M&T Bank Corp (MTB) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the M&T Bank second quarter 2004 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 the presentation. It is now my pleasure to turn the floor over to your host, Senior Vice President, Mr. Mike Piemonte. Sir, you may begin.

Thank you Holly. Good morning to everyone. This is Mike Piemonte. I would like to thank everyone for participating in M&T's second 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 have not read our news release, you may access it, along with the financial tables and schedules, from our website, www.m&tbank.com, and clicking on the investor relations link.

Also before we start, I would like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. We encourage participants to refer to our SEC filings for a complete discussion of forward-looking statements.

And now I would like to introduce our CFO, 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 second quarter, focusing on the changes from last year's second quarter and the first quarter of 2004.

Before we get into the financials for the quarter, I would like to point out that for the first time year-over-year and linked quarter comparison include the results of our merger with Allfirst Financial which closed on April 1, 2003. As we have said before, while many of the cultural elements of the integration will yet take some time, the financial results of the merger continue to meet or exceed our initial expectations.

Diluted earnings per share, which include the amortization of core deposits and other intangible assets and merger related costs, were $1.53 in 2004's second quarter, up 39 percent from the $1.10 in 2003's second quarter and 18 percent higher than the $1.30 on the linked quarter. Amortization of core deposits and another intangible asset amounted to 10 cents per share in this year's second quarter compared with 11 cents in last year's second quarter and in the linked quarter. There were no merger related costs incurred in either of this year's first two quarters. However, $22 million of after-tax merger related costs were incurred in 2003's second quarter.

Second quarter diluted net operating earnings per share, which excludes the amortization of core deposits and other intangible assets and merger related costs, were $1.53, up 18 percent from $1.38 in 2003's second quarter and 16 percent higher than the $1.41 in the linked quarter.

This morning's press release contains a tabular reconciliation of GAAP and non-GAAP, including intangible assets and equity.

A significant part of the increases from last year and the linked quarter was the result of valuation changes in capitalized residential mortgage servicing rights caused by movement in interest rates. Simply put, in both last year's second quarter and this year's first quarter pre-tax charges of $18 million and $11 million respectively were taken for possible impairment of the value of the MSR portfolio. At the end of the most recent quarter interest rates dictated that $22 million of that valuation allowance be recaptured. The combined EPS impact on the relevant quarters was 20 cents per share year-over-year and 17 cents per share quarter-to-quarter. It is worth noting -- or maybe it is not worth noting, but either way if interest rates stay the same as they are today, there would be an impairment charge of just over $1 million for the third quarter.

Getting back to the results of the second quarter of 2004, net income for the quarter was $184 million, up 38 percent from a year ago and a 16 percent increase from the sequential quarter. Net operating income was $196 million, which was 16 percent higher than last year's second quarter and up 14 percent from the linked quarter.

The return on average assets was 1.45 percent in the recent quarter compared with 1.10 percent in last year's second quarter and 1.29 percent in the first quarter of 2004. Net operating return on average tangible assets was 1.64 percent in the quarter, up from 1.48 percent in both 2003's second quarter and the sequential quarter.

The return on average common equity was 13.1 percent for the quarter compared with 10 percent in the second quarter of last year and 11.2 percent in the linked quarter. Net operating return on average tangible common equity was 30.3 percent for the quarter compared with 29.9 percent in the second quarter of 2003 and 26 percent in the linked quarter.

The net interest margin in the second quarter was 3.92 percent, down 20 basis points from 2003's second quarter and flat to the linked quarter. The decline in net interest margin from last year's second quarter was largely the result of declining interest rates earned on the company's assets that were not completely offset by declines in borrowing costs. As interest rates reached all-time lows many of the rates paid by M&T, especially on deposit accounts, reached effective (ph) floors. For the full year 2004 we continue to expect net interest margin to remain at the 3.8 to 4 percent range.

End of period loans totaled $37.5 billion, up more than 1 billion or 3 percent from the first quarter of 2004. Average loans for the second quarter were $36.9 billion, also up over $1 billion or 3 percent on the linked quarter.

Excluding residential mortgages annualized growth rates from the linked quarter in average balances for M&T's franchise were 16 percent in C&I loan balances, 14 percent in commercial mortgage loans and 4 percent in consumer loans. Improving economic conditions for our commercial customers are being manifested in higher commercial loan demand which is more than offsetting a slowdown in the consumer sector. The commercial loan pipeline for the entire bank was approximately $1 billion of the end of June, virtually the same as at the end of March this year. Additionally, commercial line usage was 43 percent, up 1 percent from the end of 2004's first quarter.

In contrast to the last several quarters, average loans in the mid-Atlantic region also posted meaningful growth in the recently completed quarter. Similar to the rest of M&T, most of this growth was in the commercial sectors. We believe that the previously discussed runoff of certain de-emphasize portfolios in the mid-Atlantic region is now behind us. Also, now that both year-over-year and quarter-to-quarter comparisons include post-merger results, as I mentioned earlier, and because many core operating units have been combined, we will no longer be discussing the details of the mid-Atlantic market separately.

Credit quality continued to improve during the second quarter. The level of non-performing loans declined significantly to $190 million of the end of the recent quarter from $256 million in the sequential quarter. This decrease was largely due to the disposition or payoff of several commercial loans during the quarter, including the large loan taken non-performing last quarter. A certain amount of this quarter's net interest income was attributable to the receipt of interest on these non-accrual loans. This income is non-recurring and had a slightly positive impact on net interest margin for this quarter.

The non-performing loans ratio of 51 basis points at the end of recent quarter compared with 70 basis points last quarter. Even greater evidence of the improving trend can be seen in the year-to-year numbers; the non-performing loan ratio improved 35 basis points from 86 basis total loans at the end of 2003's second quarter.

Net charge-offs for the quarter were $21 million, representing an annualized rate of 23 basis points of total loans. This was up from $18 million, or 20 basis points, in the linked quarter, but lower than the 23 million, or 26 basis points, in 2003's second quarter. I would also like to point out that net charge-offs for the recent quarter included $8 million associated with the reduction in non-performing loans I just mentioned.

The provision for credit losses for the second quarter of 2004 of $30 million more than covered charge-offs for the quarter and increased the total allowance for credit losses to 625 million or 1.66 percent of total loans. This compares with allowance levels of 1.63 percent at the end of June 2003 and 1.69 percent at the end of the linked quarter.

Loans past due 90 days but still accruing were $135 million, down 10 million or 7 percent from the end of the last quarter and down 35 million from the end of second quarter of last year. At June 30, 2004 this category included $112 million in loans that are guaranteed by government-related entities.

Non-interest income, excluding securities transactions, was 232 million in the second quarter, essentially flat to a year ago, but up at an annualized rate of nearly 12 percent from the linked quarter.

Mortgage banking income was down $14 million from last year's second quarter due to significantly higher interest rates, resulting in fewer loans originated and sold, and also due to a onetime deferral of income to the third quarter of 2004 of $6 million due to our adoption of the SEC's Staff Accounting Bulletin 105, which I briefly discussed last quarter. Compared with the linked quarter, however, mortgage banking income was up significantly. This increase was the result of a short-lived decline in interest rates at the end of the first quarter and early this past quarter which more than offset the impact of the SAB 105 deferral.

Solid growth in service charges and trust income year-over-year and quarter-to-quarter were partially offset by declines in brokerage service income and trading and foreign exchange income.

On the expense front, operating expenses, which excludes merger-related charges and the amortization of intangible assets, were $338 million, down $37 million from the second quarter of 2003 and $31 million lower than the linked quarter. Excluding the impact of mortgage servicing rights valuation changes, operating expenses were up less than 1 percent from both last year's second quarter and the linked quarter.

Adjusted to exclude security gains and intangible amortization, as well as merger-related costs, M&T's efficiency ratio in the second quarter was 50.4 percent compared with 56.2 percent in the previous year's quarter and 56.8 percent in the first quarter of 2004.

Before we turn to questions, let me briefly hit some of the highlights related to the first half of 2004. Most of these were covered in detail in the earnings release. Please keep in mind that the first quarter of 2003 did not include results from the Allfirst franchise.

Diluted net operating earnings per share were $3.03, up 11 percent from 2003. Net operating income was $369 million, up 24 percent. Net operating return on average tangible equity was 28.2 percent, up from 27.4 percent a year ago. There were no merger-related charges in the first half of 2004. $25 million after-tax in merger-related expenses were occurred in the first half of 2003.

Diluted GAAP earnings-per-share, which include merger-related charges and the amortization of core deposits and other intangible assets, for the first half of 2004 were $2.83 cents, up 23 percent. Average loans were up 16 percent to $36 billion. The net interest margin of 3.92 percent was down 28 basis points from last year.

Net charge-offs were $39 million or an annualized 22 basis points of average loans for the first half of 2004 compared with $48 million or 31 basis points last year. Non-interest income was $460 million, up 26 percent. Operating expense was $707 million, up 18 percent. Based on these operating numbers and excluding the effects of security, M&T's efficiency ratio for the first half of 2004 was 53.6 percent, unchanged from 2003.

Finally, as we mentioned in our press release, we are still comfortable with the full year earnings estimates provided earlier this year. This, of course, remains subject to many uncertainties, including actual events and circumstances that may occur throughout the year.

We will now open up the call to questions, before which Holly will briefly review the instructions.

+++ q-and-a.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

The first question I had, you mentioned that the margin was propped up somewhat by the income from some of the cured (ph) NPAs. Could you give us a sense for how much that has bolstered the margin this quarter?

In net interest income terms that was about $5 million, $5.5 million.

Okay. And then secondly, you had pretty strong deposit growth this quarter. I wondered if you could share with us where that deposit growth is coming from and in what categories.

It was pretty much across the board, except for time deposits; mainly in the savings and mao (ph) category, as you notice. The DDA (ph) growth was also pretty good quarter-to-quarter. We think it is widespread and is somewhat reflective of the economic conditions in our areas.

Lastly, Mike, I think your previous guidance, if I'm not mistaken, was sort of 590 to 610, which is a pretty wide range. And given that we're halfway through the year I wondered if you could maybe tighten that up for us a little bit?

I don't think I'm comfortable tightening it up, Mark. I think depending on what happens like with the mortgage originations and all we could be somewhere in that range. We will definitely be in that range, I think. But depending on business of volumes we could be one way or the other, and I would hate to pin myself down to one number.

Thanks Mike.

Adam Barkstrom, Legg Mason.

Hey guys. Good morning. Let's see -- a couple of things. I wanted to circle back to the margin. You have still got a range out there. What did you say, 3.80 to 4 percent, and you're kind of bumping up against the 4 percent number here? I'm just curious if you had any color on the most recent 25 basis points, if that even helps at all or if you are still so far below deposit floors that you think it is kind of stuck here for near-term.

I think basically the 25 basis points helps us a little bit, but in the short-term because I think you will see the deposit pricing, especially on the savings and now (ph) type of accounts that are going to lag. We hit close on those accounts, so actually the rates on those accounts are higher than where they should be in relationship to wholesale rates. So I think what you will see is us recovering some of that on the way up. So I think in the short-term the increases by the Fed are going to help us a little bit.

Could you give us some more color on loan growth because loan growth for the quarter obviously is one of the big stories for the quarter and I just wanted some more detail there?

The loan growth was really very, very encouraging. The commercial loan growth -- commercial loans grew gangbusters (ph). If you recall, last quarter I said that the pipeline for commercial loans was about $1 billion, and almost all of that came through in actual loan outstandings, so we were really encouraged by the loan growth. It was broad-spread. It was in our vintage markets, as I said -- that is the old markets of Buffalo, Syracuse, western New York and Pennsylvania -- as well as in the new markets of Maryland.

What has been holding us back over the past several quarters was the fact that we had de-emphasize certain portfolios that we acquired from Allfirst. And finally those portfolios seem to have run their course and did not hold back the loan growth. So we were extremely encouraged by commercial loan growth in all our markets, and it was broad-spread -- widespread.

Did you mention in your commentary earlier that the pipelines for this quarter looking forward is about the same (multiple speakers) 1 billion, right?

Yes, it is still 1 billion at the end of June, as it was -- pretty much where it was at the end of March.

The others thing that I kind of pointed out is that we have seen a slowdown in the consumer loan growth, which is kind of what we expected, that once the commercial came back it would come back because the economy was improving; would drive interest rates higher and then dampen some of the consumer long growth. We have seen a significant drop in origination volume in our auto lending area, and therefore if you notice the consumer loan growth, which really was at double-digit levels earlier, is now down to 4 percent annualized quarter-over-quarter.

I'm guess curious looking at one thing. You had very strong loan growth for the quarter; deposit growth, as you highlighted, was very strong as well. And given the earnings results I'm just curious why we saw the securities portfolio pick up a little bit here?

The securities portfolio -- two things. If you're comparable with last year --

I'm looking linked quarter, and along with the securities portfolio the borrowings picked up a little bit as well, so arguably adding on a little bit of leverage here and I'm just curious as to why.

We remanaged the securities portfolio in the context of the entire balance sheet and in the context of our risk profile. Our risk profile allowed us -- in fact, demanded of us -- to add some securities from fixed-rate because of the growth in deposits. So we added securities, also taking advantage of the fact that rates went up about 50 basis points. We added securities during the quarter.

Our securities to earning assets run at about 17.5 percent or 15.5 percent of total assets, and that is way below the average for the top 50 banks. I guess the way I would put it is we have kept our powder dry by not overbuilding up our investment securities during the low rate environment, and we are trying to make sure that we get a better position as rates go up.

You said 15 percent of earning assets?

No, 15.5 percent of total assets and about 17.6 percent of earning assets.

Is that sort of a bogey to try to keep it at that level or are you just saying that is where the level is now?

We try to keep it below 20 percent of earning assets because we use the securities portfolio to balance our interest rate risk profile, so we don't really like to have a highly leveraged portfolio. And like I said, the average for the top 50 banks is about 22 percent of assets.

Last thing and then I will hop off, and you talked a little bit about it and I may have missed some of this and I apologize. Could you (indiscernible) going to go through on a lined quarter basis the reduction in the operating expenses, what the driver was there?

In the linked quarter?

Yes.

I think the main thing there was the difference in the mortgage servicing valuation.

Right, in the other expense category? Okay.

In the other expense.

What about the occupancy and equipment area? I mean that is down 3 million.

There is a lot of seasonal factors in there. Trust me, we are running -- we are trying to keep our expense levels down, as I have said before, because we think we are in a slow revenue growth time period, and therefore we want to limit our expense growth to 1 or 2 percent a year. We've been pretty successful internally in during that, and you see that reflected in certain categories like the occupancy and like the (indiscernible) area. So I think it is better for us to control on our part.

Got you. Thanks guys. Looks like a pretty solid quarter. Thank you.

(Operator Instructions). Brian Harvey, Fox-Pitt Kelton.

Thank you. Good morning. I just had a couple of questions, Mike. First, can you talk a little bit about the end of period loan growth and maybe talk about the commercial and commercial real estate and what you're seeing maybe as we get later into the quarter? And second on that point is can you discuss any sort of loan pricing issues that you are experiencing?

First of all, the end of period loan growth was also $1 billion, so fairly similar to the average loan growth. So we saw the loans coming in throughout the quarter and I think that should position us well for the third quarter. We also, like I said, had a pipeline of $1 billion, pretty similar to the $1 billion that we had in the first quarter. So I think we're well positioned for the third quarter in terms of loan growth.

In terms of pricing, two answers there. On the consumer side, on our auto portfolios we see a decline in pricing as rates have gone up. For example, of the two-year rate over which our loans typically price has been going up pretty steadily. And that has put some pressure on our margins. We see that always; as rates go up there is pressure on our margin on the consumer side. Other than that, there is not much pressure on our pricing. We seem to be holding our margin, and the fact that the loan demand has come back, actually I think should bode well for our margins because there is more demand and that tends to push up margins a bit.

Last question on the credit side. Can you just talk about how much of the credit improvement linked quarter was related to loan sales versus paydowns?

I don't have the exact numbers here, but I would say that about two-thirds of the decline in non-performing loans was due to sales of loans and the rest were paydowns.

Can you categorize those between the core M&T versus Allfirst?

Many of them were -- actually one big one was Allfirst and one big one was M&T, so they are pretty balanced.

Okay, thank you.

There no further questions. I would like to turn the floor back over to management for any closing comments.

Okay, thanks Holly. Before closing I would like to take this opportunity to let everyone on the call know that Mr. Don MacLeod (ph) has recently joined us at M&T and is going to manage the investor relations. Many of you may know Don from his years at Mellon Bank in a similar capacity. I will be working with Don over what I am sure will be a brief transition period, after which I will be moving to a full-time position in the office of the President of M&T Bank, Emerson Brumback.

Again, we thank everyone for participating today. And as always, if clarification of any of the items in the call or the news release is necessary, please call our investor relations department at 716-842-5138. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines of this time and have a great day. Thank you.