M&T Bank Corporation
Q4 2018 Earnings Call Transcript

Published: 17 Jan 2019

[Operator:]

Welcome to the M&T Bank Fourth Quarter and Full-Year 2018 Earnings Conference Call. It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.

[Don MacLeod:]

Thank you, Laurie, and good morning, everyone. I’d like to thank you all for participating in M&T's fourth quarter and full-year 2018 earnings conference call both by telephone and through the webcast. If you’ve not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our Web site www.mtb.com, and by clicking on the investor relations link and then on the Events and Presentations link. Also, before we start, I’d like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements. Now, I would like to introduce our Chief Financial Officer, Darren King.

[Darren King:]

Thanks, Don, and good morning, everyone. As noted in this morning's earnings release, M&T's results for the fourth quarter were characterized by a continuation of the trends we've been seeing over the first three quarters of 2018. These include

[Operator:]

[Operator Instructions] Our first question comes from the line of Ken Zerbe of Morgan Stanley.

[Ken Zerbe:]

Great. Thanks. Good morning.

[Darren King:]

Good morning, Ken.

[Ken Zerbe:]

I guess, maybe just starting off in terms of the very strong growth that we saw in C&I lending this quarter. Presumably some of the -- some of that seasonal like the auto dealer piece that you mentioned, but when you think about like going into 2019 or even where we stand today, is the environment changing? Is the dialogue with borrowers getting meaningfully better or is there something particularly unusual with this quarter that may slow in future quarters? Thanks.

[Darren King:]

Sure. So there was normal seasonal uptick in our auto floor plan balances, which we had talked about on the third quarter call, that also benefited from a couple of large relationships that we on boarded during the quarter. So we would expect that number to stay around where it is at least for the first two quarters of the year. When we look outside of floor plan and we look at other C&I lending, we typically see a little bit more activity in the fourth quarter than we do in the other quarters, because year-end tends to drive things to completion. But when we look across industries and we look across geographies, it was broad-based, the uptick, which for us was encouraging and that it wasn't one sector or one geography driving the growth. And so I think there's -- I would say there's comfort from our customers perspective in the economy, but still a little bit of trepidation. And we’re hopeful that the dialogue that we saw in the fourth quarter continues into the first and second and through the year, but I guess remains to be seen, it's tough to draw conclusions off of just one quarter. And as we look underneath, we continue to see solid activity as it regards to payoffs and paydowns. And so it was really new originations that drove a lot of the growth in the quarter. And as we enter 2019 the pipelines are reasonably consistent, maybe even slightly above where they were last year. So, we're guardedly optimistic about the C&I in 2019.

[Ken Zerbe:]

All right, great. And then just my other question I had, in terms of the trust demand deposits, obviously is non-interest-bearing grew quite a bit this quarter, which is great. How sustainable are those or what's the typical pattern, if there is a typical pattern for those? Thanks.

[Darren King:]

Sure. So you’re right. Trust demand deposits were up sizably in the fourth quarter. We often see a little seasonality in those balances as well towards the end of the year. At least we’ve seen -- we saw that I think two years ago. Many of those will leave the balance sheet in the first quarter. Those tend to fluctuate depending on market activity that's going on. So we expect those will be down closer to the levels that we saw in the third and second quarters of 2018 as we enter the first half of 2019.

[Ken Zerbe:]

Okay, perfect. Thank you very much.

[Operator:]

Your next question comes from the line of John Pancari of Evercore ISI.

[John Pancari:]

Good morning.

[Darren King:]

Good morning, John.

[John Pancari:]

On the -- back to the loan growth, regarding the fourth quarter trends, how much of a impact did you see in the quarter on the commercial side from the capital markets drying up a bit in December? And then separately, just trying to think about how to model out that commercial growth, would you say that 6% end of period year-over-year growth that you saw in commercial is something that could tail off a little bit from that? And is that baked into your guidance or could it be back towards the low single-digit range? Thanks.

[Darren King:]

So when we look at C&I in the fourth quarter, I guess starting with the question about the capital markets, we did see a little bit of freeze up in some of the capital markets activity. But it didn't seem to affect our payoffs and paydowns levels in the fourth quarter. So my take on that is that many of the funds that are supplying credit that are nonbanks still had money and they were still lending and that any of the activity that was going on would have been new money that would have gone into the funds that isn't yet spoken for, except at the larger end of the customer range which is typically above where we would compete. When we look at the growth in the fourth quarter, as I mentioned, there always is a little bit of extra activity that seems to happen in the fourth quarter. So 6% to me feels really high and we're not anticipating that rate of growth would continue in 2019. We expect that to come down, we also expect to see some balances come off the balance sheet in the first half of the year. And so we're a little bit more moderated on our outlook for commercial balance growth in the year, closer to kind of the low single-digit growth that we've been talking about all the way along.

[John Pancari:]

Got it. Okay. That’s helpful. And then, separately on the operating leverage side, I know you indicated that you still expect operating leverage for 2019. We saw, I guess on what we view is a core basis, maybe 350 to 400 basis points positive operating leverage for 2018. What type of -- what magnitude of leverage do you think we could see as you look at 2019?

[Darren King:]

So when we talk about operating leverage, I guess it's important to make sure that we're all on the same page and what we're talking about and seeing. So when we talk about modest positive operating leverage, we exclude from the year-over-year calculations the $135 million that we added to the litigation reserve in 2018's first quarter. If you're looking on a GAAP basis then expenses will be down, but when you factor that out which we do, then we expect some modest expense growth even factoring in the FDIC, but we expect revenue growth to be slightly above that. And so we will expect some modest operating leverage obviously depending on rates that could be hot more or less, but based on as we look forward right now we think it's slightly positive.

[John Pancari:]

Okay, got it. Thank you.

[Operator:]

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

[Steven Alexopoulos:]

Hey, good morning, Darren.

[Darren King:]

Good morning.

[Steven Alexopoulos:]

I want to start on the NIM. So it's pretty fair you guys will benefit in the first quarter from the December hike, but given your comments for December deposit pressures to persist, the Fed does go on hold, how do you think NIM progresses for the rest of the year?

[Darren King:]

So as we look forward right now, we think the first quarter NIM gets a little bit of benefit as we mentioned before from the full impact of the hike in December. And then you got to remember, I guess, there's a couple of things. We expect some of the cash balances to come down, so those impact the margin and will impact it positively as well as the day count in the first quarter also help the margin. So with those three factors, we're expecting an increase in the margin in the first quarter. From there when we look forward with no further actions by the Fed, we would expect to kind of be within a couple of basis points plus or minus of where we are in the first quarter through the rest of the year. And then, the question is obviously how the market reacts from a deposit pricing perspective in absence of any Fed increases. Typically deposit pricing continues for little bit after the Fed stops and so we're anticipating some of that. The caveat which I think is a little bit different is for many banks. They’ve got excess securities balances that we can look to, given the change in LCR that we anticipate from the new regulations and always the question is how loan growth behaves. And if it continues like the fourth quarter for everyone and probably be a little more deposit pricing pressure if it comes back to where we've seen in the first three quarters of the year then there is probably a little bit less pressure. So I know that gives you lots of things to think about and lot of things that are on our minds. So it's not exactly a straightforward question.

[Steven Alexopoulos:]

That certainly helps. And then regarding the strong growth in C&I, quite a few other banks are pointing to customers using their cash balances right to fund expansion too. Can you give us a sense if we put the impact from the trust related deposits aside, like what did you see in noninterest bearing deposits this quarter? Thanks.

[Darren King:]

Yes. So if you hold trust demand inside, our non-interest-bearing for the quarter was flat to maybe slightly down. And if you look underneath, there's some seasonality in non-interest-bearing balances that we see at M&T because of the commercial, the magnitude of the commercial noninterest-bearing that we hold and typically the commercial customers will hold deposits through the end of the year into January in anticipation of making distributions to their principles and paying taxes. So we also typically see a little bit of an outflow of noninterest bearing in the first quarter in the commercial side for those reasons and then they slowly grow over the course of the year. So, outside of trust, we are actually encouraged by the non-interest-bearing that we saw in the fourth quarter.

[Steven Alexopoulos:]

Okay. But are you also seeing customers use noninterest bearing deposits of fund expansion?

[Darren King:]

Yes, we're seeing some of that. We're also seeing them use their lines as a way to fund growth as well. I guess my take on it is the behavior. They got the line and rates are still relatively low. So they will fund something on the line and then make a decision about making it into more permanent term debt or using their cash to eliminate it. And so we’ve seen a little bit, but not a ton of use of the cash to invest. We've seen more if we see cash flowing out of accounts, it tends to be going from non-interest-bearing into interest-bearing accounts either on balance sheet or off.

[Steven Alexopoulos:]

Okay, great. Thanks for all the color.

[Operator:]

Your next question comes from the line of Julian Wellesley of Loomis Sayles.

[Julian Wellesley:]

I have a question about middle-market lending competition. In the past you talked about frothiness in this area in terms of spreads or terms and conditions. How are you seeing things now?

[Darren King:]

I don't think we've seen a material decrease in the competitiveness of the lending environment. I think we saw as an industry in the fourth quarter a couple of things. I think we saw a lot of activity that was pent up, that was trying to get done by the end of the year as well as maybe a slight pause in the nonbank markets, but as I mentioned before, we didn’t see a material slowdown in payoffs and paydowns. Pricing has been dropping. When we look at our pricing and spreads for the last couple of quarters, they seemed to have leveled off. So our take on that is that it was the impact of the tax reform, kind of working its way through pricing and it seems to have stabilized. And really when we see changes we were seeing, we continue to see covenant light things up there. If we see things on structure, we are seeing longer interest-only periods and maybe slight moves up in LTVs, but it was minor. So from our perspective the fourth quarter, it didn't get worse, but it didn’t really get better.

[Julian Wellesley:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Erika Najarian of Bank of America.

[Erika Najarian:]

Hi. Good morning. I wanted to ask, Darren, a little bit more about the flexibility on the securities portfolio if you didn't have to adhere to LCR. I'm wondering if you could help us understand what the potential yield benefit would be or would you shrink your balance sheet and that would still be spread accretive?

[Darren King:]

So within the securities portfolio, I think if you look at what our securities portfolio is today, it's still higher than where we were before liquidity coverage ratio became a requirement. And so, we will never take that down to zero because we do want that liquidity, but there's an option to look at that as one source to fund loan growth. And given the spreads here on securities versus the spreads on loans, shifting that mix would be a positive for our margin. If you look at what we've been doing with that book over the last few quarters as longer dated mortgage-backed securities of paydown, we've held that money in cash or invested in short-term treasuries just given where the rate environment has been. But we look -- we don’t have a specific plan for that portfolio this year per se, but we consider it amongst our options versus overnight funding versus brokered deposits versus bank debt and obviously customer deposit growth as an avenue to fund loan growth. And we're always thinking about the impact on the duration of the balance sheet as well as the cost of funds as we consider all those options.

[Erika Najarian:]

Thank you for that. And just as a follow-up, as we think about the revenue outlook for 2019, if somehow it falls a little short of your budget, is there flex in your expense outlook or expense budget to be able to create positive operating leverage even if the revenue outlook is a little bit softer than what we're expecting today?

[Darren King:]

Sure. Great question. I think the positive operating leverage comment, there's a number of things that could impact that. The biggest one is what happens with rates with the Fed and if they turn from raising to decline. If rates stay flat then we should be okay on positive operating leverage. But to answer your question, there is some flex in our expenses. It doesn't happen -- it doesn't turn on a dime, but over the course of a couple of quarters there are things that we have an ability to do to manage the pace of the expense growth. But we’re going to balance that off against the investments that we're making for the long-term of the bank. And if we have to sacrifice a little bit of operating leverage in the short-term to make the investments we need to for the bank for the future, we’re not going to worry about that too much.

[Erika Najarian:]

Got it. And just one last question on the deposit repricing delay. How many quarters typically does it take after the last fed rate hike in terms of the repricing for the repricing to cease or significantly die down?

[Darren King:]

If you use the past as an indication of the future, it's usually two to three quarters that can continue, but it also depends on what the reactivity has been up to that point. And so there's a lot of things that go into that and then the other question of course is how much loan demand is there and need for those funds. So that's kind of what we've seen in the past. I think there's reason to believe that there are couple of differences, one positive and one negative to that history in the current environment. But that’s kind of what we’ve seen in the past.

[Erika Najarian:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Peter Winter of Wedbush.

[Peter Winter:]

Good morning, Darren.

[Darren King:]

Good morning, Peter.

[Peter Winter:]

I wanted to ask about credit quality. Obviously, it's very strong, but you’ve got nonperforming assets that increased a little bit two quarters in a row, you mentioned the criticized loans increasing. I’m just wondering if you can just give a little bit color there? And then, secondly, with the outlook for better loan growth next year or 2019, would you expect to start adding to reserves?

[Darren King:]

Sure. So, I guess I started at the high-level and look at delinquency and where delinquency trends have been. We haven't seen anything that that gives us cause for concern in any of the books. We've seen a little bit of an increase as you noted in year-end in nonperformers and the allowance. Actually the allowance is pretty flat in nonperformers. And when we look under the covers of what's going on there, we continue to not really see any particular industry as it relates to C&I, any particular class of real estate as it relates to CRE, any particular geography from a consumer perspective that causes us concern. Now that said, where M&T and we’re paranoid. So we’re going back through the book again, to see if there's anything that we're missing. But generally as we’ve gone through the nonperformers, there are also couple of larger nonperformers in couple of larger criticize that we -- that I mentioned before, they’re very specific situations. So we’re comfortable with where things are, but we're M&T, so we are paranoid.

[Peter Winter:]

Okay. And then just the -- possibly adding to reserves with a better outlook for loan growth this year?

[Darren King:]

Yes, I mean, obviously we go through our allowance every quarter. And we've got a process that we follow every quarter looking at the grades of our loans and the charge-off rates and obviously we’ve a little higher loan growth that would be reasonable to expect that the provision would go up with it.

[Peter Winter:]

Got it. Thanks, Darren.

[Operator:]

Your next question comes from the line of Jeffrey Elliott of Autonomous Research.

[Jeffrey Elliott:]

Hello. Thanks for taking the question. Another one on those criticized loans. Can you give us a bit more of a sense of the magnitude of the increase, just to give us a feel for how significant or not significant it is? And then, anything on the industry or types of loans, any kind of color around those that will be helpful? Thanks.

[Darren King:]

Sure. It's going to be a couple of hundred million dollar increase in the quarter compared to third quarter. And within there, there's two or three large loans over $50 million that we've got our eye on. And it's a variety of industry and various different reasons why. In one case, we've got a company that has a debt service coverage ratio that got a little close to our trigger, but when we look at that company and we look through its income statement and we work with them, we can see that they’ve opportunities to change their expense profile and rectify that situation. When we look at another one, we see some excessive leverage that was helped by some of the non-bank financials. So, there's a story to each one and there are paths for them to not remain on that criticized list, but because we're doing our work and we’re watching what's going on, we put them on that list to make sure that we pay attention to it and try to keep them from becoming defaults.

[Jeffrey Elliott:]

Understood. Thanks very much.

[Operator:]

Your next question comes from the line of Frank Schiraldi of Sandler O'Neill.

[Frank Schiraldi:]

Good morning.

[Darren King:]

Good morning.

[Frank Schiraldi:]

Just one question. Just on the -- this might be splitting hairs, Darren, but just in terms of the December rate hike that we already got, you talked about 2 to 4 basis points of benefit and if we get any additional rate hikes perhaps in 2019. And in the past you guys talked about 5 to 8 bps I think of benefit. So just wondering if December rate hike the benefit you’re likely to get in the first quarter from it, is that somewhere in between or is the 2 to 4 bps a good number to use there?

[Darren King:]

That’s not a bad number to use, because we’ve gotten some benefit of it already, right, and we’ve talked about 5 to 8 before. So that’s probably a good number to use.

[Frank Schiraldi:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Gerard Cassidy of RBC.

[Gerard Cassidy:]

Hi, Darren. How are you?

[Darren King:]

Good. How are you, Gerard?

[Gerard Cassidy:]

Good. Thank you. On your C&I loan growth that you saw this quarter, when you look at it, what percentage of it came from existing customers versus new customers that you won in the quarter?

[Darren King:]

It's a great question. If you look at our loan book, we generally get the majority of our loan growth from our existing customers just because on a percentage basis of the portfolio that's where a lot of the growth comes from. We did see some new customer adds, particularly in New Jersey. We noted New Jersey as a strong growth market. I will remind everyone once again that it continues to be basically a de novo, so it's of a small base, but it was a really nice add in terms of what we refer to as prospect convergence in the quarter. But when you look in aggregate, the bulk tends to come from the existing customer base.

[Gerard Cassidy:]

Very good. And then speaking of New Jersey, I think you said in your opening remarks you saw some good commercial real estate loan growth in New Jersey. Was that construction or mortgage -- commercial real estate term mortgage? And just what types of properties were you able to finance?

[Darren King:]

So I don't have the specifics for New Jersey on those ones, Gerard, but the trend we saw in the quarter have seen for much of the year is activity in multifamily and in hotel space. So I would expect that in New Jersey we saw some of that, but just given our presence in New Jersey and the fact that we are growing out, I think it's a little bit broader that we would see some permanent mortgage business there as well.

[Gerard Cassidy:]

And then lastly, obviously M&T has always distinguish itself on your ability to manage your capital, very effectively, granted the post financial crisis has changed that a bit. But once you come out of CCAR, what are the advantages that you guys are thinking you are going to have in terms of managing your capital, once you don’t have to go through the annual CCAR test?

[Darren King:]

So we’re still waiting for final word on what all of this is going to mean, both in terms of what the process is with the regulators as well as whether the new stress capital buffer framework comes into effect. I guess, what -- we’re hopeful for is that we start to end up in a place a little bit like the LCR or where the LCR seems to be evolving and that its part of your normal supervisory process that you’re reviewing your position with the regulators, but you have a little bit more flexibility to manage that part of the balance sheet without some of the specifics of what you can do and how much you can do in any given time period. And I think we just look for the ability to be able to deploy our shareholders capital either into customer growth, if they need support and we want to be there to provide lending to help them grow their businesses. And when they're not able to do that, we want to be able to take that capital that we can't put to use in the business and return to the shareholders and kind of not have as many restrictions on how much we can return in any quarter that we can be a little bit more dynamic in how we manage the balance sheet.

[Gerard Cassidy:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Matt O'Connor of Deutsche Bank.

[Matt O'Connor:]

Hi. Good morning.

[Darren King:]

Good morning.

[Matt O'Connor:]

Just wonder if you could talk about how other bank CEOs are thinking about the stocks, the environment. Obviously, you have a lot of capital you’ve been acquired in the past, just wondering if a selloff in stocks and [indiscernible] assets in general and increased macro concerns maybe bring up some people to the table or think a little bit differently than say 3, 6 months ago?

[Darren King:]

So, I guess I haven't spent a lot of time with other bank CEOs to know exactly what they’re thinking. But when you look at the market and what’s happened with bank stocks and with multiples, the whole industry is rerated down basically together. I think, we had a better December than some others did, but we’re still all relatively down. So for someone to think about selling or for acquisition that to work its about the difference between the buyer and the seller in some cases and the relative differences hasn't changed from what it was a few months ago. And I don't think we've heard too much where people are capitulating and thinking that the world is coming to an end and it's time to sell my bank.

[Matt O'Connor:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Christopher Spahr of Wells Fargo.

[Christopher Spahr:]

Hi. Thank you. The treating line item, a pretty good pickup quarter actually compared to actually the last few years on a quarterly basis and you attributed to a pickup in C&I lending. Given your commentary on C&I lending going forward or just loan growth going forward, do you think that trading is a lot sustainable or will you kind of revert back to what we’ve seen in the last few years in trading?

[Darren King:]

Yes, the trading tends to go and locks that with originations. And it's not just C&I lending originations that happened to have a big impact on the balance sheet this quarter, but originations continued in the quarter in both CRE and C&I, and both of those sectors will use swaps to manage their interest rate risk. And so the trading account should move in lockstep with loan origination activity, and so that moves up or down the trading revenue should move up or down as well.

[Christopher Spahr:]

And just as a follow-up, the other commentary on fee revenues excluding kind of the trust, if that takes into account kind of that -- kind of outlook, correct?

[Darren King:]

Yes.

[Christopher Spahr:]

Right. Thank you.

[Operator:]

Your final question comes from the line of Brian Klock of Keefe, Bruyette & Woods.

[Brian Klock:]

Hey, good morning, Darren.

[Darren King:]

Good morning, Brian.

[Brian Klock:]

So I wanted to kind of follow-up on maybe you had a discussion earlier about some of the LCR and sort of thoughts going forward and managing your liquidity. I guess, looking at page 14 in your press release and the year-over-year '18 versus '17, the securities portfolio has come down quite a bit since 2017?

[Darren King:]

Yes.

[Brian Klock:]

And just thinking about it now and on an end of period basis at the end of the year, it's even below the fourth quarter average of $13 billion. So, I know you’ve had deposit runoff to some Hudson City time deposits etcetera. I guess, how do you think about that level of the securities portfolio in 2018? Do you think this is -- I guess, you got to use this just with other hedging and other telco strategies, but is this an area where this will grow from here or this where do you think it might stabilize at on the security side?

[Darren King:]

Sure. So on that page, Brian, when we look at securities and the portfolio, we look at it in combination with the top line there, interest-bearing deposits at banks or cash asset [ph]. And when we have been seeing payoffs and paydowns of the securities portfolio, depending on where rates were, we've been holding some of that in cash because the rate were getting in cash is within 10 or 15 basis points of what you could get at one year treasuries. And within our securities portfolio, it's kind of had a bit of a barbell, if you will, between at mortgage-backed securities being kind of longer dated for rate and then the shorter end to manage duration. And so we've been just allowing some of the securities portfolio to go into cash and that's why you see some of those cash balances increasing. Some of it was absolutely because of growth in trust demand, but some of it is also just shifting between securities and cash. And so, if you look at the combined, they are down a little bit, but it's not as quite as dramatic as what the securities might look like on its own.

[Brian Klock:]

Got it. So if I think about average earning assets in '19 versus '18, so that anything outside of loans whether it's the interest-bearing deposit Fed fund security, that’s going to be around maybe $19 billion on average which has seems like it's been in the last two years. So the earning asset growth could be higher than whatever you put into loan growth will grow your earning assets from the 106.8 that you had for 2018.

[Darren King:]

Maybe, maybe not. So you could see switch between categories, right. You could see just within the loan book switch between mortgage versus the other categories because of that continued run down and then within the asset -- on the asset side of the balance sheet between securities and loan. So aggregate earning asset growth would -- might be flat to slightly down, depending on how we choose to fund some of the loan growth.

[Brian Klock:]

Okay. And just a real follow -- quick follow-up question on the fee income guidance. So when you talked about the trust being mid single-digit, because there's a good momentum in that business. So would the mortgage banking be included with all the other in that low single-digit guide or is mortgage banking expected to be a little softer because some of the headwinds on originations?

[Darren King:]

It's included with everything else.

[Brian Klock:]

Okay. Thanks for your time, Darren.

[Darren King:]

Sure, Brian.

[Operator:]

Thank you. I will now return the call to Don MacLeod for any additional or closing remarks.

[Don MacLeod:]

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

[Operator:]

Thank you for participating in the M&T Bank's fourth quarter and full-year 2018 earnings conference call. You may now disconnect.