Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants lines have been placed in a listen-only mode. And later the floor will be open for your question. [Operator Instructions] It is now my pleasure to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Maria, and good morning, everyone. I'd like to thank you for participating in M&T's fourth quarter and full year 2020 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 from our website, www.mtb.com 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'd like to introduce our Chief Financial Officer, Darren King.

Thanks, Don, and good morning, everyone, and Happy New Year. Before we get into the details, I'll touch on just a few highlights in the recent quarter's results. PPP loan forgiveness ramped up in the fourth quarter. Average PPP loans declined by $351 million compared with the third quarter and were down $1.1 billion on an end-of-period basis. This resulted in the accelerated recognition of $29 million of PPP loan fees into net interest income during the quarter. In addition to the impact of accelerated PPP loan fees, net interest income increased as a result of improved deposit pricing across all customer segments. Notwithstanding the PPP forgiveness, average loans were up during the quarter, including growth in dealer floor plan loans, and mortgage loans purchased from servicing pools. Fee revenues held up well, particularly trust income due to continued strong capital markets and service charges due to the improved economic activity. Expenses were impacted by costs relating to the migration of our retail brokerage platform to LPL Financial and were otherwise in line with our expectations. As to credit, we saw an increase in nonaccrual loans this quarter that is consistent with the higher expected credit losses that we provided for earlier in the year. While CRE loans came off COVID forbearance and net charge-offs rose to a level just above our long-term average. Capital levels remained strong with our CET1 ratio growing to 10% at year-end. We'll review the numbers for the full year in a moment, but first let's turn to the results of the fourth quarter. Diluted GAAP earnings per common share were $3.52 in the fourth quarter of 2020, compared with $2.75 in the third quarter of 2020, and $3.60 in the fourth quarter of 2019. Net income for the quarter was $471 million, compared with…

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

All right. Great. I guess maybe starting off, you mentioned that you're certainly sitting on a huge amount of excess cash versus kind of where you normally have been there's obviously a lot of debate around whether it's prudent to invest the excess deposits in low rates or low rate -- low-yielding securities or keep it in cash. How are you guys balancing that debate? And where do you come out on it?

Yes. Ken, and thanks for the question. It's a discussion that we have every other week at our ALCO meetings, and our debate is always how long the cash will hang around, given the way it showed up on the balance sheet, it just nearly exploded in the second half of the year. And that impacts our decision and thought process about what kind of duration to take on. And so in the short term, as we work our way through that thought process, holding it in cash versus investing it in short-term treasuries, there really isn't much of a basis point gain from doing that. And so we're looking at alternative ways where we can get maybe a little bit better spread or yield on that cash without setting up a tremendous amount of duration risk. One of the things we mentioned in the prepared remarks was we've been using that cash for buyouts of Ginnie Mae securities. And we've found that to be an attractive use of cash in the short term, because it offsets an expense. The spread on those is better than what we would get on 1-year treasuries, and it creates the opportunity for some fee income. So we'll look for other opportunities like that. We'll watch and see how the PPP 2 goes and what the net change in loan balances is. And then we'll continue to watch the rate curve and the environment and we'll keep our powder drive. It's something we continue to look at on a regular basis to see where we can put some of that money to work because, obviously, we're not paid to hold cash. So that's always our objective, but we're trying to be prudent with how much duration risk we might be taking on.

All right. Great. Helpful. And then maybe just a follow-up question. Can you just talk a little bit more about the -- I think you mentioned $530 million worth of hotel credits that were transferred to nonaccrual. I'd love to learn more about the credit quality of those.

Yes. Sure. I'm happy to discuss that. When we look at those credits, I guess it's -- I don't need to take off my shoes and socks to count the number of them, which is a good thing. So we know exactly how many there are. We know exactly where they are, and we've had a long-standing relationship with many of these -- all of these clients. When I look at the loan to values of the top, let's say, we looked at the top 10, most are 60% or below. That 60%, obviously, is primarily based on at-origination, but we still haven't seen a material decrease in asset prices in the market with anything that's traded. We've seen the CMBS market come back a little bit as we got to the end of the year, which also should help sustain asset prices. And a couple of the downgrades are full relationships. And so there's a couple of larger ones, but it's not just 1 single property. It's multiple properties. And so there's good collateral behind these and good long-standing relationships. We can see some level of occupancy in the hotels. They tend to be in the larger cities. And so as the larger cities start to see more either business travel or tourism, they'll start to come back. But where we sit right now, we feel comfortable that we have our arms around these, and we have good visibility into them and are able to watch them closely. And so I would just view this as what would be the normal progression when you're in 1 of these economic cycles, right, that you start to see signs of delinquency, some of these were in the forbearance, and now they've gone to nonaccrual. And what's interesting about the new CECL environment is that you kind of take the provision and set up the reserve before you see stuff in nonaccrual. And so these are just kind of catching up to that provisioning. And generally, we called out hotels, because when you look outside of hotels, a lot of the CRE trends are actually pretty solid. Outside of that, there's really not a lot of concern today in multifamily. Retail portfolio has actually done reasonably well. And then we're actually seeing some parts of the portfolio, not necessarily CRE related, but seeing some upgrades like in the dealer book and that the dealers have done -- have just had a fantastic year, and in some cases, had record profits. And so that's really the sector that we're watching, and that's obviously why we did make that move with those loans and classifying them as nonaccrual.

Got it. Did you have to -- did you build any incremental reserve associated with those credits when they mentioned nonaccrual?

No, there wasn't anything material. Those that was in effect accounted for in the provisioning that we had done through the prior three quarters of the year.

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

On the -- back to that $530 million, was the -- was that a result of more of a deeper dive into those credits this quarter that resulted them all moving to nonaccrual this quarter? Or was it just how it played out in terms of them coming off of forbearance?

Yes, John, it's really the latter. We've been able to identify in the hotel portfolio on a credit by credit basis, right from the start and being able to pay attention to each one of these relationships. Working with them, understanding what their NOI is and how it's moving and what kind of situation they're in. These would largely be folks that got to the end of that forbearance period. And we thought the appropriate thing to do, the most conservative thing to do, was to start to move them into nonaccrual and not continue down that forbearance path.

Got it. Okay. And then it looks like your 90-day past dues also increased about -- looks like more than 60% in the quarter. Was that also related to hotels? And then also maybe if you can comment on your office exposure and just how that's been holding up?

Yes. I guess I'll start with the office exposure. When we look at what's been happening in office, the trends in rent collection have been pretty solid. We haven't seen a big decrease in what the -- our customers have been able to receive from the tenants. And obviously, a bunch of that is with the leases that are signed, they tend to be longer-term and oftentimes with larger corporations. So it's been pretty steady. When I look at that space and I look at how many modifications there are in there, that are outstanding, it's like 1% of the portfolio. And so overall, the office space is doing very well. Again, I would say the multifamily space is also holding up quite well and retail, after our concerns early on, were -- is also doing well. When you look at the over 90-day to answer that question and what's going on. The bulk of that is driven by the residential mortgage loans and the things that we're buying out of the pools and they're largely government guaranteed. So it's kind of the way they're classified, but not something that we worry about from a credit perspective.

Our next question comes from the line of Bill Carcache of Wolfe Research.

Darren, following up on comments that you've made on credit, specifically the hotel credits that you moved to nonaccrual and are no longer applying forbearance. Can you just give a bigger picture view of what the trajectory is across the loan portfolio of downgrades? And then along those lines, is it reasonable to expect that we could see your reserve rate revert to the day 1 level of about 1.3% on the other side of the pandemic? And maybe you could just discuss how soon we'd get there in light of some of the longer tail concerns that you guys have cited in CRE in particular?

Yes, sure. So I guess, just watching the trends and what we've been seeing over the course of the last, I would describe it as 6 months. When we were in June in the thick of things, forbearance was quite widespread. There was -- it was across a number of industries and across quite a number of customers. And what's happened over the course of the last 6 months is is that we've seen stability, and we've seen improvement. I mean probably the most remarkable turnout was in the dealer book that was -- if my memory is correct, about $4.2 billion of forbearance. And all of those are off of forbearance. And in fact, all of those are current. They've not just -- they're not just off forbearance, but they've recovered what they had skipped. And when we look through the rest of the portfolio and what was in forbearance, I think I mentioned that -- first talking about criticized trends, so we've been -- even though forbearance has been on, we go through and we grade the book following our grading system and looking at our credit review process, looking at cash flows, looking at collateral, looking at ability to repay, intent to repay and grading the book. And so, what you're seeing is a slowdown in the migration to criticized, right; so we talked about that being up above 5% this quarter. And so the rate of increase in criticized is declining. And the nonaccruals is really just that progression of people going from criticized into nonaccrual. And what's really in the book is hotel. There's a little bit of retail, but retail has performed quite well. And a little bit of multifamily. And those are really the big three industries, but hotel is far and away…

That's super helpful color. If I could squeeze in another one. And just broadly, if you could discuss your thoughts around back book repricing dynamics for you guys? And really across the industry in the last cycle, loan yields continued to decline throughout the trip cycle until we got our first-rate hike in late 2015. And I was wondering if you could just discuss whether you expect to see a similar dynamic in the cycle?

Yes. I guess a couple of things on the back book. On the deposit side, we've seen a tremendous amount of repricing and the reactivity in the deposit book for us and for the industry, especially given the excess liquidity has been very rapid. And when we look at deposit pricing and yields, certainly for a lot of the interest-bearing categories, excluding time deposits, we're getting close to the lows that we saw over the last 10 years. And so, there's some room to go there, but it's single-digit -- low single-digit basis points. When you talk about loans and loan yields, we think about it as loan margin. And the yield is always of -- in reference to the benchmark rate because there's still variable rate driven product. But when you look at what the spread is on the new originations versus what's rolling off, we're actually seeing better spreads on new originations, and we've been seeing that for the last two quarters. And it's in the range of, call it, 40 to 60 basis points over where we had been pre-pandemic. And so what's nice about that is, obviously, over time, as the hedge benefit rolls off, we're starting to see -- we'll see a larger percentage of the book at the new pricing, which is a little bit better than the roll-off pricing. And so we actually were quite positive on that part of what's happening in the portfolio, especially in the consumer -- sorry, commercial real estate and C&I space.

Great. I mean how does that better spreads on new originations compared to the last trip cycle? Just to follow-up on that.

It's -- I guess, I would say, it's reasonably consistent with what happens in the cycle. And usually, what you see is you see leading into the cycles, you see margins drop because usually, there's lots of liquidity and lots of capital, lots of people looking for growth. And then you will see margins compress when you're in that environment. And then as you see a little challenge in the economy, then you tend to see -- and people protecting capital. You tend to see a little bit of an improvement in pricing because there's a little more pricing power. Obviously, with the liquidity, this time, probably not quite as severe as last time. And so there might not be the same level of increase in pricing, but we're certainly seeing it in the short term. And I would say that, that general trend in an economic environment like this and as you come out of it, is actually pretty consistent with what you see.

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

So, the follow-up, not to beat a dead horse on the hotel nonaccruals. But I know you said there was no provision taken as you moved these into nonaccrual. But were there any charge-offs taken?

There were no charge-offs taken on that part of the portfolio. If you look at the charge-offs for the fourth quarter, there's really three large relationships that really drove that increase. Two of them were -- what we would describe as in closed malls and regional mall operators. And by taking those charge-offs, that pretty much eliminates our outstanding exposure to any closed malls. And then there was one company that was in the -- that's described as delivery service, highly related to the travel industry and with no travel going on, that necessitated the charge-off there. Outside of those, it was a variety of things, but generally relatively small compared to those three that I mentioned.

Okay. Darren, in terms of what you do now with these hotel loans on nonaccrual, I know you said they're long-term relationships. Are you planning to offer deferrals until maybe better days ahead? Do you plan to modify the principle, to move them back to current? Or do you plan on going into the hotel business and taking these collateral over?

Well, not the latter. The latter is always our last resort. We're bankers, not hotel operators. And so we'd rather let the experts do that. But it's generally the first two things that you talked about. So we'll work with the borrower and see whether we think that -- first question is, do they have any outside liquidity and can they bring something to the table to be in addition to the interest reserve. It could be some combination of that plus some extended payment relief. You could see some restructuring into something that looks more like an A note, B note kind of structure where you split to credit and might have a partial charge-off on those, but not a complete. And so there's a bunch of different options of ways that we can work with the clients to try and keep them in business and keep them operating as long as possible. Because, obviously, us being in that business is absolutely the last resort.

Okay. And if I could squeeze one more in. On dealer floor plan, I think you said it was up $800 million in the quarter. What was the balance at year-end? And can you talk about expectations for that business, right? It seems dealers have gone a lot more efficient with managing inventory levels during the pandemic. So can you talk about what you expect from the business?

Yes. I guess when you look at the number of cars on lots, we bottomed out. And I want to say, within the summer to early fall. And inventories have been building since then. There's a bunch of factors that go into the inventory that are sitting on the lots. I mean, not the least of which is what the car rental companies are doing. With the challenges in travel, there's been less demand for cars from that sector in the economy. In the early part of this year, as the manufacturers shut down, there was tremendous demand from the dealers to put used cars on their lots. And so they were buying up some of the inventory that was coming off of the rental agencies. And so what we expect is that we'll see an uptick in inventories as we go through 2021. We don't believe we'll go all the way back to what we saw pre-pandemic or in 2019, that the SAAR won't go all the way back into that $16.5 million, $17 million range, but we will see some pickup. And just, I guess, to give a little bit of sense of magnitude looking at balances. From where we are at the end of the year to where we were at the end of the year last year, there's roughly, call it, $800 million to $1 billion difference in what's outstanding at that point in time. So how quickly we get back there? I don't know that we'll get all the way back there in 2021, but we should be approaching that as we get to the end of the year, assuming the economy continues to operate the way it was. But we think there's still some room for that segment to show some growth.

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

Did I miss any comments on the outlook for the tax rate in '21?

You did not miss that. Our expectation for the tax rate for next year is 24%, kind of plus or minus 0.5 point.

Okay. And are there opportunities to lower that? Like we're seeing some other banks heavy ESG kind of partnerships. I think some might be actually buying low-income housing credits, but some also seem to be doing some other things, structures, partnerships with customers or clients. And is that kind of another way to maybe deploy capital if there's not a lot of loans, can't really want grow securities and buying back stock after it's doubled is maybe less appealing, just theoretically. So are there opportunities there? Or are you trying to think differently of what you can do to your capital, given everything I just said?

Yes. No Litec is a part of the sector that we've always been in. We've actually kind of increased it in the last 18 to 24 months. It's part of being a community bank that being in the community, supporting those kinds of projects is critical. We found that over time to be effective in that space, you need to be not just on the loan, but in the equity side of those deals as well. And so we've been doing a little bit more of that. And so it's absolutely part of how we do it. It's also an important part of your CRE rating. And so for all of those reasons, that's absolutely a space that we have been in and will continue to be and as opportunities present themselves, we'll certainly be there for the communities and for the clients.

And then anything new specifically on some of these like ESG initiatives that other banks seem to be kind of leaning into pretty heavily that reduced tax rate?

Yes. We've done some of that. We're in the space. We see opportunity for there to be a little bit more. We haven't discussed it, because it's not been a huge part of our portfolio. And I guess one of the questions as we go forward is, even with the tax rate where it is, how much tax using capacity will there be with us making less money than we did a year ago. And -- but maybe there'll be more capacity to use taxes depending on if there's any changes with the new administration. So it's a space that we're familiar with, and we do, do some business in, but it's selective at the moment.

Our next question comes from the line of Ken Usdin of Jefferies.

Darren, just good to see that buyback announcement this morning. I was just wondering if you can just walk us through the December stress test results and the implied SCB that was brought forth in that document. Does it mean anything in terms of how you have to think about capital? And does it lead you to think about participating in this year's stress test process as a result?

Yes. So the CCAR stress test results in December, obviously, reflected a much more severe economic environment than anything we've seen before. And is meaningfully more severe than what the current environment looks like. And so the good news is we're not operating in that environment. That said, we learned a lot from that output, and we continue to work and talk with the Federal Reserve to understand a little bit more what is behind some of the outputs there. So we're using it to inform our thinking. We haven't -- as we go through that process and learn more from the Fed, that will help inform our decision about whether or not to participate in this year's CCAR. I guess if you look at the implications of that and where we are at the end of the year, the nice thing is when you look at where our CET1 ratio ended the year, we ended the year at 10%. And so there's a comfortable amount of space between where we sit and what might be implied by the outcome of that test. And with the restrictions that have been in place with capital sitting at 10%, we would feel, given also the reserving that we've done, that we're well protected and that we certainly don't need to see the CET1 ratio drop dramatically to 9% in the environment that we're in today with the restrictions. That wouldn't be possible. But we equally don't see a need or a concern that we would want to run the capital ratios up materially from here. And so as we think about those tests, we think about the feedback that came with them and we think about as we go forward, we'll be taking that -- those things into account as we determine when and if and how much shares -- stock to repurchase.

And ladies and gentlemen, we have time for one final question. Our final question will come from the line of Erika Najarian of Bank of America.

Just a follow-up to Ken's question. Is that -- should we think about your DFAS 2.0 results with the 5% SCB is binding relative to how you think about buybacks? I guess I was under impression that most banks were operating for the assumption that DFAS 1.0 results were sort of the binding results. And DFAS 2.0 wasn't binding, but I'm wondering, especially rolls have your $800 million buyback announcing your thoughts there?

Yes. I guess, I wouldn't consider that binding per se. It's obviously an input and an important one in our thought process, because the Federal Reserve told us something with that. And so we're paying attention to it. I think the -- by the letter of the law, the Feds indicated that they would not share with the institutions, if that was to become a new SCB until the end of March, if not sooner. And so we'll learn a little bit more about that over the course of the coming days. And so until that point, it's our understanding that the SCB that was calculated in the June results is the binding one. That said, when you look at the earnings and some of the restrictions on distributions relative to earnings in the forecast, moving the CET1 ratio down meaningfully would be pretty difficult. And so the announced buyback kind of takes into account our current capital position, our forecasted earnings our forecasted balance sheet growth and contemplate some of the restrictions that have been in place. And that was really what got us to that amount at this point. And as we mentioned before, we think that we're still not through the challenges of the pandemic. And so we wouldn't see -- it doesn't seem prudent to us to lower those ratios dramatically. But on the flip side, we don't think that we need to be higher, much higher than where we are. And so we'll kind of manage to that in the short term. And as we go through the year and see how the recovery unfolds, we'll continue to update our thinking and share that with you.

And if I could just squeeze in 1 more question on the NII guide. Darren, in the NII guide for down low to mid-single digits, what are you assuming, if any, in terms of cash deployment relative to $22.6 billion on average in the fourth quarter, and if you could remind us what the swap income realized in 2020 versus what's embedded in your guide for '21?

Yes. So within that projection, there is some expectation that the cash balances come down a little bit. And generally, it's the volatility in the cash balances as opposed to them going into higher-yielding securities or loan growth. And so I guess, embedded in that guide is still a relatively elevated cash position. So to the extent that we find ways to deploy that into higher-yielding assets, which we're always on the lookout for. There's some upside to that. When you look at the income from the hedge portfolio, what we earned this quarter was very similar to what we earned last quarter in terms of NII and what we should see in Q1 is also in line with that, and then it starts to decline, as we've talked about on prior calls over the course of 2021. There's still some benefit in 2020 -- 2021 from the hedges, but it's declining as we go through the year.

Okay. And could you care to quantify in dollars?

I've got it in front of me by quarter, so I'm just looking at it. It's -- it was around $300 million in 2020 and droid to about $275 million in 2021.

And that was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.

Again, thank you all for participating today. And as always, a clarification of any of the items on the call or news release is necessary, please contact our Investor Relations department at (716) 842-5138. Thank you, and goodbye.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.