Q2 2024 Earnings Summary
- Significant progress in reducing CRE concentration, bringing it closer to normal levels, enhancing the company's risk profile and capital efficiency.
- Improving asset quality, with declines in nonaccrual and criticized loans, and a focused effort by the credit team to continue this positive trend.
- Commitment to returning capital to shareholders, with plans to return excess capital conservatively, reinforcing shareholder value.
- Elevated levels of criticized loans, particularly in the Commercial Real Estate (CRE) sector at $12 billion, pose a significant concern despite efforts to reduce these balances.
- The bank's increasing loan modifications for CRE borrowers may be deferring problems, leading to potential future pressures if economic conditions worsen.
- While the bank believes loss content is lower due to strong underwriting, there remains a risk of higher charge-offs if the economy doesn't perform as expected or if interest rates remain high.
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Credit Losses in CRE
Q: What's the expected loss content in CRE loans?
A: Management emphasized that despite higher levels of criticized and nonaccrual loans, they expect lower loss content due to strong underwriting with loan-to-value ratios under 60%, even in the office portfolio. Half of the nonaccruals don't have a reserve because the collateral value exceeds the loan value. They are actively working to reduce criticized loans and believe their underwriting strength will mitigate potential losses. -
Capital Returns and CET1 Levels
Q: How should shareholders view capital returns and CET1?
A: Management acknowledged that the current CET1 ratio is higher than long-term targets due to elevated criticized loan balances. They are working to bring those balances down and affirmed that excess capital will be returned to shareholders in a conservative manner. They promised not to waste capital and will return it when appropriate. -
Deposit Costs and Brokered CD Runoff
Q: Is the reduction in deposit costs sustainable without rate cuts?
A: Management expects brokered CDs to run off by the end of the year, contributing to lower deposit costs. They see more rational pricing in the market and believe deposit costs will remain flat or decline as the year progresses and into next year. There's still some migration from non-interest-bearing to interest-bearing deposits, but it's slowing down. -
CRE Concentration Reduction
Q: What's the outlook for reducing CRE concentration?
A: The bank has made tremendous progress in lowering its CRE concentration, now at 151% of risk-based capital, and is nearing its target. They expect to reach a more normal level within a quarter or two. Management believes this level is appropriate for the company's size and client base. -
Loan Modifications in CRE
Q: Are loan mods just delaying future problems in CRE?
A: Management asserts that their loan modifications enhance their position by requiring borrowers to provide more capital or recourse in exchange for extended terms. They are not simply delaying issues but improving their standing. This approach reflects the bank's history of working with clients while protecting their interests. -
Impact of Lower Rates on Criticized Loans
Q: Could lower rates significantly reduce criticized loans?
A: Management noted that if rates decline, especially the 10-year yield, it would enable them to refinance more loans and lower criticized balances sooner and faster. A previous drop in rates led to a huge volume of loans being placed with agencies. -
Securities Portfolio Yields
Q: How will securities yields progress going forward?
A: The bank is disciplined in security purchases, keeping duration around 3 years and aiming for a blended yield around 5%. With securities maturing at about 2.5%, reinvestment offers a potential increase of 250 basis points in yields. They practice dollar-cost averaging to steadily improve yields. -
Stress Capital Buffer Reduction
Q: Can the SCB improve further next year?
A: Management was pleased with the 20 basis point reduction in their stress capital buffer. They are focused on reducing criticized loans to potentially achieve a lower SCB in future stress tests. Share repurchases may also increase, aiding in this effort. -
M&A Strategy and Focus Areas
Q: What's the outlook on depository acquisitions?
A: While M&T has a history of successful acquisitions, they are currently not focused on M&A. Instead, they are concentrating on four priorities: building out markets from the Peoples acquisition, enhancing risk areas, improving resiliency through transformations, and optimizing revenue and expenses. Growth in treasury management revenues is a highlight. -
Expense Management and Headcount
Q: What is the plan for expenses and headcount?
A: Expenses are on track and might see slight shifts in the second half but will meet planned numbers. The bank reduced headcount by a couple of hundred FTEs from the start of the year. They maintain an owner's mindset, ensuring money is spent wisely and outcomes are delivered.