probably have a little smaller balance sheet, maybe $2 billion or $3 billion shorter than that. But we feel really good about it. If you look at how things are playing out, our deposits, the real value of our deposit franchise I think came out really strong this quarter. I mean, our core deposits hardly budged, and increasing of interest rates, we still saw some growth in our retail CDs, which kind of drove the increase. But other than that, core deposits were flat from a cost perspective. And if you look on the asset side of the equation, we're getting nice reactivity both on our consumer loans. Our consumer loans are increasing nicely and auto, RV, and HELOC and all those are contributing positively. And then as we put money to work in the investment securities portfolio, I know it's not as high as what it is at the Fed, but as we help manage our sensitivities, we're going to have some really nice repricing on our investment portfolio. We're up 17 basis points. We could easily do that for the next couple of quarters plus throughout the year. So I think we feel pretty good about NII going forward right now.

Can you tell me the duration you're placing on the securities book?

During this quarter, we made three significant purchases of securities. Our strategy focuses on maintaining flat convexity. We've acquired treasuries and CMBS, which provide positive convexity, along with some low convexity MBS. In the first quarter, we achieved a yield of 4.6%, with a duration just over three years. Given current interest rates, we could potentially see an increase of 30 to 40 basis points in yield. If we continue this approach into the second quarter, we can expect further improvements.

That's really helpful. And then maybe a quick follow-up on the liquidity side. Cash as a percentage of assets is up another 150 basis points or so this quarter. Can you talk about the rationale for continuing to ratchet up that liquidity level? Is it the CRE exposure? Is it partly some of the stress we saw in the markets last quarter? So maybe if you can talk about what the right level of liquidity is, given the current credit environment?

In light of the current situation, we will maintain a conservative approach during any industry scares. Our priority is to ensure that the company has robust capital and ample liquidity. We are comfortable allowing some of the excess liquidity to gradually decrease from our balance sheet, aiming for around $27 billion to $26 billion, depending on how the year progresses, unless we face additional pressures in the industry.

Great. Thank you.

Yes.

Thank you. Our next question will come from John Pancari with Evercore. Please go ahead.

Good morning.

Hey, John.

Back to the balance sheet trends. The C&I loans, you seemed relatively positive in your commentary regarding the growth you're experiencing. You mentioned improved line utilization; could you elaborate on that a bit? Where do you see demand, and what is your outlook for growth in the upcoming quarter?

Yes. So if you look at our growth, it was actually broad-based. We had really good growth in many sectors. So if you look at our dealer financial services area, just the auto floor planning, is funding up, so we had increased utilization there. Our middle market business was strong and actually had increases in that space. Corporate and institutional was also up. Fund banking was up. Our equipment leasing was higher as well as mortgage warehouse. So those were the businesses that drove it. If you look at the regions, we operate in 28 community bank regions. Two-thirds of our community bank regions now are growing positively. The highlights were in Massachusetts, New Jersey, Philadelphia, and Western New York were kind of the drivers where the growth came from.

Okay, great. Thanks, Daryl. And then on the credit front, it's good to see the commercial real estate nonaccruals down in the quarter. What are you seeing on the CRE front in terms of NPA inflows? Are you seeing a slowing, or is that somewhat impacted by an increase in loan modifications? And then just separately on the C&I front. I know you noted some higher nonaccruals there. Just what are you seeing on that front that's driving the added stress?

Yes. On the commercial real estate front, we saw strong performance this quarter. While one quarter doesn't establish a trend, it was a positive outcome. Our criticized numbers decreased, although we saw a slight increase in healthcare and office sectors. Overall, we're observing some stabilization. As mentioned in the prepared remarks, we completed 80% of our construction review, which resulted in only a $200 million change in criticized assets. There is still some work to do, but we expect only a minimal increase. Reviewing that construction portfolio, which was about $8.6 billion in size, was significant. We'll continue to keep an eye on it, especially since office and healthcare remain the more troubled sectors, and we will be addressing those over time. Our teams are actively engaged with customers to help them navigate any stress they may be facing, and we feel optimistic moving forward. While we're not completely out of challenges with commercial real estate, we are seeing some positive trends. Regarding commercial and industrial, we did have two significant credits impacting our numbers. One was a marine dealer facing stress due to higher interest rates, which resulted in reduced demand for boat sales. We had to specify a reserve and take a charge-off in that area. The other significant credit was in healthcare. If it weren't for these two cases, you likely wouldn't have seen much impact from a charge-off or provision perspective.

Thanks, Daryl. If I can ask just one more on the credit front tied to that. Your criticized loans do trend above your peer levels. But is there a degree of conservativeness in there, in terms of I guess, how you treat your recourse agreement as part of CRE and elsewhere? Is there something in the way you're doing your internal risk ratings that may include your criticized levels? We're getting a fair amount of incoming regarding that.

Yes, we have a long-standing approach of maintaining a higher level of criticized loans. This is intentional as it allows us to support our clients during challenging times, fostering their loyalty to our company. It's also beneficial for our communities. Firstly, we are a conservative company. My focus is on the financial aspects, so I prioritize conservatism regarding capital and liquidity. Mike Todaro and Bob, our Chief Credit Officer, maintain a conservative stance on credit as well. This is simply how we operate the bank. We aim to do the right things and assist our customers in overcoming difficulties. When customers don’t cooperate in resolving issues, we might consider selling some credits, but that happens rarely. Historically, we prioritize working closely with our clients, which leads to reduced losses, better capital preservation, and favorable outcomes for both our shareholders and the company. This will continue to be our operational strategy.

Okay, thanks, Daryl.

Yes.

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

Hey, good morning, Daryl.

Good morning.

I have a question regarding commercial real estate. You've conducted extensive analysis on the portfolio over the past year. Considering the stress in the market and its impact on your stock, particularly associated with what higher interest rates could mean for commercial real estate risk, can you discuss the sensitivity given factors like loan-to-value ratios and debt service coverage? If we do not see any rate cuts in the next two years and the economy continues to perform reasonably well, does this result in worse outcomes solely due to higher rates? Please provide insights on the implications of no rate cuts and an elevated yield curve on credit losses in that portfolio.

Yes, Ebrahim, I’d like to shift gears a bit. Last quarter, we analyzed a scenario where we increased our commercial real estate portfolio by 100 basis points to see the potential impact. The effects depend on how high rates go, particularly the Fed’s short-term rates. In our CRE portfolio, most of it is fixed-rate, either through fixed-rate loans or synthetic swaps. Only 29% is affected by rate increases. If rates rose by 100 basis points, we would expect very minimal impact, with perhaps around $500 million entering the criticized category if they fell below the 1.2 debt service coverage ratio. Regarding the commercial and industrial (C&I) book, which totals $58 billion, it is all floating rate. Most of this has strong debt service coverage ratios above 2%. However, we have about $5 billion in a subset that we classify as leveraged. Interestingly, around half of these are no longer considered leveraged due to their performance. Thus, for the true leveraged loans, a 100 basis point stress would result in minimal impact, around a couple of hundred million in criticized loans. On the longer end of the curve, a 100 basis point increase in rates might have more of an effect on our construction book since takeouts are necessary there. Currently, financing trends are moving towards shorter terms, like five years instead of ten. Overall, we believe that if rates rise by 100 basis points, we can manage through it without significantly affecting our credit performance.

That is a good color. Thanks for talking through. And then one question. In terms of buybacks, you have a lot of excess capital. You called out four things, macro, overall asset quality, stress test results, and the level of CRE. If the first three are okay and fast forward to July, no issues on the first three, is there something around the level of CRE that we should be mindful of when we think about potential for buybacks getting started in the back half of the year?

Yes, there are actually five factors to consider. I'll outline them again. We have the macroeconomic environment, capital generation, stress test results, the level of commercial real estate, and overall asset quality. We plan to assess these factors at the end of the second quarter, keeping in mind the uncertainty in the marketplace. We aim to be responsible with our capital, which is intended for our investors. It will eventually be available to them; it's just a question of timing and our comfort level. Currently, we want to ensure that this is the right time to act. If we decide to proceed, which I’m not confirming, we would likely start modestly while maintaining an 11% or higher CET1 ratio and monitor the situation from there. We will revisit this topic during our earnings call in three months to share our thoughts on share repurchases, and we will continue from that point. Our commitment to shareholders is fundamental to our approach, and we will buy back stock when we have surplus capital instead of pursuing acquisitions.

Got it. Thanks for taking my questions.

Thank you. Our next question comes from Ken Usdin with Jefferies. Please go ahead.

Thanks. Good morning.

Good morning.

Daryl, I was wondering if you can elaborate a little bit more on deposits. So I think typically M&T see a little bit of a seasonal decline in the first Q. And I think quarter had like a weird ending date with a holiday and payroll, but really interesting to see your DDAs and interest-bearing up at period end versus the averages. Can you talk about your flows? What you're seeing? And how that dynamic is changing with the higher-for-longer environment?

Ken, it's really all around trying to make sure we grow our core deposits. And to be honest with you, some of our businesses, I mentioned it in the prepared remarks, but in our trust businesses, they're growing nicely. Again, a lot of traction, and we had some nice wins in those businesses that added to our deposits in the second half of the first quarter, early part of the second quarter. So we have a lot of momentum in that business and doing really well. I can't be more pleased though with the other areas. Our commercial bank is really focused on growing deposits as well, as well as the retail bank. So I mean, everybody is focused on doing the right thing, and that's where we are. Our bread and butter is really getting the operating account, and we're really good at that. And once we get them, they tend not to leave us. So we're happy with that as we move forward.

Got it. Great. And one question on the loan side. You talked about the benefit from securities yields grinding higher. Can you give us any color on your fixed rate loan repricing and what that looks like over the next year or two?

Yes. If we examine the yields, particularly in the auto and RV sectors, our spreads are higher, which reflects an increase of 24 basis points in auto and 63 basis points in RV compared to our marginal cost of funds. Moreover, when comparing the incremental yields we're obtaining to those that are rolling off, we see an increase of 192 basis points in auto yields and 140 basis points in RV yields. This illustrates the movement of yields within our consumer loan portfolios. Does that clarify things?

It does. And are those the two books that are the majority of where you'll get that benefit over the next year or two?

I would say for the other businesses, the competition is tough in the middle market. However, in some of our other sectors, we are achieving slightly higher spreads and yields overall when you analyze certain businesses. Thus, we feel quite optimistic about that. Regarding the securities portfolio, it's set to reprice favorably. I briefly discussed this with Manan, but with the maturing assets in the securities portfolio and our plans for purchasing and repurchasing, we could potentially see an increase of over 20 basis points in the yield of that portfolio in the upcoming quarters.

Great. Thanks, Daryl.

Thank you. Our next question comes from Steven Alexopoulos with JP Morgan. Please go ahead.

Hey, good morning, Daryl.

Hey, good morning.

I wanted to start by appreciating all the comments on what the CRE portfolio could do under different stress scenarios looking forward. However, if we focus on what actually occurred this quarter, I understand that you have roughly $8.5 billion coming due this year. Could you walk us through what came due in the first quarter? How did it play out? What percentage of these were refinanced, what was paid off, and what had to be extended because they couldn't refinance? Could you provide some insights on what actually happened with the portfolio this quarter?

Yes, I can do that. In the first quarter, we had about $2.3 billion mature. Out of that total, approximately 56% was extended, and within that extension, about 9% involved upgrades. Additionally, around 23% of the amount was actually paid off. We are currently addressing the remaining portion, which will either be extended or paid off. Very little of this amount went into criticized status, constituting a small portion. Overall, our teams are closely monitoring the situation, and this represents the impact of the maturities we experienced in the first quarter, which we hope will continue through the rest of the year.

Got it. And when you say extended, do you mean refinanced, or they weren't in a position to refinance, so you gave them another year as an example?

So typically, when we extend, you always try to get more equity and more recourse from the customer. So fees wanting to extend out a year, we're going to try to right-size the debt service coverage ratio and they'll put more equity in or give us more tangible assets to protect us as we move forward is kind of how the negotiation goes. And typically, we extend anywhere from six months to a year after willing to support it.

Got it. Okay. Thanks. Regarding the margin, I recall you mentioned it would be in the mid to high 3.50s for the remainder of the year. However, I've noticed that the deposit cost has significantly slowed down and it seems you're quite aligned with the market. Looking at the earning assets, the loan yield stands at 6.3%, with commercial and industrial loans coming in much higher. You've indicated that securities are performing better too. Why isn't the outlook more optimistic? It appears that you're in a good position on the deposit side, and there seems to be ample opportunity for earning assets to increase. I'm just curious about what factors are influencing this. Thanks.

Yes. I'm trying to give you the best color that I can give you with what I know. But at the end of the day, the biggest factor, and it's been this way my whole career in asset liability management. How deposits behave, especially the non-maturity deposits really drives your interest rate sensitivity. And while it's slowing in the commercial, we're still going to see growth in the retail CD book just because you're over 3%. So you're going to have that. Now to offset that, we are paying off some of our brokered deposits, which is a good guy to counteract some of that. But this disintermediation piece is just really hard to model. And we put our best guess out there is what we think is going to do there. Obviously, we could outperform, but I'd much rather under-promise and over-deliver right now.

Got it. It sounds like you're being conservative. Okay. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.

Good morning. I would like you to discuss S&P's recent decision to lower your ratings to a negative outlook. While there was no actual rating change, the negative outlook is notable. Clearly, your capital, earnings, and liquidity are strong, so many positive points are evident. However, one concern they raised was the concentration in commercial real estate. Could you address this topic and share how you plan to ease their concerns? Thank you.

Yes. So Matt, we actively meet with all of our rating agencies, all four of them on a very frequent basis. S&P did put us on negative outlook. But I think we feel very comfortable that, that won't result in a downgrade. We think we have a good handle on both our CRE exposure and the amount of criticized that we have and what we're working towards right now. So I think we feel that where we've got strategies in place to, over time, get that to be less of a risk in the balance sheet from a credit perspective. But rating agencies are one constituency; it's an important constituency. We also have to deal with our other constituencies as well, too. But we're all doing the right things. We come to work every day, and I'm excited to be working with the professionals that we have in our commercial and credit teams. They were working their hardest each and every day. I answered the call, your question earlier about going through the $2.3 billion maturities we had in the first quarter. We really worked through almost all of those to fruition and had very minimal impact as we move forward. We're going to continue to just grind it out and do a good job, and we'll just see how things play out.

Okay. And then just separately, on the trust fees, you talked about them being a driver going forward. Maybe just like frame how much equity drives that business, what some of the other drivers are? Because obviously, like the underlying trends are a little tricky to see because year-over-year, as you mentioned, you had a sale linked-quarter; I think there is some seasonality that maybe has a drag from like annuity sales or something. But just talk about some of the underlying drivers of that business and what gives you confidence that being a key driver of fees this year.

Yes. I mean if you look at that business, and I think our disclosures are a lot easier to understand now as we move forward with our change in segments that come out on quarter end. You'll be able to track our business performances there. But the ICS business, specifically, they have a little over 20 different product services that they offer. Some of them are fee based; some of them are fees and funding-based oriented. Examples would be escrow, M&A activity from that. Some of it can be lumpy at times; it can go back and forth. But just getting in the flow in that business and just doing a good job and good reputation. Jen, who runs this business, her and her team, they've built a really great reputation and really have done a good job growing this space nicely over the last couple of years, and we're investing in this space. We think it's a good business, core business for us, and we're really happy to have it, and we'll continue to focus on it. And I think we'll see some of the benefits that you saw in the first quarter hopefully play out throughout future quarters for us.

Okay. Thank you.

Yes.

Thank you. Our next question comes from Brian Foran with Autonomous. Please go ahead.

Hi. I just wanted to follow up on the 11%, likely staying at or above that even if you restart buybacks this year. Is there any thoughts you can give on framing it? Is that a moment in time given the five factors you cited versus is that maybe where the new normal is trending? Just kind of any thought on when we look at this 11.1%, I guess, ultimately how much of it is excess capital and how much is the new normal to running the business?

Yes. Brian, I think we need to kind of see where our stress capital buffer comes out. But I mean, at the end of the day, we're going to be really conservative. We are in uncertain times, risky times. So we are just going to be a little bit more cautious typically. I would say, long term, our average might be lower than that. But just starting this year repurchase, I think, it would be a significant change, to be honest with you, as we move forward. So not saying that's going to happen. But if it does happen, we're going to be very modest as we start out.

And then maybe I could ask the same question. I think you noted on cash, $26 billion at the end of the year as a potential landing spot. Again, is that still an excess cash position in your mind, or is that kind of more of a normal cash position you see going forward? Any thoughts on the level of excess liquidity right now?

So there's a new liquidity proposal that's supposed to come out from the regulators probably in the next quarter or so. So we'll see what's in there. We've done some of our own modeling. The treasury team has. And when you look at what we need from an operating basis, what's the fluctuations that we have within our businesses, our minimum is probably $15 billion, so we would operate with a cushion over that. But we are in no way going to come near that in the near future. We're going to be much more conservative than that as we move forward.

Thank you. Thank you for taking both.

Yes.

Thank you. Our next question comes from Peter Winter with D.A. Davidson. Please go ahead.

Good morning. I was surprised by the increase in criticized loans in the commercial and industrial sector, given the recent focus on commercial real estate. Do you think we might be at the beginning of more stress in this area due to the prolonged higher interest rates?

For us, there are three main industries that we are currently observing in our portfolio. The non-auto dealer segment, particularly RV and Marine, has faced challenges as some dealers accumulated inventory after COVID in 2022 and had to offload it at a loss, which negatively impacted their operating performance. Additionally, higher interest rates have led to reduced discretionary spending in these areas. Regarding healthcare, we’ve noted some improvement in occupancy and product availability, although reimbursement rates remain inconsistent, and while staffing may be slightly improving, it remains a stressful environment. The third theme relates to trucking and freight; during COVID, many clients expanded their capacity due to increased shipping demands, but now they find themselves with excess capacity and moving significantly less freight, which has resulted in lower operating performance. Aside from the exceptions mentioned earlier, these are the three main trends we see within the commercial and industrial sector that I am open to discussing.

Okay. Daryl, you mentioned at the conference that you're aiming to reduce the CRE as a percentage of capital reserves to about 160%. How long do you estimate this will take? Also, is achieving this a crucial factor in relation to the overall theme of starting buybacks, as you outlined in your five considerations?

It's one of the five themes. It's important, but you have to remember we started at around 260 four years ago. We've made tremendous progress over the last three to four years. I expect that we'll be in the mid to low 160s by the end of the year if we continue on this pace.

Okay. Thanks, Daryl.

Thank you. Our next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning.

Good morning.

I'm curious, Daryl, regarding the criticized balances and the overall reduction in commercial real estate. Could you identify any specific factors contributing to this? It seems like this is the second consecutive quarter of reduced criticized balances. Is it due to improved occupancy and debt service coverage, or are there perhaps some accounts moving into modifications? Any specific drivers for the decline in these balances over the last few quarters would be helpful.

Yes. I mean the CRE portfolio, with the exception of office and healthcare, the operating performance of the CRE businesses are performing well. Some of them are stressed just because of higher rates. But as we continue to work with our clients going through, we feel very good that we're going to work through these issues. It's what that we said earlier in other calls, Frank, but our customers work with us and put capital in, and we're definitely seeing all of our customers, our sponsors really support these projects. I think it really starts with client selection. And we have really good client selection that really helps win the day for us. So I think you're just seeing that commitment come through, and we're working really closely with them, and I think that's really important as we move forward. So I think we will continue to work through this, but definitely feel that CRE is very manageable, and we'll continue to address that.

Okay. And then just to follow-up on the expense side. I know even though you have limited expense growth baked in for this year, you do have some investments you guys are focused on. And just wondering if given the stronger NII outlook driven by rates, if you could potentially foresee accelerating some of that investment in 2024. Thanks.

Yes. I would tell you, sometimes you can only do so much in a company at once. We got six major projects we're working on right now in the company. We're all making really good progress in these six major projects. And they're going as fast as they can go, to be honest with you, with what we're doing. I can't imagine that we would push them to go faster or if we try to start up another project. There's just a lot of change going on in the company, and I think we're just going to be conservative, get these things across the finish line and then start up other ones as we move forward.

Great. Okay. Thanks for the color.

Thanks, Frank.

Thank you. Our next question comes from Gerard Cassidy with RBC. Please go ahead.

Hi, good morning. This is Thomas Leddy calling on behalf of Gerard. Given the jump in criticized loans in the quarter and the fact that you guys tend to historically carry a little bit more than peers. Just curious how does the criticized levels today compare to where they were in the 2008, 2009 and then 2020 peaks?

I'm going to see if I have a friend here to help me with that. I don't have that. Yes, hold on a second, Tom.

I'll just say that, obviously, 2008, 2009 was more of a residential mortgage-type issue. So we don't criticize per se; we won't monitor delinquencies on the residential side. There were pockets of criticized. So they did rise. I don't have those numbers at my disposal, but these numbers on the commercial side are higher than what they would have been back then.

Okay. Thank you. That's helpful. And then just a quick follow-up. With the increase in criticized C&I loans reported today, do you guys still feel pretty confident that you can maintain M&T's historical track record of outperformance in terms of credit losses relative to peers?

Yes, I think we do. We have a long-term history of performing in good times and stress times, and I think we will continue to do really well and perform, and all that will come to fruition. I mean, I couldn't be more pleased with how hard everybody is working and the success that we're making. We have a ways to go. But you kind of see that we have a path and how we're going to get through that. And I have no doubt in my mind that we will get through this positively and still have really good credit performance.

Okay, great. That's helpful. Thanks for taking my questions.

Yes.

Thank you. Our next question comes from Christopher Spahr with Wells Fargo. Please go ahead.

Hi, good morning. So two questions. First is just reconciling your outlook for the NIM and the increase in long-term borrowings that we saw both at end of period on an average basis this quarter?

We recently secured some Federal Home Loan Bank advances around the time of the New York Community events and also completed an unsecured issuance in March. Moving forward for the remainder of the year, our main priority is to grow customer deposits and reduce reliance on non-customer funding. We may engage in further securitization efforts, having already implemented them in our equipment leasing and auto sectors. Our strategy is to prudently increase customer deposits while reducing broker deposits and Federal Home Loan Bank advances. If necessary, we will explore other funding options like securitizations. Additionally, we want to maintain capacity for potential stress periods, ensuring we are prepared for any challenges that may arise.

Thank you. My follow-up question is regarding the schedule on Slide 17, where I've noticed that the criticized loans for motor vehicles and RVs have seen a significant increase. In response to Ken's question, you mentioned the rising yields. How do you reconcile the increase in criticized portfolios with the fact that you're also seeing greater yields? It seems like these factors might work against each other. Thank you.

No. So it's two different businesses. So the stress is in the floor planning business for the non-auto, so RV and Marine. So that's floor planning. That's where the stress is. We also are all in the indirect business for RV. Just like you have indirect auto, you have indirect RV, and that's where we're getting the yield pickup on the consumer loan portfolio. So we have a very prime-based consumer loan credit box. If you look at the average FICO score that we have in that portfolio, it's 790. So it's pretty pristine in there, and we feel good about the performance of that portfolio.

Thank you.

Thank you. At this time, I will now turn the call back to our speakers for additional or closing remarks.

And thanks, Todd. And again, thank you all for participating today. And as always, the clarification of any of the items in the call or news release if necessary, please contact our Investor Relations department. The area code is (716) 842-5138. Thank you, and have a great day.

And this does conclude the M&T Bank First Quarter 2024 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day.