M&T Bank Corp (MTB) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to your M&T Bank Corporation first quarter 2003 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. It is my pleasure to turn the floor over to your Host, Mike Piemonte (ph), SVP of Corporate Finance. Sir, you may begin.

Good morning. This is Mike Piemonte. I'd like to thank everyone for participating in M&T's first quarter 2003 earnings conference call both by telephone and via webcast. Hopefully everyone has had an opportunity to read our news release issued this morning. If you have not read it you may 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 this call, and M&T undertakes no obligation to revise these statements or reflect events or circumstances after today, April 10th, 2003. Additionally, M&T encourages participants to refer to our SEC filings found on forms 10-K and 10-Q for a more complete discussion of forward-looking statements. I'd now like to introduce 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 news release. I'll begin with the summary of the first quarter, focusing on the changes in from the first quarter of 2002, and from the fourth quarter of this past year. I'd also like to remind everyone at the outset that we successfully closed the Allfirst Financial merger on April 1, 2003. However, unless otherwise stated, comments made about 2003 will not include the effects of the Allfirst transaction.

As previously announced, we began expensing stock options in January of this year. As a result of this, net income in the recent quarter was reduced by $7m or $0.08 per share, compared with $7m or $0.07 per share in last year's first quarter and $7m or $0.08 per share in the linked quarter.

M&T elected to use the retroactive restatement method which not only recognizes expense related to options granted in the current year, but also, for those options granted in previous years that vest in the current year. This method also requires us to restate prior years to reflect the expense that would have been recognized in those years had the same method been used. So that the numbers are comparable. As a result, all references to prior year in our earnings release and in this call reflect these restated numbers.

Diluted earnings per share which include the expensing of stock options, the amortization of co-deposit and other intangible assets and merger related costs were $1.23 in this year's first quarter. Up 4% from $1.18 in 2002's first quarter but down 2% from the $1.25 earned in the linked quarter. The amortization of co-deposit and other intangible assets amounted to $0.07 per share in the recent quarter, compared to $0.09 in last year's recent quarter and $0.07 per share in last year's final quarter.

Merger-related costs in the most recent quarter totaled $4m net of taxes or $0.04 per share. There were no merger-related costs incurred in last year's first or fourth quarters. First quarter diluted cash earnings per share which excludes the amortization of core deposit and other intangible assets and merger related costs were $1.34 up 2% from the $1.32 in the linked quarter and up 6% from the $1.27 in 2002's first quarter.

Net income for the quarter was $117m up 3% from a year ago but down 2% from the $119m in the linked quarter. Cash net income for the quarter was $127m, up 4% from a year ago and up 1% from the $126m in the linked quarter. Return on average assets was 1.43% in the quarter compared to 1.47% in 2002's first quarter and 1.42% in the last quarter of 2002.

Cash return on average tangible assets was 1.62% in the quarter, compared with 1.65% in 2002's first quarter, and 1.56% in the last quarter of 2002. Return on average common equity was 14.46% for the quarter, compared with 15.56% in the first quarter of last year and 15% in the linked quarter. Cash return on average tangible common equity, which is a measure of the leverageable capital we generate through earnings was 24.68% for the quarter compared to 28.41% in the first quarter of last year and 28.54% in the linked quarter.

Net interest margin in the first quarter was 4.32% down five basis points from last year's first quarter but up four basis points from the linked quarter. That increase was primarily due to the number of days being lower in the first quarter. As we stated last quarter, we expect the full year net interest margin excluding Allfirst to be in the range of 4.2- 4.3%.

End of period loans total $26.2b up approximately $500m or 2% from the fourth quarter of last year. Excluding residential mortgages, average loans grew 7% 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 15%. Growth in the commercial portfolios continues to be slow. Commercial loans increased at an annualized rate of 5% from the linked quarter while commercial mortgages were up an annualized 2%.

Turning to credit, we continue to see general weakness in the overall economic environment. The annualized chargeoff rate for this year's first quarter was 39 basis points, down from 48 basis points in the previous quarter but up from 26 basis points in last year's first quarter. On a dollar basis net chargeoffs for the quarter were $25m, up from $16m in the first quarter of 2002, but lower than the $31m charged off in the previous quarter.

The quarterly provision for loan losses at $33m exceeded net chargeoffs and was $9m higher than last year's first quarter, unchanged from the linked quarter. The allowance for credit losses was 1.7% of total loans at the end of the recent quarter unchanged from December 31st, 2002, and down slightly from 172 at the end of last year's first quarter. In dollar amount the allowance for loan losses totaled $445m at the end of this quarter, up from $433m at the end of last year's first quarter, and from $436m at the end of 2002.

The level of nonperforming loans increased during the quarter to $230m or 0.88% of total loans, from $215m or 0.84% at the end of the year. This was essentially driven by the addition of two commercial credits to nonapproved status. Nonperforming loans totaled $182m or 0.73% of loans at the end of last year's first quarter.

Loans past due, 90 days but still accruing were $146m, down from $148m at the end of last year's first quarter and from $154m at the end of 2002. This category, as we've said in the past, includes government guaranteed Ginnie Mae loans repurchased to reduce servicing expenses which totaled $120m at the end of this first quarter.

Noninterest income excluding security transactions was $133m. 4% lower than the $138m in the linked quarter but 7% higher than the $124m in the first quarter of 2001. The decline from the linked quarter was largely as a result of the $5m gain on the sale of a portion of securitized residential mortgages realized in last year's fourth quarter.

Turning to expenses, operating expense was $225m, down $14m from the linked quarter, and up only 5% from $220m in the first quarter of last year. Operating expense in 2002's final quarter included an impairment charge of $30m related to capitalized mortgage servicing rights. There was no similar charge in the first quarter of 2003 or in the first quarter of 2002.

Salaries and benefits expense increased by 1% this quarter compared to the prior year's first quarter, and remained flat from the linked quarter. Additionally, during this year's first quarter many areas of M&T began incurring expenses in anticipation of the Allfirst merger. While these expenses were operating in nature and are not included in the merger related expenses we discussed earlier, we expect many of these expenses would be covered by additional revenues from the [inaudible] future quarters. Adjusted to include [inaudible], amortization as well as merger related costs M&T's efficiency ratio in the first quarter was 49.8% compared to 51.7% in the previous quarter and 51.3% in the first quarter of last year.

To conclude as we said last quarter and mentioned in our press release this morning at the current time assuming the economy begins to recover later this year, we are comfortable that full year 2003 diluted earnings per share excluding the effect of the Allfirst transaction, will be the $525m to $535m range. As we've also stated previously, we continue to expect the Allfirst transaction will be slightly accretive to cash earnings per share in 2003. We'll 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 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. Once again ladies and gentlemen, that's 1 followed by 4 on your touch tone phone at this time. Our first question comes from Brian Harvey of Fox-Pitt Kelton. Your line is live.

Good morning.

Good morning, Brian.

Could you talk about the two commercial loans, what industry those are and then more broadly could you just talk about the overall auto exposure for the company, maybe size of the portfolio and discuss what type of lending you're involved with.

Let me take the auto loan portfolio first. What we do pretty much our biggest business there is in direct auto lending, that's the fastest growing business and we're very comfortable with that business because the way we do it. The average [inaudible] business was in the $730m range for all loans originated this year. And the margins right now are pretty strong, roughly 3.5%. So that gives us a very profitable business, that we are very comfortable with. Again, just as a point of reference, the chargeoffs at that portfolio run at about 60 basis points which are pretty low for consumer loans as you know.

In terms of the nonperforming loans, the big loan there was a loan to a heavy equipment retailers. It's still paying, it's a performing loan. But we took it non-performing because we have doubts about the eventual collectibilty of the loan. So it's still current, it's paying. The second loan was actually a loan that is not -- is no longer current, and that was to a -- basically an excavation company, if you want to call it that. And that -- that loan was about $6m.

Okay. Just getting back to the auto exposure, can you just talk about the other direct lending you might do to auto suppliers, or just the auto industry in general?

Yeah, that portfolio is not very significant, compared to our other portfolios, and we have it in our commercial and industrial portfolio. What we tend to do with the auto business is we link the auto pro plan landing and our indirect auto lending so that we do both on a relationship basis, and we feel a large part of the success in the indirect lending business is because of our relationships on the floor plan lending. I believe the auto flow plan portfolio about $700m so it is not a material number.

Okay, thank you.

Okay. Our next question comes from Mark Fitzgibbon of Sandler O'Neill.

Good morning Mike.

Good morning.

I wonder what sort of Allfirst first quarter looked like and secondly I was wondering if you could give up an update on cost saves and maybe pro forma balance sheet position looks like from a rate sensitivity standpoint.

Mark, I can't really comment on the Allfirst first quarter, because it's not public yet. So -- so all I can say is that we haven't noticed any surprises from where -- from the time we did our due diligence, so there's nothing negative that we've seen through this first quarter.

We closed the deal on April 1st, and we think there could be timing issues in with when we realize the cost saves. Because as you know we just closed on April 1st, the conversion is scheduled for mid July, sometime mid year sometime, and we just started looking through the investment securities portfolio and the loan portfolios. So all of these things can affect the timing in 2003. On the other hand, we're very comfortable with that -- that the run rate that we talked about in our acquisition analysis of $100m per year, we're very comfortable with achieving that run rate of expense savings at this time.

But your feeling is that some of those things would be pushed out a little later in the year?

I'm not saying that. I'm just saying that it's hard to predict exactly what will happen this year, because of timing. However, as I've said on the call, I feel very comfortable saying it will be slightly accretive to cash earnings this year.

Okay. And then what is your plan in terms of positioning the balance sheet from a rate sensitivity standpoint?

As I've said before, we don't believe in making money by taking interest rate risks. We run a fairly well-matched book and that's going to be our position going forward too we will match the book and we won't take much interest rate risk. Currently, just to give you an idea, our current outlook combining both M&T and Allfirst is that our GAAP or our change in net interest income would be less than 1% or 2% upward move in rates. And you know a downward move to 0% on the Fed funds rate. The difference is less than 1% over the first year.

Thank you.

Thanks.

Once again ladies and gentlemen as a reminder, if you do have a question or a comment you could press 1 followed by 4 on your touch tone phone at this time. Our next question comes from Rose Looby of CSFB.

Thanks, good morning, guys.

Good morning Rose.

You had a bulk securitization of $1.1b last quarter. Do you have plans for additional securitizations over the course of the year and comment on the mortgage pipeline?

The mortgage pipeline is about $850m at this time. It's pretty robust. We had a very good quarter for applications. One of the best quarters we've had. Our application volume was about $3b. So the mortgage pipeline, business has done very well and the pipeline is strong. I would envisage that we do another securitization maybe in the fourth quarter of this year. Because you know, as the mortgage volume comes on the books, it's more efficient to securitize it than keep it as whole loans on the balance sheet. I don't think however that we'd get rid of the assets, we'd securitize them and hold them in our investment portfolio, pretty much like we did last year.

Okay, thanks.

Thanks Rose.

Robert Hughes of Keith Bruett. Your line is live.

Two questions. I notice the deal on your investment securities portfolio moved up a little bit from the fourth quarter. Can you give us a little color on the changes in the composition of the portfolio quarter to quarter. And secondly has there been any change in your outlook for merger related charges with respect to the acquisition?

I -- good morning. I'll take the first question. The yield moving up from the fourth quarter, last quarter as you may recall, we had leveraged up the balance sheet with short term commercial paper and that was rolling off during the quarter. We had done that because we had the equity, we were stockpiling if you want to call it that equity for the Allfirst merger. And we leveraged up the balance sheet for that. And that was rolling off throughout the fourth quarter. We had none of that in the first quarter of this year. So that took the yield up.

Right.

In terms of -- your second question was the --

Has there been any change to your outlook for the merger related charges?

Yeah, I think it's fair to say that we're going to come in lower than that number. I think the number was $191m. We don't think it's going to be that high. But as you know, many of these things change, depending on the marks that we put on the assets that we purchase. So we're not done with those marks, and so as a result, we're not sure about the exact number. It will be lower than the number we talked about though.

Okay. Very good.

Thanks.

As a final reminder, if you do have a question or comment you could press 1 followed by 4 on your touch tone phone at this time. Our next question comes from Seamus Murphy of Marion.

Good morning. Just a quick question. Just on the capital side, give us a feel for the tangible equity to tangible assets ratio and whether you see that moving up above 5% next year, especially securitization in the fourth quarter and secondly, just in relation to-- have you made any decision in relation of the corporate loan portfolio of Allfirst, for example the marine portfolio?

To answer the first question Seamus, the tangible ratio at the end of March will come in probably at 6.5 to 6.7%. But as you know, that ratio comes under pressure once we've consummated the acquisition which is April 1st. Our estimate is that as of the April 1st the tangible equity ratio would be 4.5%. And we -- as we've said we won't buy back stock for the rest of the year. And we think that that ratio will be back up to 540 or thereabouts by the end of the year.

Okay.

With regard to the loan portfolios I think it's premature. We just closed the transaction April 1st, so we're going to go through all the loan portfolios with a fine tooth comb and then decide what we want to do. At this time we haven't decided to get rid of the marine portfolio or anything like that.

Thank you.

Thank you.

Our final question comes from Roger Lister from Morgan Stanley.

Can you give us a sense of what the trends are on your consumer delinquency, auto portfolio versus home he equity?

Yes, good morning, Roger. I mean in terms of delinquencies, our delinquencies are actually flat. They're not increasing on the consumer portfolio. There are of course differences between the Heloc portfolio, home equity portofolio, and auto portfolio. The auto portfolio tend to be higher and the Heloc portfolio tend to be lower. To give you an idea of that in the first quarter of 2003, we had no Heloc chargeoffs. We had actually net recoveries on the Heloc portfolio. On the indirect portfolio, the chargeoffs were -- the chargeoffs were at 68 basis points. Total consumer was about 60 basis points. So we -- we haven't seen any tick up in the delinquencies of the consumer portfolios.

You also talked about, I think, 15% annualized growth in your consumer portfolio. Given what you're seeing now, in terms of applications, what's your outlook for the next couple of quarters on growth in consumer lending?

With things the way they are, I hesitate to even predict the next quarter leave alone a couple of quarters. But all I can say is that the volume is still pretty strong. We haven't seen any decline in volumes currently. Of course, I mean, that's very interest rate dependent. So I would assume, if rates went up from where we are now, that volume will dry up both in the mortgage area, as well as in the consumer lending area.

Are you seeing any differences between your mortgage banking business out in the west versus what's going on in the East coast?

Not really. I think we're seeing the strong origination volumes across the board both in the west and in the east. And the only difference is that in the west we don't retain the mortgages, or the mortgage servicing, because it's outside our footprint, our retame footprint. Whereas in the east we retain mortgage servicing rights.

Just one final issue. In terms of the sort of auto losses, if you looked at like the default rates and the sort of loss of severity, are these sort of lack of tracking to your expectations, are you seeing more deteriorations in terms of loss of severity, is that stabilized or what is the trend on that side?

We think the charges are pretty much within where we model them for our pro forma profitability. In fact we use a much higher rate of chargeoffs than we have seen now in the portfolio. So I think it's well within our prediction.

Okay, thank you.

Thanks Roger.

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

Okay, well again, we thank everyone for participating in the first quarter conference call. Clarifications of any items in the news release is necessary, you may call the investor relations department here at M&T. The number is 716-812-5438. Thank you.

This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.