M&T Bank Corp (MTB) 2003 Q2 法說會逐字稿

Good morning, ladies and gentleman and welcome to the M&T Bank Second Quarter 2003 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The floor will be open for questions following the presentation.

I would now like to hand the call over to your host, Mr. Mike Piemonte, VP of Corporate Finance.

Thank you, Maria. Good morning, everyone. This is Mike Piemonte. I'd like to thank everyone for participating in M&T's Second 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'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 I start, I would like to mention the 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 to reflect events or circumstances after today, July 14, 2003. Additionally, M&T encourages participants to refer to our SEC filings found on forms 10-K and 10-Q for a more completion discussion of forward-looking statements.

At this point, 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 2002 and the first quarter of this year. Of course, the main event of the quarter with the largest impact on our second quarter results was the acquisition of Allfirst Financial on April 1st. We are very pleased with the continued integration of the Allfirst franchise, which is progressing nicely. In general, a large part of the variances from last year and the previous quarter are the result of the Allfirst transaction. As we get into details of the quarter, we'll quantify some of that impact.

The conversion of the primary customer loan and department systems that Allfirst systems occurred over the weekend of July 4th. In all, 1.4m new customer accounts were integrated into the M&T family and more than 1.3m deposit accounts and 315,000 loan files were converted. On Monday, July 7th, over 250 former Allfirst branches opened as M&T Bank branches, and more than 550 ATM's came online. Additionally, about 735,000 cards have been mailed out and we had 38,000 Web banking enrollments. So far, the results of the conversion have been very good.

We would like to thank our dedicated staff from the expanded M&T network for their roles in the successful integration of Allfirst systems into M&T. As previously announced, we began expensing stock options in January of this year. As a result of this net income in this year's second quarter was reduced by $7m or 6 cents per share, compared with $7m or 7 cents per share in last year's second quarter and $7m or 8 cents per share in the linked quarter.

According to a recent "Wall Street Journal" article, M&T is only one of nine companies electing to use the retroactive restatement method which not only recognizes expense related to options in the current year but also for those options started in previous years. This method also requires us to restate prior years to include 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 core deposit and other intangible assets and merger-related costs were $10 in this year's second quarter, down 8% from the $19 in 2002's second quarter and 11% below the $1.23 earned in the linked quarter.

Amortization of core deposits and other intangible assets amounted to 11 cents per share in the recent quarter, compared with 9 cents per share in last year's second quarter and 7 cents per share in this year's first quarter. Merger related costs net of applicable taxes total $22m in the most recent quarter or 17 cents per share compared to $4m or 4 cents in the linked quarter.

Such amounts represent the after tax cost for professional services, travel and other expenses associated with the Allfirst acquisition and the related integration of data processing and other operating systems and functions. There were no merger-related costs incurred in last year's second quarter.

Second quarter diluted net operating earnings per share which exclude the amortization of core deposit and other intangible assets and merger-related costs were $1.38, up 3% from $1.34 in the linked quarter and up 8% from the $1.28 earned in last year's second quarter.

By the way, consistent with the last quarter, I'm sure many of you have noticed this morning's press release which contains a tabular reconciliation of both GAAP and non-GAAP results.

Net income for the quarter was $134m, up 17% from a year ago, and up 15% from the $117m in the linked quarter. Net operating income for the quarter was $169m, up 38% from a year ago and up 33% from the $127m in the linked quarter.

Return on average assets was 1.10% in the quarter compared with 147% in 2002's second quarter and 1.43% in the first quarter of this year. Net operating return on average tangible assets was 1.48% in the quarter compared with 1.64% in 2002's second quarter and 1.62% in the first quarter of 2003.

Return on average common equity was 10% for the quarter compared with 15.43% in the second quarter of last year and 14.46% in the linked quarter. Net operating return on average tangible common equity was 29.89% for the quarter, up from 27.75% in the second quarter of last year and 24.68% in the linked quarter.

Net interest margin in the second quarter was 4.12%, down 31 basis points from 2002's second quarter and down 28 basis points from the linked quarter. The decline in net interest margin was a direct consequence of the impact of the margin on the assets and liabilities obtained in the Allfirst acquisition. Excluding this impact, the net interest margin was 4.38%, or six basis points higher than the linked quarter.

Put another way, on a pro forma basis combining the previously reported financial results of M&T and Allfirst, the net interest margin for the first quarter of this year would have been 3.99% or 13 basis points lower than the current quarter. In essence, unlike many of our peers, M&T did not experience margin compression during the quarter. That said, the historically low interest rate environment is likely to exert some downward pressure on spreads on earning assets during the second half of this year.

End of period loans totaled $37b, up significantly from the first quarter of this year. The April 1, 2003 Allfirst acquisition added approximately $10b to loan balances in the recent quarter, accounting for 90% of the increase from last quarter. Excluding the impact of the loans acquired from Allfirst and also excluding our residential mortgage portfolio, average loans grew 10% on an annualized basis from the linked quarter.

We were pleasantly surprised by a pick up in our commercial loan portfolio, again excluding Allfirst C & I loans grew at an analyzed rate of 17% from 2003's first quarter. Still the fastest growth from the loan portfolio came from consumer loans. Total consumer loans excluding Allfirst grew at an annualized rate of 20% this quarter.

Turning to credit, the annualized charge-off rate for this year's second quarter was 26 basis points, down from 39 basis points in both the previous and last year's second quarter. Excluding the impact of charge-offs on loans acquired from Allfirst, net charge-offs were 35 basis points of average loans. On the dollar basis, net charge-offs for the quarter was $23m, down from $25m in last year's second quarter, and this year's first quarter.

The quarterly provision for loan losses at $36m exceeded net charge offs and was $8m higher than last year's second quarter and $3m higher than the linked quarter. The allowance for credit losses was 1.63% of total loans at the end of the most recent quarter, down from 1.70% at the end of last year's second quarter and the linked quarter. The decline in the ratio was directly the result of the Allfirst acquisition.

The combined allowance immediately after the Allfirst acquisition was 1.62% of loans. In dollar amounts, the allowance for credit losses totaled $604m at the end of this quarter. The Allfirst acquisition added $146m to the allowance on April 1. The allowance for credit losses was $436m at the end of last year's second quarter, and $445m at the end of the linked quarter.

The dollar amount of non-performing loans increased during the quarter to $319m from $230m at the end of the previous quarter. The ratio of non-performing loans to total loans, however, declined to 86 basis points of total loans from 88 basis points in the linked quarter.

Included in the June 30th numbers were $109m of non-performing loans obtained in the Allfirst transaction. Non-performing loans excluding those acquired through Allfirst totaled $210m, or 77 basis points of loans. Non-performing loans totaled $168m or 66 basis points of total loans at the end of last year's second quarter. Loans past due 90 days, but still accruing were $170m, up from $128m at the end of last year's second quarter and from $146m at the end of this year's first quarter. This category includes $33m in loans acquired through the Allfirst transaction.

Government guaranteed Ginny Mae loans repurchased to reduce servicing expenses, which totaled $115m at the end of the second quarter. Non-interest income excluding securities transactions was $233m, 75% higher than the $133m in the linked quarter, and 92% higher than the $121m in the second quarter of 2002. Once again, much of this increase was due to the addition of Allfirst. We estimate that excluding Allfirst, non-interest income was still up $10m or an annualized 30% from the linked quarter and $21m or 8% up from the second quarter of last year.

Turning to expenses, operating expenses which exclude the previously mentioned merger related charges and the amortization of intangible assets but include expenses attributable to stock based compensation were $375m, up $150m from the linked quarter and up $155m from the second quarter of last year. Approximately 85% of the increase in expenses was related to

Allfirst operations. Operating expenses in the second quarters of 2003 and 2002 also included impairment charges of $18m and $3m respectively related to capitalized residential mortgage service rights. There was no similar charge in the linked quarter. As we've discussed in previous quarters, M&T does not take any specific action to the value of its residential mortgage servicing portfolio. Rather, we rely on the natural hedge provided by the activity in residential mortgage loan origination.

Consistent with that practice, we believe that over the Coors course of a complete cycle, the impairment charges taken against the value of the servicing portfolio will be generally offset by increased revenues in mortgage banking. Adjusted to exclude security gains and intangible amortization as well as margin related costs, M&T's efficiency ratio in the second quarter was 56.2% compared with 50.7% in the second quarter of last year. The higher ratio this quarter reflects the acquired Allfirst operations that were integrated into M&T's operations earlier this month. Excluding the impact of

Allfirst operations, the operating efficiency ratio was 52.2% in the second quarter. Before we turn to questions, let me briefly hit some of the highlights related to the first half of 2003, which include the results of one quarter of Allfirst operations. Most of these were covered in detail in the earnings release. Diluted net operating earnings per share were $2.73, up 7% from 2002.

Net operating income was $297m, up 21% from 2002. Net operating return on average tangible equity was 27.39% in 2003, compared with 28.03% in 2002. Allfirst-related merger charges total $25m after tax during the first half of 2003. We anticipate incurring additional merger related expenses during the second half of the year as Allfirst operations are fully integrated into M&T. There were no merger related charges in the first half of 2002.

Diluted GAAP earnings per share which no longer includes amortization of most types of goodwill was $2.30, down 3% from 2002. On a per-share basis, the impact of Allfirst-related merger expenses was 23 cents in 2003

Average loans were up 24% to $31b, and end of period loans were up 45% to $37b. Net interest margin of 4.2% in 2003 was down 20 basis points from last year. Net charge-offs were $48m, or an annualized 31 basis points of average loans for the first half of 2003 compared with $41m or 33 basis points last year. Non-interest income was $366m, up 49% from 2002. Operating expense was $601m, up 37% from 2002. Based on these operating numbers and excluding the effects of security gains, M&T's efficiency ratio for the first half of 2003 was 53.6% compared with the 51% in 2002.

Finally, as we mentioned in our press release, we believe that M&T's full-year results excluding the impact of Allfirst merger-related charges should be in line with the current consensus estimate of $5.23. As we've also stated previously, we continue to expect the Allfirst transaction to be neutral or slightly accretive to net operating earnings per share in 2003.

We'll now open 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, please press the number 1 followed by 4 on your touchtone 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 do ask, though, while you pose your question that you please pick up your handset to provide optimum sound quality. Ladies and gentlemen, once again, that is 1 followed by 4 on your touchtone phone at this time. Please hold while I poll for questions

Your first question is coming from Rosalind Looby of Credit Suisse First Boston. Please state your question.

Thanks. Good morning, guys. Quick question, Mike, on your comments about the expected EPS range for the rest of the year. In your release, it talks about you expect EPS to be in line with current analyst estimates. First Call is about $5.23. Historically you said to $5.25 - $5.35. What's changed appeared that particularly given with the margin what it is today, your run rate excluding additional impairments, that visibility would be higher for the second half? Can you just comment on that?

Rose, nothing has changed, to tell you the truth. $5.23 is pretty close to $5.25, and actually a better way to say that is and at the same place I was in the beginning of the year. But it's 2 cents, so it's in line.

Ok. What are you guys assuming in terms of additional impairments right now?

Nothing going forward because in July, the 10-year Treasury and the mortgage rates have come back up from where they were at the end of the quarter, so we think we'll be fine. But again, like I said, we do believe we have a natural edge. So if there is, in fact, an impairment, that will lead to a higher pipeline in our origination site. So we believe that over the year, the impact is neutral to us.

Ok. One more question, if I may. Your new reserve ratio at 1.62% of loans, it's obviously bounced around a little bit over the last year. Is that where we should assume it's going to stay or are you going to build that back up?

I think the result is actually 1.63%. It was 1.62% on April 1st, so I think we've always been pretty steady at the 1.7% level given the makeup of our loan portfolio. We'll have to take a look at the Allfirst loans and depending on how we feel about the Allfirst loans, you'll probably see us build that back up to the 1.70% range by the end of the year or so.

Okay. Great. Thanks very much, guys.

Thank you. Your next question is coming from Robert Lacoursiere of Lehman Brothers.

Still along the line of Allfirst and their loan portfolio, have you completed the review of it? I got the sense there wasn't any charge-offs required according to the press release for the new portfolio. Have you completely finished the review of it and you feel that it's comfortable to meeting your standards now?

Robert, Good morning.

Good morning.

We have not totally gone through our cycle. Our cycle involves going through every single loan file over the course of the year, so we've not totally completed that; however, we've gone through all the classified loans and classifications. I would feel very comfortable that we're in good shape on Allfirst. As you no doubt read in the press release, there was no material charge-offs for Allfirst in the quarter, and we don't see any coming down the road in a material sense.

If I could follow up, is there any expectation of some disposals? Have you made those decisions yet?

I think it's too early, far too early. We were focused on the conversions, and we just completed the conversions, as I said, July 4th weekend, so I think now we'll turn our attention to sorting through the portfolios and deciding what we want to do with this.

Thank you.

Thanks, Robert.

Thank you. Your next question is coming from Mark Fitzgibbon of Sandler O'Neill. Please go ahead with your question.

Good morning, Mike.

Hi, Mark.

I'm wondering if, at this point, you're still comfortable with that 17% cost savings expectation or do you think that's conservative?

I would hope it's conservative, but I'm still very comfortable with it.

Okay. Then the second thing, I know you guys don't take a lot of interest rate risk, but you have had the balance sheet slightly liability side position. I'm wondering if your outlook has changed and whether you're contemplating swinging it in the opposite direction?

Not really. As you said, I think you said it well. We don't take interest rate risk and we run net interest income as well as our duration, balance sheet duration on a regular basis, and whenever we feel that we are out of line, we adjust our balance sheet in some way. So there is no risk, and we don't take a position of any material sort.

Okay. Then finally, I wondered if you could just give us kind of a sense of the timing of the remainder of that charge coming in. Will most of that occur, do you think, in the first third quarter?

I think most of it will occur in the third quarter. We'll have some straggle through expenses in the fourth quarter, but most of it will be third quarter.

Thank you.

You're welcome, Mark.

Thank you. Your next question is coming from Brian Harvey of Fox-Pitt Kelton.

Two questions here, Mike. If you could just talk about what you saw in terms of the acceleration in commercial loan growth, what was driving that, if you could talk about any particular geography or industry? My second question was just on credit quality. If you were to exclude Allfirst, it looks like non-performers were down linked quarter. Can you just talk about what was driving some of that?

Yes, Brian. I mean, first of all on the commercial loan pickup, it was pretty broad across all our businesses, so we didn't see any particular thing for our part. Now that 17% growth is actually an annualized number, so actually quarter to quarter, we just saw 7-1/2% growth. So there's nothing that I can point to that was accounting for that.

On the non-performing, on the credit quality, the non-performing loans, essentially the good news is that we didn't add anything new other than the Allfirst on the core M&T excluding Allfirst. We didn't add any new loans of any material size, and then we got rid of some of the charged off some of the other loans and got paydowns. So again, I think the reason you see that coming down is because of paydowns of charge-offs and nothing new being added.

Just a follow-up on the commercial loans. As you look at the pipeline at the end of the quarter, is there any change in terms of the momentum that you were seeing in this quarter?

No. We're seeing a steady growth in the balances, no real change.

Ok. Thank you.

Thanks, Brian.

Thank you. Your next question is coming from Ken Usdin of UBS.

Good morning. This is Ken Usdin from UBS. Two quick questions for you. First of all, following on the loan growth, I was wondering if you could just contrast and compare the two regions, the former M&T and Allfirst from kind of what you're seeing from a demand perspective?

I think on the Allfirst side, it's too early to tell because we just like I said, we've been focused on the conversion. We did see some C&I runoff in the Allfirst region, but also we saw they had a consumer mortgage portfolio which, because of the prepayments, because of the refinancing that took place, we saw the consumer mortgage portfolio go down. So that was offset by what I consider pretty strong growth on the M&T side of the franchise. But again, it's too early to tell on Allfirst.

Ken Usdin Ok. The second question was just can you update us on your thoughts around Capital Management given the recent dividend policy change?

Right now, again, our tangible equity ratio has come down because of the acquisition, because of the deal that we did for Allfirst. So we intend to build that tangible equity ratio up to our target level of about 5-1/2%. Until then, we're going to focus on just building up the capital. So I don't think you'll see any change in our dividend policy or any buybacks till we build up our tangible equities ratio to that level.

Ok. Thanks very much.

Thanks, Ken.

Thank you. Your next question is coming from Ed Najarian from Merrill Lynch.

Good morning.

Hi, Ed.

Hi. Question really has to do with the sort of expense savings run rate. In your mind, did you get any initial expense savings from Allfirst in the second quarter? In other words, did you get some savings prior to the conversion taking place?

Yes, we did because the way I think of it, you get the expense in three saves. The first save is shortly after the acquisition. The second wave and the most significant wave is about a month or two after the conversion of the systems, and then the last one will be somewhere in December. So I think it's safe to say that we'll be at a full run rate starting next year, January.

Could you try to quantify what level of initial expense saves were in the second quarter, sort of core operating expense number excluding charges?

We haven't disclosed that number, Ed, and I'm not comfortable talking about it.

Ok. Thanks.

Thank you. Your next question is coming from Felisse Gelman from Sonova Capital. Please go ahead with your question.

Hi, great quarter. Maybe you can review for me, I think you had an agreement with the Allied Irish that the NPA's above a certain amount at Allfirst would be divided 50/50. Honestly, I was surprised at how low the level of NPA's was. I'm wondering, did that have any effect on it, did that take place after the close? Or was it just that they managed to get a lot of stuff resolved fairly promptly?

Felisse, the NPA's are not impacted by that agreement. The agreement basically, as we disclosed, was that charge-offs in excess of a certain amount on certain portfolios would be shared 50/50. And the portfolio was specifically a telecom portfolio and an airline lease portfolio. So it's not on all loans first of all, it's just on a subset of the loans, and it's charge-offs above a certain level that would be shared 50/50. None of that has any impact on non-performing loan ratio.

So they just managed to resolve a good deal of problems fairly promptly?

Yes. I would say either resolve a charge-off or whatever you want to call it, but the number was much better than we expected.

Great.

Thank you. Your next question is coming from Andreas Atkinson of UBS.

Yes, I have a question regarding the Allfirst transaction as well. Just if you have a feeling how far you've come and when do you think it will be possible to start looking externally again? And if and when you do so, do you believe that you will do that yourself and do you believe that AIB will have some part of that quarter and further steps? Thanks.

I think it's a difficult question to answer because like I said, we've been focused on the conversion, but suffice it to say that we believe the full integration of any acquired franchise takes more than a year. The conversion is just the first step of it, but then to get people thinking in the M&T way, to get the culture the same takes the better part of a year. So I would be very surprised to see us doing any deals for a year or so.

So just to follow-up, do you see that AIB, do you see these things have any positive in that forward expansion?

I think the contract with AIB that we have allows them to keep their percentage ownership at 22-1/2%. So it gives them that option, so if we were to grow by acquisition and issue shares, I would expect that AIB would take down that 22-1/2%.

Ok. Thanks.

Thank you. Again, ladies and gentlemen, if you do have a question, please press the number 1 followed by 4 on your touchtone phone at this time.

Your next question is coming from David Levau of Levau Information System.

Good morning. I wonder if you anticipate any time in the near future going to the market to raise capital or are you strictly going to use integrated funds?

We generate a large amount of equity, tangible equity every quarter. In fact, our return on tangible equity was about 29% for this past quarter, so I don't anticipate going to the equity markets. I think we'll build it up ourselves.

Okay. Thank you very much.

Thank you.

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

Okay. Well, we thank all of you again for participating in our second quarter conference call. If clarifications of any of these items in the news release are necessary, you can call our investor relations department at 716-842-5138. Thanks again.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.