M&T Bank Corp (MTB) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the M&T Bank 3rd Quarter earnings release. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to hand this over to your host, Mr. Mike Piedmont. Sir, the floor is yours.

Thank you, Nancy. I'd like to thank you everyone for participating in M&T's third quarter 2002 earnings conference call. This is being broadcast both by telephone and webcast. Hopefully everyone had an opportunity read our news release that was issued this morning. If you haven't read the news release, you can access it along with the financial tables and schedules from our website which is www.mandtbank.com. By clicking on the Investor Relations link.

Also, before we start, I would 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 this call and M&T undertakes no obligation to revise the statements or to reflect the circumstances after today, October 9th, 2002. Additionally, M&T encourages participants to refer if our SEC filings found on forms 10K and 10Q for a more complete discussion of forward-looking statements. Now I'd like to introduce our Chief Financial Officer, Michael Pinto.

Thank you, and good morning, everyone. Before I respond to questions, I'd like to cover a few points from the morning's news release.

I'll start with a summary of the 3rd Quarter, focusing on changes from the 3rd Quarter of last year and the 2nd Quarter of this year. As we've discussed previously, effective January 1 of this year, GAAP earnings no longer include amortization for goodwill. However, we continue to amortize other intangibles. Third quarter diluted cash earnings per share, which excludes the amortization of goodwill in last year's 3rd Quarter and core deposits and other intangible amortizations in other quarters was $1.32, 6% from the $1.24 in 2001's 3rd Quarter and down slightly from the $1.35 earned in the last quarter.

There were no one-time costs incurred in this year or last year's 3rd Quarter. Cash net income for the quarter was $125 million, up 1% from a year ago, a full percent lower than the $130 million earned in the last quarter. Cash return and average tangible assets was 1.2% in the quarter compared with 1.64% in 2001's 3rd Quarter and 1.73% in the 2nd Quarter of 2002.

Cash return on average tangible common equity, which is a measure of the leverageable capital we generate through earnings, was 27.3% in the quarter. This compares with 28.4% in the 3rd Quarter of 2001 and 29.7% in the latest quarter. Diluted GAAP earnings per share, which no longer include the amortization for goodwill was $1.23 in the past quarter, down 3 cents from the previous quarter. On the same basis as though we had adopted FAS 142 last year, pro forma gap earnings per share on a diluted basis would have been $1.14 in 2001's 3rd Quarter. Net interest margin in 3rd quarter was 4.38%, up 16 basis points from 2001's 3rd Quarter and five basis points lower than the linked quarter.

As we stated in the past, we would expect our margin to contract to a more sustainable level in the future. We expect the margin to be in the $4.35 range. End of period loans totaled $26.3 billion, up $705 million or 3% from the 2nd Quarter of this year.

On an annualized basis, average loans, excluding residential mortgages, grew at a strong pace of 12% from the linked quarter. Growth in the loan portfolio during the quarter was again driven by the strong growth in consumer loans at an annualized rate of 29%. However, in contrast with recent quarters, the commercial portfolio also contributed to loan growth. T&I loans increased at a rate of 9% from the linked quarter while commercial mortgages were up and annualized 4%.

Turning to credit, we continue to see general weakness in the overall economic environment. The annualized charge-off rates for the 3rd Quarter was 55 basis points, up from 39 basis points in the previous quarter and from 38 basis points in last year's 3rd Quarter. For the first nine months of this year, annualized charge-offs were 40 basis points, within the range we've previously discussed. On a dollar basis, the net charge-offs for the quarter were $36 million, up $24 million from the 3rd Quarter of 2001 and $25 million in the previous quarter. The increase from the linked quarter was largely the result of the charge-off of the entire $17 million balance relating to two leases to a large commercial airline company which declared chapter 11 bankruptcy during the quarter.

The quarterly provision for loan losses of $37 million covered net charge-offs and was $9 million higher than last year's 3rd Quarter and this year's 2nd Quarter. The allowance for loan losses was 1.66% of total loans at the end of this if you are, up slightly from 1.65% at September 30th of last year but down from 1.70% in the linked quarter. In dollar amounts, the amount from loan losses totaled $437 million at the end of this quarter, compared to $413 million at the end of last year's 3rd Quarter and $436 million at June 30th this year.

The level of non-performing loans increased during the quarter to $227 million of 86 basis points of total loan from $168 million or 66 basis points at the end of the previous quarter. Non-performing loans totaled $197 million or 79 basis points at the end of last year's 3rd Quarter. Increase from the linked quarter was largely the result of the transfer of three large commercial loans totaling $53 million. Loans past due 90 days still accruing over $148 million, up from $138 million last year and $128 million at June 30th 2002. This category includes government guarantees, Jenny May loans, repurchase for expenses which totaled $109 million at the end of the most recent quarter.

Non-interest income excluding securities transactions was $129 million, 6% above the $121 million in the linked quarter and 8% higher than $120 million in the 3rd Quarter of 2001. Increases in mortgage banking revenues and department service charges from the linked quarter were partially offset by declines in brokerage services income.

Turning to expenses, operating expenses were $221 million, up $11 million from the linked quarter and up $16 million from $205 million in the 3rd Quarter of last year. The increase from the previous quarter was largely due -- in fact, entirely due to an impairment charge of $60 million related to capitalized mortgage servicing rights. This charge was $14 million higher than last year's 3rd Quarter and $13 million higher than the linked quarter.

As we've discussed in the past, M&T does not specifically hedge its mortgage servicing. Rather, we view it as naturally hedged by other parts of our business, principally mortgage origination. During the 3rd Quarter, mortgage applications reached record levels of $3 billion, up from $1.9 billion each during last year's 3rd Quarter and this year's 2nd Quarter. Mortgage banking fees during the quarter were $30 million, $7 million higher than the linked quarter. We believe that the increased income from mortgage originations realized in the second half of this year and early next year will offset impairment charges. Adjusted to exclude security gains and intangible amortizations it was 49.3% in the 3rd Quarter compared with 48.4% in the previous quarter and 49% in the 3rd Quarter of last year.

During the 3rd Quarter of this year, M&T repurchased 408,000 of its outstanding shares at an average cost of $77.40 per share. At quarter-end, approximately 1.4 million shares remain to be purchased under the current authorization. As we mentioned in our news release, we expected to spend further stock buybacks and allow capital levels to build.

Before we turn to questions, let me briefly hit on the highlights related to the first nine months of 2002 and most of these items were covered in detail in the earnings release. Diluted cash earnings per share were $4.01, up 12% from 2001. Cash net income was $385 million, up 8% from 2001. Cash return on average tangible equity was 29.1% in 2002, up from 28.2% in 2001. There were no merger-related expenses this year, while one-time merger related expenses were $5 million after tax or 5 cents per share in 2001. Diluted GAAP earnings per share, which no longer include amortization amortized for goodwill were $3.75, up 35% from 2001.

On the same basis as though we had adopted FAS 142 last year, pro forma GAAP earnings pare share would have been $3.24 through the first nine months of last year. Average loans were up 5% to $25.4 billion and end of period loans were up 5% to $26.3 billion. Net interest margin of 4.93% in 2002 was up 20 basis points from last year. Net chargeoffs were $77 million or 40 basis points for the first three quarters of 2002, up from $55 million at this point last year. Interest income excluding securities transactions was $374 million, up 8% from last year.

Cash offering expense was $641 million, up 6% from 2001. Based on these cash numbers and excluding the effects of security gains, M&T's efficiency ratio for the first three quarters of 2002 was 48.9%, 86 basis points better than 2001. Finally, as we mentioned in our press release, at this point in the year, we are comfortable with the consensus estimate 2002 GAAP earnings per share of $5.07. We will now open up the call to questions before which the operator will briefly review the instructions.

Thank you. The floor is now open for questions. If you have a question or a comment, please press the numbers 1 followed by 4 on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask all parties to pick up the handsets while posing their question. The first question is coming from Brian Harvey of Fox-Pitt Kelton. Please state your question.

Thank you, good morning. Mike, can you just give a little more detail on those three large commercial credits you added this quarter? Can you give any sort of detail on what industry those might be in? Was it market credits or it was it related to the shared national credit review?

Thank you, Brian, for the question. Of the $53 million that went non-performing in loans, $34 million of that was related to -- $37 million of that was related to the shared national credit exam. All of the loans basically are in the CNI portfolio in the manufacturing industry. So, except for one, which was -- which was in the shared national credit exam relating to a partnership from Adelphia which -- which we had to take non-performing due to the exam.

Okay. So there was one relationship of $37 million and the other two were the balance of the $53 million?

No, there were two relationships for $37 million, which came from the shared national credit exam.

Okay. Can you talk about the watch list and what you're seeing in terms of any sort of new credits coming on? Is there more migration happening? Can you give us a better view what you're seeing?

I think our -- other than the CNI portfolio, we don't see much change in the watch list. The CNI portfolio, due to the shared national credit exam and general sluggishness in the CNI portfolio, the watch list is growing slowly. But, but again, it's geared toward the larger loans that we've talked about, basic with a small business and commercial loans seem to be pretty stable.

Thank you.

Thank you, Brian.

Thank you, the next question comes from Mark Fitzgibbon of Sandler O'Neal.

Good morning, Mike.

Good morning, Mark.

My question relates to your guidance for the 4th Quarter. In order to get to the $5.07 consensus estimate, you'd need to earn a $1.32 in 4Q, which is about 7% higher than what you earned in 3Q. It seems to me that the only way you can really get to that number is if you had a fairly substantial reduction in credit costs. Is that factored into your projection for 4Q?

Well, I think it would be fair to say that we expect credit costs to come in at about 40 to 45 basis points. Having said that, I did mention that during the quarter we had $17 million in -- in -- in two commercial leases to a big airline company. That's -- that's an unusual charge for us. So -- so I would expect the charge-off rate could come down from 3rd Quarter and come down about 40 basis points to 45 basis points.

Okay. The second question I had is about sort of the interest rate sensitivity of the balance sheet today, how is it positioned and what can we look for for the margin in coming quarters?

I think like I said, Mark, I think the margin is going to contract a little bit from where it is now. We already saw a decline of 5 basis points from 2nd Quarter to 3rd Quarter, so, I think I'm comfortable with around 44.35% for the full year or thereabouts. In terms of positioning, we -- we are fairly well-GAAPed, well matched and don't see any specific change in the net interest income projections for either increasing or decreases in rates. Having said that, we probably will make slightly more money if rates go up.

Thank you.

Thanks, Mark.

Thank you. Our next question is coming from Adam Compton of KBW. Please state your question.

Yeah, hi. Good morning. A couple of questions. One is can you tell us what your MSR value is now relative to loans serviced? Also, you know, given is strong growth and the consumer loan portfolio which has been pretty sustained for a while, do you remain comfortable that the underwriting there is remaining stringent and a year from now we won't see negative effects from that growth? And last question is -- when you look at the period end balance sheet versus the averages, it's clear your investment portfolio bloated way up at the end of the period, but didn't affect the average at all. Should we expect that to come back down or will some of the 4th Quarter -- will the 4th Quarter see some benefit from bigger investment portfolio?

Thanks, Adam. I will try to remember all three of your questions. Let me start with -- with the mortgage servicing rights. We have -- we have mortgage servicing rights of about $129 million on a principal balance in the portfolio of $11.6 billion. That gives us a CMSR of about 1.11%. Against that we have a reserve, including the reserve we just talked, the payment reserve of about $19.5 million. So, net of the impairment reserve, our CMSR percentage to the loans is about 94 basis points. On your second question, with regard to the consumer portfolio, there is strong growth there, but as I said before, we -- we continue to see very good credit qualities. I'll just read a few FICO scores to you. The average FICO score on the portfolio in 2002 is about 747. On our interest loan portfolios, 720. So -- so, as you can see, the average FICA scores are really good and we feel good with the credit we are originating even though the credits with pretty high. I believe your third question was with regard to the investment securities portfolio and balances. You note that we start buying back shares because of the pending merger. As long as we have the equity we felt that before the merger, we might as well leverage up the investment securities portfolio to get some additional income. Having said that, most of the investment securities that we've put on are very, very short and given the rate structure on the yield curve, I wouldn't expect them to earn more than 20, 25 basis points on the leveraging.

So, basically when we talk about a strong 4th Quarter, you're not getting help from having additional investments on.

Not much help. I think when I talk about the new year, I think the 3rd Quarter had two what I would call unusual events in them. One was the leased writedown of $17 million. The other was the impairment reserve of $16 million. Now, having said that, I wouldn't -- I wouldn't want to imply that we're going to owe that much more in the 4th Quarter because you note that our provision went about 9 million above normal limits and if you take out the mortgage origination fee from the impairment charge that, gives you another $9 million. So, the two of them -- the two unusual charges were about $18 million in the quarter.

I guess the only thing I don't really much understand is if you're getting really thin spread on a short-term investment, why put them on at all?

Because we have excessed equity since we're not buying back stock and we just felt that, you know, we might as well earn some thing on the equity. We feel strongly that we need a return on our equity and we just don't like to see it go down.

I mean leveraged ROE on the business for you guys is roughly what?

But when you're stuck with the "E," any "R" is better than no "R".

Right.

If we -- if we -- if we could have been buying back stock then we would have bought back stock, but we can't because we need the capital for the acquisition. So, normal times we wouldn't do any leveraging in normal times. We would have bought back stock because you find that the ROE is low and we take it and buy back stock in normal times, but since we need the equity and can't buy back stock now, we might as well earn some return on it.

So, when the [All First] deal closes we should see some of the excess come off.

Absolutely. In fact, before it closes it will come off. That's why it is short-term. We don't want to take any interest rate risk or a credit risk with this. So, it is very short-term and it's highly rated securities.

Okay, I guess one last question if I can squeeze it in, you know, given overall deteriorion we've seen in credit for the industry, you know, do you remain comfortable with the credit quality at All First and that you had a good enough look there that there won't be surprises for us?

We did our due diligence and went through the portfolio. We've done a good due diligence. We've identified a few areas of concern, but that's all based into the pricing. So, -- so I think we're very comfortable with the credit, also.

Okay, thank you.

Thanks, Adam.

Thank you, next is Adam Starr of Kramer Rosenthal. Please state your question.

Thank you, my question was already asked and answered.

Thank you.

Thank you. Our next question comes from Dee Quest of The Post Standard. Please state your question.

Yes, you answered most of the questions regarding offers that I had. Do you have an idea of how long it's going to take to integrate all first into M&T?

It's early yet to be able to give you an idea on that, but I typically integrate all of our acquisitions within the 4th -- [ loss of audio ]

Hello?

[ Audio difficulties, when the call comes back on there are no further questions and the call ends. ]