M&T Bank Corp (MTB) 2004 Q1 法說會逐字稿

Welcome to the M&T Bank first-quarter earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Mike Piemonte.

Good afternoon to everyone. This is Mike Piemonte. I'd like to thank everyone for participating in M&T's first-quarter 2004 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 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. M&T encourages participants to refer to our SEC filings found on forms 10-K and 10-Q for a complete discussion of forward-looking statements. And now I'd like to turn it over to our CFO, Mike Pinto.

Good afternoon, everyone. Before I respond to questions I'd like to cover a few points in this morning's earnings release. I'll begin with a summary of the first-quarter, focusing on the changes from last year's first-quarter and the fourth-quarter of 2003. Before we get into the financials for the quarter I'd like to point out again that a large part of the variances from the first-quarter 2003 are the result of our merger with Allfirst Financial on April 1, 2003. Over the last year much of our focus has been on the conversion and integration of the two franchises. And although fully complete the (indiscernible) elements of the integration will yet take some time, the results so far have been encouraging.

Diluted earnings per share for the quarter, which include the amortization of core deposit and other intangible assets and merger related costs, were $1.30 in 2004's first-quarter up 6 percent from the $1.23 we earned in 2003's first-quarter and 4 percent lower than the $1.35 earned in the linked quarter. Amortization of core deposits and other intangible assets amounted to 11 cents per share in the first-quarter of 2004 and the fourth-quarter of 2003 compared with 7 cents per share in last year's first-quarter. Merger related costs net of applicable taxes totaled 2 million in the fourth-quarter of 2003 or 1 cent per share and $4 million or 4 cents per share in last year's first-quarter. There were no merger related costs incurred in this year's first-quarter.

First-quarter diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets and merger related costs, were $1.41, up 5 percent from the $1.34 in 2003's first-quarter and down 4 percent from the $1.47 in the linked quarter. This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including intangible assets and equity.

Much of the decline from the linked quarter was due to a pretax charge of $11 million to reflect impairment in our mortgage servicing rights portfolio. This charge reduced earnings per share by 6 cents and was exclusively driven by the level of interest rate at the end of the quarter. I'll further discuss this in other items affecting this quarter's earnings later in this call.

Net income for the first-quarter of 2004 was $159 million, up 37 percent from a year earlier and down 4 percent from the $167 million earned in the sequential quarter. Net operating income for the quarter was $172 million, up 36 percent from last year's first-quarter and down 5 percent from the 182 million in the linked quarter. Return on average assets was 1.29 percent in the recent quarter compared with 1.43 percent in last year's first-quarter and 1.35 percent in the fourth-quarter of 2003.

Net operating return on average tangible assets was 1.48 percent in the quarter compared with 1.62 percent in 2003's first-quarter and 1.57 percent in the sequential quarter. The return on average common equity was 11.19 percent for the quarter compared with 14.46 percent in the first-quarter of last year and 11.77 percent in the linked quarter. The net operating return on average tangible common equity was 26.02 percent for the quarter compared with 24.68 percent in the first-quarter of 2003 and 28.33 percent in the linked quarter.

The net interest margin in the first-quarter was 3.92 percent, down 4 basis points from the linked quarter and 40 basis points from 2003's first-quarter. Much of the decline in net interest margin from last year's first-quarter was a direct consequence of the yields and earning assets and rates paid on interest-bearing liabilities acquired from Allfirst Financial. The narrowing of the margin from the sequential quarter was largely the result of (indiscernible) pricing of loans at lower rates.

In the period loans totaled $37 billion, up 743 million or 2 percent from the fourth-quarter of 2003. Average loans for the first-quarter were $36 billion, down 518 million or 1 percent from the linked quarter due largely to the impact of the securitization of 1.3 billion of residential mortgages during the final quarter of 2003. Excluding the impact of residential mortgages, average loans increased $157 million during this year's initial quarter from the linked quarter. Excluding residential mortgages annualized growth rates in our pre module (ph) franchise from the linked quarter were 3 percent on average and 9 percent in end of period C&I loan balances; 6 percent on average and 16 percent in the end of period commercial mortgage loan balances; 9 percent growth in average and 11 percent in end of period consumer loans again led by growth in the auto loan and home equity loan portfolios.

These higher period end figures were driven by much stronger loan activity toward the end of the quarter. The average total loans, not including residential mortgages or the acquired portfolios, increased at a 6 percent annualized rate from the previous quarter and at a 13 percent rate based on end of period balances. Within the acquired portfolios average loans continued to decline during the first-quarter by approximately 250 million from the linked quarter. Notably, however, this was less than half the decline experienced in 2003's fourth-quarter. With this falloff in the rate of runoff we believe we will start to see growth in the acquired portfolios later this year.

Average commercial loans in the acquired portfolios, including commercial mortgages, declined 122 million and average consumer loans, excluding residential mortgages, declined $108 million from the linked quarter. As we've mentioned before, much of this decline was the result of our deemphasizing certain specialized lending businesses and due to prepayment activity in a discontinued home equity loan product. Excluding these portfolios, end of period loans in the mid Atlantic franchise grew at an annualized rate of 6 percent.

On a related loan, the commercial loan pipeline for the entire bank was slightly over $1 billion at the end of the recent quarter, approximately 50 percent above the level at the end of the linked quarter. Additionally, although commercial line usage was relatively flat in the M&T vintage markets; line usage in the mid Atlantic franchise was up 1 percent at the end of March. Credit quality improved considerably during the first-quarter. Net charge-offs were $18 million representing an annualized rate of 20 basis points of total loans, down from 32 million or 35 basis points in the linked quarter and 25 million or 39 basis points in 2003's first-quarter. Once again, net charge-offs in the acquired portfolios were not significant. Excluding the impact of the acquired portfolios net charge-offs were 26 basis points.

The level of nonperforming loans was $256 million at the end of the recent quarter compared with $240 million in the sequential quarter. This increase was due to the addition of one large commercial loan during the quarter. The nonperforming loan ratio was 70 basis points in the recent quarter compared with 67 basis points in the fourth-quarter of last year. Greater evidence of the improving trends can be seen in the year-to-year numbers. The nonperforming ratio improved a full 18 basis points from 88 basis points of total loans at the end of 2003's first-quarter despite an increase in the loan portfolio of more than $10 billion largely from Allfirst.

The provision for credit losses for the first-quarter of 2004 of $20 million covered net charge-offs for the quarter and increased the allowance for loan losses to $616 million or 1.69 percent of total loans. This compares with (indiscernible) ratios of 1.7 percent at the end of March 2003 and 1.72 percent at the end of the linked quarter. Loans past due 90 days but still accruing were $144 million, down $10 million or 7 percent from the end of 2003's final quarter and almost unchanged from the 146 million at the end of the first-quarter of last year. This category includes $117 million in loans that are guaranteed by government related entities.

Noninterest income excluding security transactions was $226 million, down 3 percent from the linked quarter and 70 percent higher than the 133 million in the first-quarter of 2003. A decline in the volume of mortgage loans sold during the quarter resulted in the $4 million decrease in mortgage banking revenues from the linked quarter. Seasonal declines in (indiscernible) service charges and trust income also contributed to the decline from 2003's fourth-quarter.

On the expense front -- operating expenses which exclude merger-related charges and amortization of intangible assets were $369 million, up 14 million or 4 percent from the linked quarter and up $144 million from the first-quarter of 2003. As I mentioned earlier, operating expense for this year's first-quarter included a pre-tax impairment charge of $11 million associated with M&T's capitalized mortgage servicing rights. Operating expense in the fourth-quarter of 2003 included an expense reduction due to a partial recap shelf payment (indiscernible) valuation allowance of $4 million. This resulted in a net difference of $15 million quarter-to-quarter in this line item.

As I'm sure most of you know, the 10 year treasury note yield and correspondingly residential mortgage rates have increased dramatically over the past few weeks. Obviously no one knows where rates will be at the end of the second-quarter or the end of the year, but the current rate levels would result in a reversal greater than the charge taken in the first-quarter.

As we've discussed in previous quarters, M&T does not take any specific action to hedge the accounting fluctuations in the reported value of its residential mortgage servicing portfolio. Rather we look to the economics of the business and rely on the natural hedge provided by activity and residential mortgage loan origination. Consistent with that practice, we believe that over the course of a complete cycle the impairment charges taken against the value of the servicing portfolio will generally be offset by increased revenues in mortgage banking.

Because of the way we manage the business, relying on the natural hedge between servicing, valuation, and origination activity, the combination of MSR impairment and loan origination related income does not typically happen in the same quarter. In the recently ended quarter, however, a precipitous rate decline occurred during the quarter, too late for any pickup in origination volume this quarter. Again, consistent with our strategy, we do expect to see higher origination income in the second-quarter of this year. As a result of this perfect storm in the first-quarter, the (indiscernible) contribution of our residential mortgage segment declined by more than $12 million from the linked quarter and by nearly $17 million from last year's first-quarter. These segment numbers will be reported in our first-quarter 10-Q it will be filed in the next couple of weeks.

Adding to this confusion over mortgage banking income the second-quarter of 2004 will be impacted by yet another required accounting change related to the mortgage business. In March of this year the Securities and Exchange Commission issued Staff Accounting Bulletin 105. This bulletin which has a required effective date of April 1,2004 sets out specific accounting rules governing the timing of revenue recognition related to mortgage loan commitments. We currently expect that there will be a onetime deferral of income that will otherwise have been recognized in the second-quarter. It is very important to note, however, that this bulletin does not reflect any change in the underlying cash flows or the economic value of the mortgage business.

Also, since the result is essentially a timing difference, in future quarters the impact will be much less because of the rollover effect. Had this bulletin been adopted in the first-quarter, mortgage banking revenues would have been approximately $6 million lower pre-tax. However, given that this amount depends on the actual level of mortgage loans in the pipeline at the end of the quarter, it will vary with the level of originations in any one quarter.

Excluding the impact of the MSR valuation adjustments, all printing expense in the first quarter of 2004 was lower than the prior quarter by $1 million. This improvement was largely the result of a full quarter of expense savings and the acquired franchise partially offset by higher employee benefit costs. Adjusted to exclude security gains and intangible amortization as well as merger-related costs M&T's efficiency ratio in the first-quarter was 56.8 percent compared with 53.9 percent in the previous quarter, and 49.8 percent in the first-quarter of 2003. Finally, as we mentioned in our press release this morning, we are so comparable with full year earnings guidance provided last quarter. This of course remains subject to many uncertainties including actual events and circumstances that may occur throughout the year. We will now about up the call to questions before which actually will review the instructions.

(OPERATOR INSTRUCTIONS) Mark Fitzgibbon, Sandler O'Neill.

The first question I had was on expense growth. I think linked quarter expenses were up a little over 3 percent. Do you have a target in mind for expense growth for 2004?

As I said, Mark, on the call, if you adjust for the servicing impairment our linked quarter expenses were actually down $1 million. And I think we're trying to keep the expenses flat. Our target is to try and keep the expenses flat because we are worried about revenue growth this year.

And secondly, think you said you were comfortable with your previous earnings guidance for '04 which I believe it was 590 to 610. If we take the core earnings for the first-quarter of $1.35 and multiply by 4 you'd get to 540. I guess I'd just be curious as to how you go from 540 to 590 or grow 10 per cent. Where do you see the biggest drivers coming from?

We're really encouraged by the linked quarter increase in our loan volumes. If you look at what happened in the first-quarter, especially -- I tried to give you some flavor for the end of period loan growth. Our loan growth has been pretty strong in the double-digit range. Of you look at the beginning -- at the period end balances from December 31st to March 31st. So we're hoping to see some pickup in the net interest income because of that. The second piece is credit, we think credit has really improved considerably and we'll see some contribution on the credit side. Of course we saw some of that in the first-quarter and then we expect our fee revenue to rebound some too. So we're quite optimistic about the rest of the year.

And I'm sorry, did you say before that the portion for your franchise that was doing best from a commercial loan standpoint -- was it a mid-Atlantic region?

If you exclude the deemphasized portfolios, which is what I did, the two basic categories of deemphasized portfolios; one is a specialized lending portfolio including shared national credit; and then the consumer mortgage product which we've discontinued. If you exclude those (indiscernible) small-business, middle market lending businesses, commercial real estate business in the mid-Atlantic franchise grow at 6 percent -- demonstrable (ph) 6 percent period end to period end. That was about the same as in our vintage portfolios.

And then lastly, I think you said the commercial loan utilization rates were up like 1 percent. What are the commercial loan utilization rates right now?

For the old franchise, the vintage franchise it's 45 percent, and for the Allfirst franchise it's 37.4 percent.

Great, thank you, Mike.

Adam Barkstrom, Legg Mason.

Mike, could you walk us through again -- I mean it seems like obviously first-quarter we've got a couple of timing issues which you eluded to, one of which you said originations picked up but closings have not yet happened and we should be a bump in the mortgage fee income line for second-quarter. Can give us some flavor as to that? And then secondly, you also alluded to, again, who knows where the tenure is going to be at the end of this quarter; but assuming it's at these levels here, pre-tax you guys took an $11 million hit on the MSR and you said that the recovery could actually, if I heard you right, could actually be greater than that in second-quarter. Am I correct there and could you give us some more color on that piece as well?

Yes, Adam, thanks for the question. If we did the valuation today, this morning, we'd recapture around $12 million. As I said, we'll more than recover the $11 million. And that kind of shows you the silliness of the way that accounting works because if you react to the 11 million impairment by trying to put hedges on or something like that then two weeks from then it whips around the other side. That's why we tend to ignore that accounting impact and we try to focus through the economics. That's one part of the answer.

The second part of the answer I can best give you by describing our mortgage pipeline. At the end of December our mortgage pipeline was $960 million approximately. At the end of the first-quarter, at the end of March, our mortgage pipeline was $1.6 billion. So I mean, those were applications that we received in the first-quarter but those loans hadn't closed. Now a portion of those loans will never close, but just the relative size of the two pipelines give you an indicator for how we should see mortgage fee income improve next quarter.

Right, you said -- was that 900 million end of Q4?

960 at the end of Q4.

Okay. Back on the fee income category, a couple things I was just curious about. First of all, so that being said, any -- I know it's hard to pin down -- but any sense as to what that mortgage banking fee line item might be for 2Q?

It's very hard because it's a combination of how much fallout there is from the pipeline. That's why I -- I think I look at the indications in the pipeline -- the numbers that I gave you on the pipeline; that gives you some indication of the relative increase. The margin also is a -- plays a factor (ph) of the margin on the loans we've originated and sold and closed, so that's harder to predict. Also there will be some closings from applications we take in the second-quarter itself. So to predict the actual line item is kind of tough.

Got you. How about -- can you give us some color on the deposit service charge line item first-quarter? Linked quarter we're down a good bit from fourth-quarter. I would imagine fourth-quarter is probably a seasonally strong number; but just looking back through the quarters it's down from third-quarter numbers as well.

Yes, I think the biggest fluctuation there is in some of the usage fees like MSF (ph) fees and debit card interchange fees. They're seasonally high in the fourth-quarter as you observe with the holiday season out there. And they kind of taper off in the first-quarter, but there's nothing in there that really bothers us. That's just a seasonal variation.

And then last question. I want to flip it back to credit and potential credit leverage going forward here. You mentioned that you continue to see credit improvement. During the quarter we saw provisions cover net charge-offs and yet you still have at 170 roughly pretty high reserves. Would you feel comfortable taking that number down throughout the year to the 150 level or can you give us any sense there?

No.

You can't give us any sense or you don't feel comfortable?

No, we wouldn't take it down to the 150 level.

What would sort of be the minimum level?

I think based on the risk inherent in our portfolios we're kind of comfortable where we are. And of course it depends on what kind of loans we put on in the future. But given the state of our portfolio and the way we look at the economy around us, we think the level we are at is a good level.

Even though you seem to be giving us the sense that you've got an improving credit picture here?

Yes, and I think if there's a tremendous improvement, and we see the sustained improvement in the future, we'll reconsider that. But right now we're comfortable at the level it is which is around the 170 level as you pointed out, Adam.

Thank you.

Bob Hughes, KBW.

Embedded in your guidance does that include the onetime deferral of income that you anticipate in the second-quarter from the accounting change?

Excuse me, I didn't get your question, Bob.

Your guidance for this year, that does include the onetime deferral of income?

That $6 million, yes -- more or less because if the rates (indiscernible) pans out as we're talking about the originations -- the application pipeline will go down tremendously. So like I said, given the high pipeline that we had at the end of the first-quarter, the charge would have been somewhere in the neighborhood -- the deferral would have been in the neighborhood of $6 million pre-tax or about 2 cents a share. If that pipeline were to come down dramatically the impact is going to be less than that. So I think we're comfortable even including the deferral.

Okay, great. And looking at expenses, Mike, exclusive of the MSR impairments and recoveries, are the expense levels in the first quarter -- is that a level we should look to going forward? I know you ended the year sort of at your analyzed run rate of cost savings. So is there more opportunity there or should we look for expenses to hold flat from these levels?

Yes, I would -- looking forward I would expect them to hold around flat excluding the MSR impairments. Of course I'd never admit that internally. We always strive to do better and get more expense saves and I'm hopeful that we would get those expense saves. It's easier to actually get revenue and focus on revenue increases than it is to clamp down on expenses that much. I would said I'd feel comfortable thinking about it in terms of a flat expense level.

And then thinking about the level of provisions. I know we just had a discussion about what kind of allowance levels you're comfortable with. Is your level of provisioning going to be driven more by achieving some targeted ratios or by charge-offs in any given quarter or your level of MPAs? Is 20 million sort of a run rate we would consider to be sustainable?

Yes, we look at all credit quality indicators when we decide on the level of the allowance. And I think the primary driver of how much we provide is -- happens to be charge offs because we don't really change our outlook on how much allowance we need much from quarter-to-quarter. That's a more gradual change. So the charge-offs would be the main driver of the level of the provisioning in the income statement. I don't know if I answered that --.

Absolutely. So then beyond that it'll be a function of what kind of loan growth?

Yes, and the other thing that I want to say is that we saw 20 basis points of charge-offs in the first-quarter, that's extremely good. I think on a steady-state basis we shouldn't expect to see such low charge-off rates.

Understood. Last question. Stock-based compensation expense in the quarter, do you know offhand what that amounted to? I did not see it in the release.

Yes, I think it's around $11 million. So it's consistent with last quarter.

Very good, thanks a lot, guys.

Brian Harvey, Fox Pitt, Kelton.

Just had a couple of questions. First, on the margin, Mike, can you just give us a better outlook of what you're thinking there in terms of some of the additional loan pricing pressure you may be feeling heading into the remainder of this year versus the commentary about better loan growth? And then second is just can you just talk about the interest rate position of the balance sheet given a potential rising rate environment?

A couple of comments. We said earlier in the year that our interest margin would be in the 3.80 to 4 percent range and we're comfortable in that range still. We tend to run a very balanced book so we don't really see much change and we both (indiscernible) do this -- we don't believe you can make money by betting on interest rates. So we run a balanced book and we don't really expect to see huge gains or huge losses with rates going up or down. I think it's fairly tight in that range of 3.80 to 4 percent.

Last question. Can you talk about deposit flows? I know there's some seasonal slow down in the first quarter, but can you just talk about what you're seeing in the old M&T as well as the Allfirst?

We're very happy with our experience in Allfirst. That's a huge, huge plus for us and kind of makes us feel like we did a great job with the conversion. The actual deposits in the Allfirst franchise are up 6 percent since the time we acquired -- we did the acquisitions. So from March 31, 2003 through the March 31 of this year deposits from the Allfirst are up 6 percent. That's phenomenal. We've never seen that really in any other merger. I think it attests to the quality of our conversion that we did in July of last year.

We have seen a slowdown in the other deposit flows and I think as rates go up you'll see more of a slowdown in the rate of growth. Much of the deposit growth has come in from customers keeping balances and savings accounts because their alternative, say money funds for example yielding 27 to 40 basis points are not worth their while to seek out those money funds. As money market rates go up we expect to see some flow back into money funds from our money market savings account going forward. But again, I mean the main question is when will rates go up, short-term rates? And I don't know that I can predict when that's going to happen.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Jennifer Thompson, Oppenheimer.

I was wondering if you could tell us what the MSR valuation allowance was at period end, and also how much recapture are you building into your guidance range?

Well, the reserve at the end of the -- the valuation allowance at the end of the quarter was about $46 million, and the net number which we disclosed in our press release was $119 million. So the grows MSR what about $164 million, $165 million. In the guidance that we're giving now where we say we think we'll be in line with what we said, we're assuming that the impairment we incurred in the first-quarter will all go away by the end of the year. We're looking for rates to be up slightly by the end of the year from the levels they're at now and that could mean a recapture of up to about $15 million.

So in other words basically the guidance is including about 15 million of recapture, is that what you're saying?

Yes, again, based on where rates are today and where we see them ending the year.

Right. And also, could you let us know what the unrealized gain or loss in your bond portfolio was at period?

That's a great, great, great question. You really led me to a question which I like to answer because really if you look at the impairment and the accounting for the impairment, that flows through the income statement. Whereas the available for sale portfolio, the FAS 115 model (ph) which at the end of the quarter was 4115 million, the unrealized gain was $115 million pretax. That was up from $63 million at the end of the year. So we actually saw a gain in our investment portfolio from December 31st to March 31st of about $52 million. But that doesn't go through the income statement, whereas the impairment reserve of $11 million goes through the statement.

It kind of points out how the accounting is not really symmetrical for all of these things. And I think the accounting authorities have to really think about this because they can't pick and choose pieces of the balance sheet and mark them through the income statement and then say other pieces of the balance sheet should not go through the income statement because all that leads to is uneconomic behavior. People are trying to manage the accounting results rather than managing the economics of the business.

I agree. I just wouldn't hold my breath.

Neither am I. I'm not holding my breath either.

Thank you.

Ladies and gentlemen, there appear to be no further questions in the queue at this time. I'd like to turn the floor back over to the presenters for any closing remarks.

Again, we thank everyone for participating today. If clarifications of any of the items in the call or the news release is necessary, please call our Investor Relations department at area code 716-842-5138. Thanks again.

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