M&T Bank Corp (MTB) 2002 Q2 法說會逐字稿

Welcome to the second quarter earnings conference call. This call is being recorded. With us today from the Company is Senior Vice President of Corporate Finance, Mr. Mike Piedmont (ph), and the Chief Financial Officer, Mr. Mike Pinto. At this time, I'd like to turn the call over to Mr. Mike Piedmont. Please go ahead, sir.

Thanks, David. Good morning. This is Mike Piedmont and I'd like to thank everyone for participating in M&T's second quarter 2002 earnings conference call both by telephone and via webcast. Hopefully everyone's had an opportunity to read our news release issued this morning. In that release M&T announced another quarter of continued strong earnings. If you've not read our news release, you can access it, along with the financial tables and schedules from our website, www.mandtbank.com and clicking on the Investor Relations link.

Also, before we start I'd like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. Actual results could differ materially from those discussed in the call and M&T undertakes no obligation to revise these statements or to reflect events or circumstances after today, July 10, 2002. Additionally, M&T would encourage participants to refer to our SEC filings found on Forms 10-K and 10-Q for a more complete discussion of forward-looking statements. Now I'd like to turn the call over to our CFO, Mike Pinto.

Thank you, Mike. And, good morning everyone.

Before I respond to questions, I'd like to cover a few points from this morning's earnings release. I'll begin with a summary of the second quarter, focusing on the changes from the second quarter of last year and the first quarter of this year.

As we've discussed previously, effective January 1 of this year, GAAP earnings no longer include amortization of certain types of goodwill. However, we do continue to amortize co-deposits and certain other intangibles.

Our second quarter diluted cash earnings per share which exclude the amortization of goodwill in last year's second quarter and co-deposit intangible amortization in all quarters, was $1.35, up 13% from the $1.19 in 2001 second quarter, and 1% better than the $1.34 earned in the linked quarter. There were no one-time costs incurred in either this year's first and second quarters, or in last year's second quarter.

Cash net income for the quarter was $130 million, up 8% from a year ago, and slightly higher than the linked quarter. Cash return on average tangible assets was 1.73% in the quarter, compared with 1.62% in 2001 second quarter, and 1.75% in the first quarter of 2002. Cash return on average tangible common equity, which is a measure of the leveragable capital we generate through earnings was 29.7% for the quarter, up from 28% in the second quarter of 2001, but down slightly from 30.4% in the linked quarter. Diluted GAAP earnings per share which no longer include amortization of most types of goodwill was $1.26 this past quarter, up 1 cent from the previous quarter. On the same basis as though we had adopted FAS 142 last year, pro forma GAAP earnings per share on a diluted basis would have been $1.10 in 2001 second quarter. Net interest margin in the second quarter was 4.43%, up 25 basis points from 2001 second quarter and 6 basis points higher than the linked quarter. Although we continue to see benefits from the steepness of the yield curve, our strategy remains to run a matched book of assets and liabilities. Therefore, we would expect our margin to contract to a more sustainable level in the near future. We expect the full-year net interest margin to be in the 4.30 to 4.35 % range.

The loan portfolio continues to reflect the general sluggishness in the economy. End-of-period loans total $25.6 billion, up $466 million or 2% from the first quarter of this year. On an annualized basis, the average loans also grew at a relatively slow 2% from the linked quarter. There were again, however, substantial differences between the different loan categories. Growth in the loan portfolio during the quarter was driven primarily by the continued strong growth in consumer loans which grew at an annualized rate of 27% . This was almost entirely offset by an annualized decline in residential mortgages of 26%. Sales of residential mortgages held for sales and the easing of origination volume contributed to this decrease. We are encouraged , however, by the return to modest growth rates posted in the commercial portfolios. Commercial mortgages increased at an annualized rate of 3% from the linked quarter while CNI [ph] loans were up an annualized 1%.

Turning to credit, we continue to see general weakness in the overall economic environment. The annualized charge-off rate for the second quarter was still low at 39 basis points, was up from 26 basis points from the previous quarter, and from 24 basis points in last year's second quarter . On a dollar basis, net charge-offs for the quarter were $25 million, up from $15 million in the second quarter of 2001, and $16 million in the previous quarter. The increase from the last quarter was the result of the charge-off of $9 million on two larger commercial loans, one of which was sold during the quarter. [Inaudible] provision for loan losses at $28 million was $3 million higher than net charge-offs. The allowance for loan losses was 1.70% of total loans at the end of the most recent quarter, up from 1.65% at June 30 of last year and little change from 1.72% in the linked quarter. In dollar amount, the allowance for loan losses totalled $436 million at the end of this quarter, up from $409 million at the end of last year's second quarter and from $433 million at March 31 of this year.

The level of non-performing loans decreased during the quarter to $168 million, a 0.66% of total loans, from $182 million or 73 basis points at the end of the previous quarter. Non-performing loans total $162 million or 65 basis points at the end of last year's second quarter. Loans past due 90 days but still accruing were$128 million. down from $139 million last year, and $148 million at March 31, 2002 This category includes government guaranteed Ginnie Mae loans, repurchased to reduce servicing expenses which total $104 million at the end of the most recent quarter. Non-interest income, excluding securities transactions, was $121 million compared to $124 million in the linked quarter and $116 million in the second quarter of 2001. Increases in deposit service charges and brokerage service income from the linked quarter were more than offset by declines in mortgage banking revenues.

Turning to expenses, cash operating expense was $210 million, unchanged from the linked quarter, reflecting our continued focus on cost control and up only 4% from $202 million in the second quarter of last year. Adjusted to exclude security gains and intangible amortization, M&T's efficiency ratio in the second quarter was 48.4%, improved from 48.9% in the previous quarter and from 49.5% in the second quarter of last year. During the second quarter of this year, M&T repurchased 1.3 million of its outstanding shares at an average cost of $84.62 per share. At quarter-end, approximately 1.8 million shares remain to be purchased under our current authorization.

Before we turn to questions, let me briefly hit some of the highlights related to the first half of 2002. Most of these, of course, were covered in detail in the earnings release. Diluted cash earnings per share were $2.69, up 15% from 2001. Cash net income was $259 million, up 12% from 2001. Cash return on average tangible equity was 30%, up from 28% in 2001. There were no one-time merger related expenses this year. One-time merger related expenses were $4.8 million after-tax or 5 cents per share in 2001.

Diluted GAAP earnings per share, which no longer includes amortization of most types of goodwill, was $2.51, up 40% from 2001. On the same basis, as though we had adopted FAS 142 last year, pro forma GAAP earnings per share would have been $2.10 through the first six months of last year. Average loans were up 5% to $25.2 billion and end-of-period loans were up 3% to $25.6 billion. Net interest margin of 4.4% in 2002 was up 23 basis points from last year. Net charge-offs were $41 million, up 33 basis points from the first half, up from $31 million or 26 basis points last year. Non-interest income excluding securities transactions were $245 million, up 8% from 2001. Cash operating expenses, $420 million, up 5% from 2001. Based on these cash numbers and excluding the effects of security gains, M&T's efficiency ratio for the first half of 2002 was 48.6%, 150 basis points better than 50.1 in 2001.

Finally, as we mentioned in our press release, at this point in the year, we are comfortable that we will meet or exceed the consensus estimate for 2002 GAAP earnings per share of $5.03. We will now open up the call to questions, before which David will briefly review the instructions.

Thank you Mr. Pinto. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star or asterisk key followed by the digit 1 on your touchtone telephone. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star 1 on your touchtone telephone to ask a question.

And our first question comes from Roger Lisler, Morgan Stanley.

Yes, given your success with improving your efficiency ratio, do you have a sense of a target which you might be able to get to by the end of the year?

Roger, we keep trying to improve our efficiency on a day-to-day basis and we don't like to put targets out there, especially if you're talking about the end of the year. But I wouldn't be surprised to see it be lower at the end of the year than it is right now.

On a different topic, looking sort-of out in the -- and considering where interest rates are headed, how are you positioned against an increase in the interest rates?

We tend to, as I said in my remarks, we tend to have a strategy of matching our book so we don't like to see net interest income go up or down more than 5 percentage points over a year due to changes in the interest rates and we position ourselves very carefully to be balanced, so, I think -- I think the best answer for that is we balance with regard to rates going up. On the other hand, depending on the liquidity of the rate increases and the timing of the rate increases, there usually is some short-term lag between the re-pricing of assets and liabilities. So, in the short-term, any rapid increase in interest rates would have some -- some pressure on our margins.

Thank you.

Thank you.

Our next questions comes from Mark Fitzgibbon, Sandler O'Neal.

Hi, Mike, how are you?

Hi, Mark.

I'm trying to understand better the assumptions that you are using to come up with your estimate of, I believe, 4.30 to 4.35 range for the margin for all of 2002. What are you assuming about the yield curve in interest rates?

Well, I'm being cautious. I'm assuming that the Fed is going to increase rates at sometime during the second half of the year. And that's why even though we have 4.40 through the first six months, if the Fed increases over the next half, I will expect us to fall back to the 4.35 range. On the other hand, if the Fed holds steady and doesn't increase rates over the next six months, then the margin should stay where it is to slightly higher.

Mike, in order for the margin to be at let's say 4.30 in average for the year, that would mean in the last two quarters of the year, you'd have to have a margin of 4.20. That's a dramatic depression from here.

That could happen if the Fed went up as rapidly as it went down last year. I don't think it's likely, but, you know, Mark, I don't know what the Fed is going to do.

It sounds like you're fairly sensitive to an increase in interest rates. And if that's the case are you really running a matched book?

I think it's -- it's fair to say that in the short-term, when you have rapid increases from the Fed, then we will see some compression in our margins because some of our assets, notably the home equity loan portfolio which is a pretty large portfolio that we have, re-prices the lag. That's a very short-term effect, Mark. So, I think over the long-term we're balanced, long-term being six months to a year. But in the short-term, depending on how often and when the Fed raises rates, some of our consumer portfolios lag by a couple of months in re-pricing. We got the benefit of that when the Fed went down because our loan portfolios lagged again on the way down and our margin expanded as the Fed rapidly reduced rates. And, we will get that back up if the Fed rapidly increases interest rates.

Let's suppose the Fed does nothing between now and the end of the year, and I know I asked this question last quarter and so I'm asking it again. What do you think that does to your margin for the remaining two quarters?

I think it will be around where it is, 4.40.

Okay, the second question I had was on foreign deposits. You had a fairly substantial increase. I think foreign deposits doubled during the course of the quarter. Could you perhaps give us a sense for why that is?

Mark, that's a substitute for short-term borrowing. If you note that it's a substitute for [inaudible], it's our national deposit branch where we do euro-dollar deposits. If you look at the short-term borrowings, you'll note that the short-term borrowings went down by a similar kind of amount.

Actually I -- I show that borrowings went up sequentially, Mike, from quarter-to-quarter, I think, a couple of a percent.

I was looking at the earnings release and I believe I was talking last year --

Oh, year-to-year, okay. Okay, all right. And then the next question, I wondered if you could give us a sense for what your watch list looks like, given that you did have a -- two, couple large credits go sour on you during the quarter. Or I should say you charged-off two credits in --

Yes, we charged off. I think our watch list has not deteriorated to any measurable extent. It is very sturdy. The charge-offs that we took were on loans that were already on watch or sub-standard. So, so -- there's nothing much changed out there. Having said that, we keep hearing about companies going, you know, chapter, and so things -- we don't feel very comfortable that things have improved. So, in terms of non-performings, I wouldn't be surprised to see them flat to up maybe 10 basis points over the rest of the year.

Okay, and correct me if I'm wrong, you have no direct exposure to Adelphia [ph]?

We have no direct exposure to Adelphia [ph], We have an indirect exposure through a $13 million loan that we have to a partnership. Which is a limited partnership between Adelphia [ph] and AT&T. We believe there will be a hold on that loan, but the extent of it is $13 million.

Okay. Thank you.

Thanks, Mark.

Our next question comes from Brian Harvey at Fox-Pitt Kelton.

Good morning, gentlemen. Two questions here, first, can you talk about the growth in the consumer portfolio, if you could break it out between the pieces in terms of home equity versus auto and other, and just, talk about, as well, what is the growth related to broker or any other purchase type of loans?

Well, let me take your question in parts. I think on the consumer loan portfolio, I said they grew at an annualized rate of 27%. Within the consumer loan portfolio, auto, which is pretty much indirect auto, I don't know if you describe that as broker, but we prefer to describe it as dealer-originated paper. That grew at about a 38% annualized rate. And home equity lines-of-credit grew at about a 40% annualized rate. Those are the main components. Does that answer your question, Brian?

In terms of the home equity, how much of that is brokered and how much is actually generated out of the branch system?

None of it is brokered. It is generated through the branches or through direct marketings that we have.

Okay. Just incredible growth this quarter. On the deposit side, can you talk about the growth and the demand deposits, what you're seeing in the market, what you maybe are doing in terms of incentive plans or new promotions to see the growth that you've seen this quarter?

We're very happy with the demand of public growth and I think a large part of it is due to our totally free checking program that we started this year. So, that's generating a lot of deposits, but, there is another factor there, Brian. In times when the rate environment is so low, people tend to be comfortable leaving balances to pay for fees. So, we've seen growth there, too. So, it's partly due to marketing programs and I think partly due to the rate environment being so low.

Okay, thank you.

Thanks, Brian.

Our next question comes from Audrey Myer-Lampert at David L. Babson and Company .

Good morning. I was wondering, within the consumer loan category, I 'm assuming that a fairly high percentage of that would be auto loans and I was wondering if you can quantify that? And, in addition, I'm wondering if you can give us an indication of the quality of those loans or perhaps an indication of the types of net margins you're able to get on that business?

I can -- yeah, I can try and do that. The auto loan portfolio is -- is around $2 billion that we have, and right now we think we're getting better margins than we've ever seen in the recent couple of years. And the reason being is that many banks have gotten out of that business and the yield curve is steep. So there are two reasons for that. One is that we -- we tend to price these loans off the two year point in the yield curve and the second issue is that -- that many banks have gotten out of the business. So, we've seen good growth at good margins and good returns in that portfolio. The trick with it is to make sure that the credit quality is good. And we make sure we originate in the highest calls. And the other astonishing thing about that portfolio is on our origination basis, right now, our credit quality is better than it's been in the past two or three years, too.

And, secondly, do you expect the trends with the consumer loan growth to -- exceeding residential mortgage growth, to continue for the rest of the year?

I've been expecting the consumer loan growth to decline for the last five years, but it keeps going up. So, I've been wrong for a long, long time. But, again, if you look at it, if you look at it from a macro view, there is no reason why it should be growing so much.

Okay. Thank you.

Thank you.

Our next question comes from Brock Vanderliet at Lehman Brothers.

Hi, Brock.

Mr. Vanderliet, your line is open, sir, please go ahead, sir. Once again, if you do have a question, it will be star 1 on your touch-tone telephone. We will go next to Keith Horowitz at Salomon Smith Barney.

Good morning. Two questions, one, to touch on the Adelphia [ph] , did that hit non-performing assets this quarter?

No, it's not a non-performing, it's still performing, it's a performing loan.

All right. And then, secondly, could you just kind of touch on your outlook on the commercial loan growth, it's been negative for a while, is it going to turn positive and is this an inflection point or are you seeing improved pipeline?

I don't think you can read much into one quarter, but, nevertheless, I'm really happy Keith, that we've grew at all in the commercial loan portfolio. But I don't think you can read too much into one quarter. I think I would rather wait for another quarter of growth before I comment on that. We -- we did see -- an increase in our pipeline during the second quarter, but now we've seen that go down to, you know, so there is no increase now. So, so, I'm not convinced that we've turned the corner on the commercial loan portfolio.

Okay. Thank you.

Thanks, Keith.

And we will go next to John Otis with Deutsche Banc Securities.

Good morning.

Good morning, John.

I have a few items. I apologize if you've already answered some. I missed the beginning of your comments. Could you update me on what you're seeing in the trends in your multi-family mortgage portfolio, if there's any pressure on the rent rolls? And also, maybe provide an update on how the Keystone acquisition is going and also what your outlook is now for potential acquisitions?

I will try to remember all those questions, John. Let me start with the multi-family portfolio, commercial mortgage portfolio. We don't see any pressure as such on that portfolio right now in New York City. And the reason is that much of our multi-family portfolios and rents stabilized during controlled kind-of properties. So, we -- we actually came through the last 1991, late eighties, recession pretty good on that portfolio.

Yeah, I remember that.

And we feel comfortable with it right now. We're not seeing much pressure on it. Keystone is -- the acquisition has delivered at the bottom line better than we expected and that is probably reflected in our earnings to a large extent. We have managed to take out the costs that we thought we should get. In fact, we've exceeded our costs there. Where we are slightly behind is on revenue, on the revenue side. And again, remember our projections were done in a much healthier economic environment. So, you know, I would guess that a lot of the shortfall on the revenue side is due to the economic environment and not due to anything in terms of integration with the acquisition. We've started to see some turn-around on the community banking side, small business banking. That seems to be increasing now.

Was the positive attrition in line with your expectations?

I think it was slightly higher than we expected. The reason being is that most of that attrition we saw in time deposits, when -- where Keystone's strategy was to pay a higher rate on time deposits than we do. So, we saw some attrition in the time deposit portfolio. But, again, I mean, the important thing is that the bottom line has exceeded our expectations.

Uh-huh.

Also, the outlook for future acquisitions, I don't know. We don't -- we don't go looking for acquisitions. We tend to sit back and wait and just keep up our drive focus on our business and if some opportunity comes along which we think makes sense for our shareholders, we will do it. But -- but, you know, we don't -- we don't go out -- we don't have a list of targets we keep looking at.

You sense the climate is pretty unfavorable for acquisitions, or there is still people willing to talk?

I think that people are willing to talk, but it -- it's difficult to get -- sometimes difficult to project business when the environment is so uncertain. So, I mean -- most of the pricing is based on projections for future earnings and future business and in an environment like we have right now, that projection is very difficult and so it is hard to be certain about how much you'd be willing to pay for something.

Okay, thank you.

Thank you, John.

Once again, if you do have a question, it will be star 1 on your touch-tone phone. And we will return to Brock Vanderliet at Lehman Brothers.

Thanks very much. Most of my questions were already answered. Mike, if you could just briefly comment on the velocity of the decline in mortgage banking, is that something, that rate of decline, something that we could expect the balance of the year?

Actually, that's an interesting question because, I mean, the decline was in the second quarter. Our application volume in the second quarter was about $1.9 billion. And just to put that in context, in the fourth quarter of 2001, we were at $2.4 billion in applications. So, it is a pretty steep decline from the fourth quarter to the end of the second quarter. However, at the end of June, mortgage rates have come down. The 10-year treasury Bill rate, which is a reference point for mortgage pricing, has come down pretty dramatically and I think that might spur some more refinance type activity. The other interesting thing in our mortgage applications for the second quarter was that the re-fi portion, the refinance portion, was down to 38% of the applications, whereas in the fourth quarter of 2001, re-fi's were 69% of the application volume. So, the decline has really almost totally been from refinance activity. And at the rates, if the 10-year Treasury holds at the rates that they have today, then -- then we might see an increase again in the refinance activity. So, I guess, you know, I hate to carp on this topic, but it really depends on where the 10-year treasury goes and whether the recent decline is temporary or it holds for another three or four months.

Okay, that's good color. Last question, just on the salary and benefit line. That it tweaked up a little bit more than what we were looking for, is there anything special in there?

Well, I mean the whole issue is that on -- on a consumer business, the commission that we pay and the incentives that we pay, the consumer business is still growing rapidly. So -- so, much of the increase was really incentives and commissions on both the consumer business and the mortgage business. That's the only unusual part. I mean, if you look at the balance sheet and consumer side of the business, consumer lending especially, it's been pretty strong and with the incentives based on that origination volume, that - those have increased in [inaudible].

Of your -- as you frame out the salary and benefit expenses, what percentage of them would be tied to incentive comp, roughly?

Very roughly, it would be about 20%. Between incentives and commercial. And commissions.

Okay. Thanks very much.

Thank you.

And our next question is from Adam Compton at KBW.

Hi, good morning.

Hi, Adam.

Could you give us some color just on the underwriting on the home equity that might give us some comfort levels with the growth rates, could you give us the average LTVs and maybe average FICO scores, and possibly maybe average FICO scores on the auto that you're originating now, given the high growth rates?.

I think on the auto's, the FICO scores are in excess of 700. 680 is our cut-off on the low end and so I think the average is in excess of 700. On the home equities, sorry, I don't know the FICO scores, but I think our LTVs are in the 80 to 85% range.

Thank you.

On both those portfolios, I do want to emphasize we're very comfortable with the credit that we're originating and -- and the credit that we're originating right now is better than the credit we've originated in the past couple of years.

Can I ask you on the home equity, is more of that coming out of Keystone? Because if I remember right, New York has some kind of onerous taxes on home equity. So is more of that coming out of Keystone or is pretty even across the franchise?

I think a disproportionate amount of the growth is from the Keystone franchise. Because, as you pointed out, Adam, they don't have a mortgage recording tax in Pennsylvania. So that, -- that burden is not there. And it's easier to originate there. In New York, you have a 1% mortgage recording tax and we either have to -- to kind-of incur that expense ourselves because the customers aren't willing to pay for it or we are covered somewhere in other forms of pricing. So, a large part of the volume in the east comes from Pennsylvania.

Thank you.

Thanks, Adam.

It is star 1 for questions. Next we go to Phil Marriot at Arnhold and Bleichroeder.

Good morning, I was just interested in hearing your thoughts on the commercial real estate markets, clearly. Just the ones that you serve. Could you just talk about, you know, the -- the strength or weakness of credit and the markets there, please?

We haven't see any deterioration in commercial real estate portfolio in New York all year. In fact, I just saw a report the other day that showed there were no delinquencies in the portfolios, zero delinquencies. So, we have not seen any deterioration whatsoever in the commercial mortgage portfolio that we have right now. Having said that, we read the newspapers and we see that, you know, there's pressure in rent rolls in New York and vacancies, apartment vacancies, are going up, so, I don't know what's going to come in the future. We just have not seen anything right now.

Could you talk about -- you talked a little bit about LTVs in the consumer side. Could you talk about LTVs on the commercial side?

I think on the commercial side we generally stay at around 75%.

Uh-huh. Okay. Thank you very much.

And much of our -- Phil, much of our lendings also based on the cash that moves from the multi-family rent rooms that we have in the buildings. So, we look at it both ways. We look it in terms of LTV as well as the actual cash flows from the rentals.

And how are the coverages on -- the cash flow coverages?

I wouldn't be in a position to give you a number on that, Phil, but I can get you that information.

Thank you very much.

And, gentlemen, it appears we have no further questions at this time. I'd like to turn the call back over to Mr. Piedmont for any additional or closing remarks.

Okay, thanks very much David, again, we'd like to thank everybody for participating in the call. If clarification of any of the items or the news release is necessary, please call our Investor Relations department and the number is 716-842-5138. Thank you all.

Thank you for your participation in today's conference. You may disconnect at this time.