M&T Bank Corp (MTB) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to your M&T Bank Corporation fourth quarter year-end earnings conference call. At this time all participants have been placed on listen only mode and the floor will be open for questions and comments following the presentation.

It is now my pleasure to hand the floor over to your host Mike Piemonte, Senior Vice-President of Corporate Finance. Sir you may begin.

Good morning. Thank you very much. This is Mike Piemonte. I would like to thank everyone for participating in M&T's fourth quarter 2002 earnings conference call both by telephone and via web cast.

Hopefully everyone has had an opportunity to read our news release issued this morning. If you've not read the news release, you may access it along with the financial tables and schedules from our web site, which is www.mandtbank.com and clicking on the investor relation's link. Once you get there, you need to click on the news releases and you can access the release.

Also before I 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 and actual results could differ materially from those discussed in the call. And M&T undertake no obligation to revise these statements or to reflect events or circumstances after today, January 10th, 2003.

Additionally, M&T encourages participants to refer to our SEC filings found on forms 10K and 10Q for more complete discussion of forward looking statements.

And now I would like to turn over the call to our Chief Financial Officer, Mike Pinto.

Thank you Mike and good morning everyone. Before I respond to questions, I would like to cover a few points from this morning's earnings release.

I will begin with a summary of the fourth quarter, focusing on the changes from the fourth quarter of 2001 and the third quarter of this past year.

As we discussed previously, effective January 1 of 2002, GAAP earnings no longer include amortization of certain kinds of goodwill. However, we do continue to amortize co-deposits and certain other intangibles.

Fourth quarter dilute cash earnings per share, which excludes the amortization of goodwill in 2001's fourth quarter, and co-deposits and other intangible asset amortization in all quarters, was $1.40. This was up 8 percent from $1.30 in 2001's fourth quarter and up 6 percent from the $1.32 earned in the linked quarter.

Cash net income for the quarter was $133 million, up 5 percent from a year ago and up 6 percent from the $125 million earned in the linked quarter. Cash return on average tangible assets was 1.65 percent in the quarter compared with 1.67 percent in 2001's fourth quarter and 1.62 percent in the third quarter of 2002.

Cash return on average tangible common equity, which is the measure of the leverageable capital we generate through earnings, was 27.4 percent for the quarter compared with 29.4 percent in the fourth quarter of 2001 and 27.3 percent in the linked quarter.

Diluted GAAP earnings per share, which no longer includes the amortization of most types of goodwill, was $1.33 this past quarter, up 10 percent from the previous quarter. ON the same basis as though we had adopted FAS 142 last year, both former GAAP earnings per share on a diluted basis would have been $1.21 in 2001's fourth quarter.

Interest margin in the fourth quarter was 4.28 percent, down 6 basis points from 2001's fourth quarter and 10 basis points lower than the linked quarter. For the full year, net interest margin was 4.36 percent consistent with our previous guidance.

In the period, loans totaled $25.7 billion, down $573 million or 2 percent from the third quarter of this year, reflecting the securitization of $1.1 billion of residential mortgages during the recent quarter.

Approximately 88 percent of these mortgage-backed securities were retained within our investment securities portfolio. Excluding residential mortgages, average loans grew 10 percent on an annualized basis from the linked quarter. Growth in the loan portfolio during the quarter was again driven largely by consumer loans, which grew, at an annualized rate of 19 percent.

However, in the recent quarter the commercial portfolio also contributed to loan growth. Commercial loans increased at an annualized rate of 7 percent from the linked quarter, while commercial mortgages were up an annualized 5 percent.

Turning to credit, we continue to see general weakness in the overall economic environment. The annualized charge off rate for the fourth quarter was 48 basis points, down from 55 basis points in the third quarter of last year while up from 33 basis points in 2001's fourth quarter.

For the full year, charge offs were 42 basis points of average loans within the range that we previously discussed.

On a dollar basis, net charge offs for the fourth quarter were $31 million, up from $21 million in the fourth quarter of 2001, but down from $36 million in the previous quarter.

The decrease from the linked quarter was largely the result of last quarter's charge off of the entire $17 million balance relating to two leases to a large commercial airline company. That was partially off set by the charge off in the fourth quarter of $9 million on two commercial loans.

The quarterly provision for loan losses at $33 million exceeded net charge offs and was equal to last year's fourth quarter and was $4 million lower than the linked quarter. The allowance for loan losses was 1.7 percent of total loans at the end of the most recent quarter, up from 1.69 percent at the end of 2001, and up from 1.66 percent in the linked quarter.

In dollar amounts, the allowance for loan losses totaled $436 million at the end of this quarter, compared with $425 million at the end of last year's fourth quarter and $437 million at September 30th, of 2001.

The level of non-performing loans decreased during the quarter to $215 million or 0.84 percent of total loans, from $227 million or 0.86 percent at the end of the previous quarter.

Non-performing loans total $119 million or 0.76 percent at the end of 2001's fourth quarter. The decrease from the linked quarter was largely the result of the charge off of $9 million on the two commercial loans referred to earlier.

Loans past due 90 days but still accruing, were $154 million, up from $147 million from last year end and $148 million at September 30th, 2002. This category, as we've mentioned before includes government guaranteed Ginnie Mae loans, repurchased to reduce servicing expenses which totaled $123 million at the end of the most recent quarter.

Non-interest income, excluding securities' transactions was $138 million, 7 percent above the $129 million in the linked quarter and 8 percent higher than the $128 million in the fourth quarter of 2001. Higher revenues from providing deposit account and mortgage banking services and a $5 million gain on the sale of the portion of securitized residential mortgages, contributed to the increase from the linked quarter.

Focusing on expenses, operating expense was $229 million, up $8 million from the linked quarter and up $14 million from $215 million in the fourth quarter of last year. The current quarter's operating expense includes and impairment charge of $13 million related to capitalized mortgage servicing rights. This charge was $15.3 million higher than 2001's fourth quarter, but $3.3 million lower than the linked quarter. As we've discussed in the past, M&T does not specifically hedge its mortgage servicing. Rather we view mortgage-servicing rights as naturally hedged by other parts of our business, principally mortgage origination.

We believe that the increased income from mortgage origination earned in 2002 and expected to be earned in 2003, will off set the lost income as a result of projected prepayments. Adjusted to exclude security gains and intangible amortization's, M&T's efficiency ratio in the fourth quarter was 49.4 percent compared with 49.3 percent in the previous quarter and 49.2 percent in the fourth quarter of 2001.

Before we turn to questions, let briefly hit some of the highlights related to the full year, 2002. Most of these items are covered in detail in the earnings release.

That is that cash earnings per share were $5.41, up 11 percent from 2001. Cash net income was $518 million, up 7 percent from 2001. Cash return on average tangible equity was 28.6 percent in 2002, up from 28.5 percent in 2001. There were not significant one time merger related expenses this year, while one-time merger related expenses of $5 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, were $5.07, up 33 percent from 2001. On the same basis as though we had adopted FAS 142 last year, pro forma GAAP earnings per share would have been $4.44 cents for the full year 2001. Average loans were up 4 percent to $25.5 billion and end of period loans were up 2 percent to $25.7 billion reflecting the impact of the $1.1 billion residential mortgage securitization in 2002's final quarter.

Adjusted to exclude residential mortgages, average loans increased 7 percent in 2001, while end of period loans were up 9 percent over last year-end. The net interest margin of 4.36 percent in 2002 was up 13 basis points from last year. Net charge offs were $108 million or 42 basis points for the full year 2002, up from $75 million or 31 basis points in 2001.

Interests income excluding securities transactions was $513 million 3/4 sorry; non-interest income excluding securities transactions was $513 million, up 8 percent from 2001. Operating expense was $870 million, up 6 percent from 2001. The S&G cash numbers and excluding the effects of security gains, M&T's efficiency ratio for the full year 2002, was 49 percent, improved from 49.6 percent in 2001.

Finally, I would like to briefly discuss our outlook for 2003. As we mentioned in our press release, M&T will begin expensing the fair value of stock options in January 2003. We estimate that GAAP net income for the full year 2003 will be reduced by $33 million on account of the stock option expensing. Similar after tax expense for 2002, would be $28 million.

To conclude, as we mentioned in our press release today, we believe that 2003 GAAP earnings per share including stock option expenses but excluding of the effect of the Allfirst transaction will be in the $5.25 to $5.35 range. This is consistent with current consensus estimates. We expect that the Allfirst's transaction excluding anticipated one time merger cost will be slightly accretive to cash and neutral to GAAP earnings per share in 2003. Allfirst's impact on M&T's 2003 earnings will of course depend on the timing of the closing. While we currently expect this transaction to close in the first quarter, we have not yet received the necessary regulatory approvals.

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 do have a question or a comment, you could press one, followed by four on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue. by pressing the pound key. We ask that while posing your question, you pick up your handsets to provide optimum sound quality. Once again, ladies and gentlemen, that's one followed by four on your touch-tone phone.

Our first question comes from Robert Patten of UBS Warburg. Your line is live.

Good morning, guys. How are you? Nice quarter.

Thank you.

I just want to talk about the commercial loan growth that you guys sort of saw this quarter and get a feel for what kind of companies are 3/4 is that organic growth starting to borrow? Is it new customers coming? And just get a flavor what the market is right now for you.

Bob, I personally don't see any great strength in the market. The loan growth was primarily from people drawing down on the lines toward the end of the year. And we don't see and robust growth in the commercial area, in the commercial loan area.

So was it seasonal, or do you think that is going stay on the books in the first quarter?

I think it might stick on the books because during 2002 we noticed that people were not using their lines as much as they had in the past. And some of that came back in the fourth quarter. Maybe some activity is picking up. I guess what I'm saying is it's very anemic and not robust.

OK. And can you just give us sort of an update on what's going on the Allfirst's franchise, in terms of underlying revenue growth and what they are doing done in their markets?

The Allfirst's fourth quarter results have not been published yet. But I think it is pretty much the same as usual. Then also we looked at the numbers recently as they relate to our projections and our estimates that we made at the time of merger and we don't note any variances from that trend.

And last question, were you expecting your approvals at this point in time? Or is this just running the normal course?

Excuse me, I didn't ...

... the regulatory approvals for the deal. Were you expecting them? You said you don't have them at this point in time. Were you expecting them by now?

I think they are pretty much on track. I mean we were hoping that they might have come in a little bit earlier than normal, but they are pretty much on track. We expected when we announced the merger, we expected to close April 1st, at the end of the first quarter. And I think we are still on track for that.

OK. Thanks.

Thanks, Bob.

Thank you. Our next question comes from Roz Looby of Credit Suisse First Boston. Your line is live.

Thanks good morning guys. A couple of quick questions for you. On the investment portfolio, that jumped up this quarter. Can you talk about exactly how much of that came from levering in front of the Offer's transaction and when we might expect that to come off?

Yes, I think, Roz, most of that was leveraging from the Allfirst transaction. Some of it was the securitization that we did that I mentioned. So what we did we securitized $1.1 billion of mortgage loans and retained about 88 percent of that in the investment securities portfolio. So, I mean, that was done in November, so that had some impact in the quarter averages.

I think, I think if you look at all the categories together (inaudible) mortgages and the investment securities, you'll notice some slight to moderate leveraging which will come down before the Allfirst transaction closes.

OK. And one other question. Your consumer growth obviously was quite strong at almost 20 percent annualized this quarter. Can you elaborate on exactly where that came from? Was it more home equity or was it more indirect auto? And can you talk about your comfort level with continuing to grow in direct auto at this pace?

Yes. Roz, the indirect auto grew at about a 35 percent pace and (inaudible) grew at about a 29 percent pace - annualized pace. I think we're quite happy with what we're seeing on the indirect portfolio. The credit quality is still pretty good - you know, our average cycles (ph) (inaudible) are in excess of 700 out of both 720, 730 cycles (ph) (inaudible). So, we like the credit. The margins are pretty good. So, as long as we see those trends, we're quite happy with what we are originating and we don't see any reason to slow that down.

Having said that, the consumer loan growth depends mainly on macro trends, too. And I personally don't expect the macro trends to keep on a same pace as they have in 2002. You know, because what I am saying I think overall the consumer will start borrowing less, at some point. But, again, I've been saying that for the past couple of years and I've been wrong, so I don't know.

OK. Thanks very much.

Thanks, Roz.

Thank you. Our next question comes from Robert Lacoursirer of Lehman Brothers. Your line is live.

Thanks. Good morning. Just looking forward a little bit, I don't know if you could comment or give us some color on how you view the interest rate environment going forward and how that affects your guidance?

Yes, Robert. I think our perspective is that rates will pick up slightly towards the end of next year. So, we're looking at, you know, fat (ph) funds being in the, say two percent range by the end of 2003.

As I've said before, we pretty much run a matched book on our balance sheet. And really we don't expect any great impact for any variances in rates either up or down, in level of rates. So, I think for all reasonable rates in areas, we are quite comfortable with our net interest margin being in the 420, 430 range.

If I could just - to see if I can zero in a little bit. So, how much - so, could you give us a sense of how much this quarter's compression was really the result of just the securities because of in front of the All First deal, that versus the underlying interest rate environment?

I took a look at that and we went down about 10 basis points and I would guess about five basis points of that was due to leverage. And the rest of it was the interest rate environment. The biggest thing that I see is that the value of non-interest bearing accounts, like DDA's and other non-interest bearing accounts, that value has gone to very low levels because of that funds rate is so low.

So, that's having the most impact in our margins.

Well, if I could, just a slightly different - your deposit growth outlook for next year in this quarter it was quarter on quarter it was a little bit anemic. But what do you see going forward?

Much of the same. I think if you look at our deposit growth, we do very well in the transaction accounts. DDA and Now accounts tend to grow at healthy paces. I think almost double digits, if I'm not mistaken in DDA growth and Now growth. Where we think pressure is of course on the time deposit portfolio where consumers are not really willing to lock up their money for rates in the one percent, one and a half percent range.

So, I think until the rate environment turns around, we're not going to see much - we're not going to see very dramatic deposit growth.

Thank you very much.

Thanks, Robert.

Thank you. Our next question comes from Ed Majarian of Merrill Lynch. Your line is live.

Yes. Good morning. Just a quick question related to what I think I heard you say about mortgage banking. You're expecting mortgage banking profitability in '03 to sort of stay relatively flat as lower servicing impairment costs offset lower origination volume or lower origination fees. Is that what I heard? Or could you give me maybe a little bit more description on your outlook for the mortgage business?

Yes. I think 2002 has been the best mortgage year that we've ever seen in terms of originations. And the same type of rate environment that causes the originations to go up like that has an impact on the servicing portfolio. That's why we kind of look at it as a natural hedge.

If the rate environment keeps low next year, then you'll see continued good mortgage originations. There probably won't be as high as 2002, but they'll still be at a higher level than historically. But, again, I mean, if the rate environment is up and the mortgage originations slow down, we should see some of that reserve on the servicing reverse itself. So, I guess the way you portrayed it is probably overall correct.

Right. I guess my question is in your mind is there close to a one to one relationship there in terms of the offset?

No, it isn't. There's a timing issue because the servicing statement is a forward looking view. So, for example, under the servicing impairment (ph) that we took this quarter, occurred in the last week of December, when rates really came down to more than 40 year lows. And then it's just, you know, a discounted cash flow type of calculation and when the discount rate comes down, you're future cash flows, the (inaudible) of that really reduces tremendously which causes the impairment. The originations tend to come off to us in the next few quarters.

Right.

Having said that, because of the nature of the calculation is on - you know, December 31st, if you noticed, rates have come back up 30, 35 basis points in January. So, it was temporary, you know, down drop in rates. So, we might not see the originations come in but we will then see the net present value of the servicing rates go up. Which is what I was trying to say.

OK, thanks.

Thanks, Ed.

Ladies and gentlemen, as a reminder, if you do have question or comment, you can press one followed by four on your touch-tone phone at this time. Our next question comes from Roger Lister of Morgan Stanley. Your line is live.

Yes, I wonder if you can give sorted (ph) on the business side of your deposits, you seeing any inflows on DDA's from businesses? Are they building up balances?

Yes, we've seen, we've seen increases in across the board in both commercial and in consumer on the DDA's. And I think on the commercial side as the rate environment lowers more of our commercial customers keep balances to pay for cash management type services.

So, do you anticipate that when rates go back up again you may lose these deposits for the same reason?

On the commercial side, it's quite likely that we'll see, we'll see some of that. But, I think we've got to remember that the rate environment is so low now that it would take maybe a doubling of the fed (ph) funds rate to have that sort of a dampening (ph) impact on the DDA.

Right. Then to - second topic was sort of the New York City, New York Metro Area economy struggling, how you seeing things evolve in terms of loan problems on either the commercial real estate side or on the residential mortgage side?

Well, the biggest portion of our portfolio in New York City is really the commercial real estate portfolio. And actually, as a matter of fact, it's performing really well at this stage from a credit standpoint. I believe there was a month in 2002, where we didn't have a single delinquent loan. And we've had very little delinquency on that portfolio. No non-performings at all in that portfolio.

So, I think the portfolio in New York City is holding up really well. If you'd talk to me, you know, in 2001 after 9/11, I wouldn't have expected the performance of the portfolio that we saw in 2002.

Now, do you think this is due to the way you've really tackled the lendings as a strength of your clients? Or is something generally true about the market as a whole?

I would like to claim credit for us, but I would guess that the whole New York City commercial real estate business is pretty much the same. I don't think - I do think that we underwrite the mortgages in a different way, with more cash flow lender. And we lend based on rentals and the income from the rentals, not on appraised value. So, I think that gives us some edge because the way we underwrite New York City.

And what about prospects for growth in 2003?

I don't see much growth in the portfolio. This portfolio is (inaudible) has grown at double digits rates, but during the year has slowed down to mid single digits rate of growth. And I think more of the same for 2003. (inaudible) very robust growth at all.

Thank you.

Thank you. Our next question comes from Bob Plezia of RJJP. Your line is live.

Good morning. I wondered if you could give us some guidance on the All First contribution to your operation in 2003 assuming 4/01, April 01 close? In terms of earnings? Earnings per share? Give the dilution.

As I said, I think - as we've said, I think it's going to be creative (ph) to cash earnings, excluding one time expenses. So, it's going to be a creative (ph) to cash earnings per share and we expect it again to be neutral to slightly positive accretion a GAP earnings per share, again, excluding one time costs.

As we get closer to the date of acquisition, to the merger date, we'll be able to refine the numbers further. But as you know, we don't have regulatory approval so we can't really get a good grip on exactly what the forecast for the business is going to be.

Could you comment on their markets in the year 2002? How - what was the growth?

The Baltimore - Washington, D.C. area is a very robust compared to our traditional markets in Buffalo, Rochester and Syracuse. So, they've seen more growth in population and income than the average for the national economy. But, I don't have the exact numbers.

Thank you.

Thank you.

Gentlemen, I'm showing no further questions at this time.

OK. Well, again, we thank all of you for participating in our fourth quarter conference call. For clarifications of any of the items in the news releases is necessary, you can call our investor relations department at area code 716-842-5138. And again, thank you.

Thank you, ladies and gentlemen. This does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day. 8

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