M&T Bank Corp (MTB) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the M&T Bank third-quarter 2004 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Mr. Don MacLeod, Director of Investor Relations. Sir, you may begin.

This is Don MacLeod. I would like to thank everyone for participating in M&T's third-quarter 2004 earnings conference call both by telephone and through the webcast. I hope everyone has had an opportunity to read our press release issued this morning. If you have not read our press 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 found on Forms 10-K and 10-Q for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, Mike Pinto.

Thank you, Don, 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 third quarter, focusing on changes from last year's third quarter and the second quarter of 2004.

Diluted earnings per share, which includes the amortization of core deposits and other intangible assets and merger-related costs, were $1.56 in 2004's third quarter. This was up 22 percent from the $1.28 in 2003's third quarter, and 2 percent higher than the $1.53 earned in the linked quarter.

Amortization of core deposit and other intangible assets amounted to 9 cents per share in this year's third quarter, compared with 11 cents in last year's third quarter, and 10 cents in the linked quarter. There were no merger-related costs incurred in any of this year's first 3 quarters; however 12 million of after-tax merger-related costs were incurred in 2003's third quarter.

Third-quarter diluted net operating earnings per share, which exclude the amortization of core deposit and other intangible assets and exclude merger-related costs, were $1.65, up 11 percent from the $1.49 in 2003's third quarter, and 1 percent higher than the $1.63 in the linked quarter.

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

The results for the third quarter included several items of particular interest that I would like to point out. During the quarter, M&T reorganized certain of its subsidiaries, which resulted in a decrease in M&T's effective state income tax rate for the quarter. The result was a 12 million reduction in our deferred tax liability, and a corresponding 12 million decrease in income tax expense for the quarter. Nevertheless, M&T's effective income tax rate in future periods is not expected to be significantly different from what it otherwise would have been had the subsidiary reorganization not occurred.

Also impacting the third quarter's results was a tax-deductible $25 million cash contribution to the M&T charitable foundation. The after-tax impact of the contribution was $15 million.

Third, a $3 million after-tax gain was realized on the sale of a venture capital investment that we obtained through the merger with Allfirst. I will remind you that we don't have a venture capital business, but rather a small portfolio of private equity investments obtained through mergers which has been liquidated over time.

Finally, as a result of falling interest rates over the course of the quarter, we recognized a $7 million addition to the valuation allowance for impairment of capital's (ph) residential mortgage servicing rights. This compares with a $12 million partial reversal of the impairment allowance in the third quarter of 2003, and a $22 million partial reversal in the second quarter of 2004. Year-to-date, the impact of impairment is a $3 million net reversal in 2004, compared with a $6 million net provision in the first 3 quarters of 2003.

Now I will review some of the other highlights of the third quarter. Net income for the quarter was $186 million, up 19 percent from a year earlier, and a 1 percent increase from the sequential quarter. Net operating income was $198 million, which was 8 percent higher than last year's third quarter, and up 1 percent from the linked quarter.

The return on average assets was 1.42 percent in the recent quarter, compared with 1.24 percent in last year's third quarter, and 1.45 percent in the second quarter of 2004. Net operating return on average tangible assets was 1.60 percent in the quarter, up from 1.55 percent in 2003's third quarter, but down from 1.64 percent in the sequential quarter.

The return on average common equity was 13.02 percent for the quarter, compared with 11.37 percent in the third quarter of last year, and 13.12 percent in the linked quarter. Net operating return on average tangible equity was 29.42 percent for the quarter, compared with 30.67 percent in the third quarter of 2003, and 30.12 percent in the linked quarter.

The net interest margin in the third quarter was 3.85 percent, down 17 basis points from 2003's third quarter, and also down slightly from the linked quarter. Lower yields in loans and investment securities contributed significantly to the year-over-year decline. For the full year 2004, we continue to expect net interest margin to be in the 3.8 to 4 percent range.

End of period loans totaled $38 billion, up over $400 million or 1 percent from the second quarter of 2004. Average loans for the third quarter were 37.6 billion, up over 7.5 percent annualized from the 36.9 billion in the linked quarter.

The annualized loan growth from the linked quarter was mixed with some encouraging results on the commercial side, but little change in the consumer loan portfolio. For example, by category we saw an 8 percent annualized increase in average C&I loan balances; an apparent 22 percent annualized increase in commercial real estate loans, however this was impacted by a reclassification of some loans previously classified as residential real estate, and so the actual increase is more like 13 percent annualized; and a 2 percent annualized increase in consumer loans.

Improving economic conditions for our commercial customers seem to be contributing to higher commercial loan demand, which is more than offsetting the general slowdown in the consumer sector, especially in automobile lending. The commercial loan pipeline has improved by some 200 million at the end of September, up from approximately 1 billion at the end of March and June of this year.

Initially commercial line usage was little changed, trending upwards from levels at the end of last year, but still below pre-recession levels in the low 50s. Credit quality continued to be strong during the quarter.

Nonperforming loans totaled $181 million at the end of the recent quarter, improved from $190 million at the end of the previous quarter. The nonperforming loan ratio was 48 basis points at the end of the recent quarter, compared with 51 basis points at the end of the second quarter.

Better evidence of this improving trend can be seen in the year-to-year numbers. The nonperforming loan ratio improved 29 basis points from 77 basis points of total loans at the end of 2003's third quarter.

Net charge-offs for the quarter were $15 million, representing an annualized rate of 16 basis points of total loans. This was down from 21 million or 23 basis points in the linked quarter and also slightly improved from the 16 million or 17 basis points in 2003's third quarter.

The provision for credit losses for the third quarter of 2004 was $17 million and more than covered net charge-offs for the quarter. This increased the total allowance for credit losses to 626 million or 1.65 percent of total loans. This compares with allowance levels of 1.67 percent at the end of September 2003, and 1.66 percent at the end of the linked quarter.

Loans past due 90 days but still accruing were $140 million, compared with $135 million at the end of the second quarter, and 174 million at the end of last year's third quarter. At September 30, 2004, this category included 112 million in loans that are guaranteed by government-related entities.

Non-interest income was $245 million in the third quarter, up 6 percent from a year earlier, and an annualized 22 percent higher than the linked quarter. Growth in credit-related fees and the venture capital gain already discussed were partially offset by lower mortgage banking revenues. These revenues declined $7 million from last year's third quarter, due to high interest rates which resulted in lower levels of loan originations and refinancing activities by customers.

On the expense front, operating expense, which excludes merger-related charges and the amortization of intangible assets, were $388 million, up $34 million from the third quarter of 2003, and up $50 million from the second quarter of 2004.

However, as I have mentioned before, the third quarter's figures include the $25 million cash contribution to the M&T charitable foundation and the 7 million addition to the valuation allowance for capitalized residential mortgage servicing rights, while partial reversals of that valuation allowance totaling 12 million and 22 million are reflected in last year's third quarter and this year's second quarter. Excluding both these items, we saw reductions in operating expenses on both a year-to-date -- on a year-to-year as well as a linked-quarter basis.

Before we turn to questions, let me briefly hit some of the highlights related to the first 9 months of 2004. Most of these points are covered in detail in the earnings release. Please keep in mind also that the first quarter of 2003 did not include results from the Allfirst franchise.

Diluted net operating earnings per share were $4.69, up 11 percent from 2003. Net operating income was 566 million, up 18 percent. Net operating return on average tangible equity was 28.45 percent, compared with 28.55 percent a year ago.

There were no merger-related charges in the first 9 months of 2004; 38 million after-tax of merger-related expenses were incurred in the first 9 months 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 9 months of 2004 were $4.39, up 22 percent.

Average loans were up 11 percent to 36.8 million. Net interest margin of 3.9 percent was down 23 basis points from last year. This decline is due partially to interest rates, but also due to bringing on the Allfirst business mix, which had a structurally lower margin than vintage M&T.

Net charge-offs were $54 million or an annualized 20 basis points of average loans for the first 9 months of 2004, compared with 64 million or 26 basis points last year. Non-interest income was $705 million, up 18 percent. Operating expense was $1.1 billion, up 15 percent.

Based on these operating numbers and excluding the effects of security gains, M&T's efficiency ratio for the first 9 months of 2004 was 54.5 percent. Excluding the charitable contribution mentioned previously, the ratio is 53.3 percent, compared with 53.5 percent in the first 9 months of 2003.

Finally, as we mentioned in our press release, we're still comfortable with the full-year earnings guidance provided earlier this year. That guidance remains subject to many uncertainties including actual events and circumstances that may occur throughout the rest of the year, many of which are referred to in our release as future factors.

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

(OPERATOR INSTRUCTIONS) Adam Barkstrom with Legg Mason.

A couple of questions. Could you tell us again, you mentioned the credit line usage rates, specifically what that number is?

That number was up to about 45.3 percent. The line utilization rate was up to 45 point --

That was 44 percent last quarter, is that right?

It was 43.4 percent the last quarter; so it was up about 1.9 percent.

Okay. Second question. I guess relative to our assumptions your provision levels came in significantly below where our numbers were. Given the fact that you have got 1.65 percent reserves, and the group averages are around 135-ish, how comfortable do you feel bringing that number down? And what kind of level would you bring that number down to?

I think the most important thing with the allowance is to be consistent in your application of it. If you go back into history, you will see that we have typically had a more conservative allowance than our peer group. So, I think you should not expect that to change. I think you should expect us to always be a little bit higher than the peer group.

I think where you will see the allowance move is when our credit quality improves. Over the past year and over the past quarter, our credit quality -- both reflected in the nonperforming loan numbers as well as the chargeoffs -- has improved dramatically. So we decided that we should reflect that in the allowance by taking the allowance percentage down.

Then you also talked about margins as 3.8 to 4 percent I think was your guidance for the rest of the year, if I heard that right.

Yes.

You are at 3.84, so you are already bumping at the low end of that guidance range. I am just curious, can you even get to the 3.8 for fourth quarter, given the fact what the yield curve has done toward the end of this quarter? The flattening of the yield curve, that is certainly going to pressure your margin further from here, I would think. Correct me if I am wrong.

Adam, the issue really is not so much of an impact to us, because if it occurs the flattening of the yield curve hurts us on repricing. We tend to run a matched book. We don't take interest rate risk. So as the yield curve lowers, our cost of deposits, of funding the loans, also comes down.

There is a slight impact, but we see that over a year, and it is not very dramatic. It happens mainly when our commercial real estate portfolio turns over; and that portfolio typically has a length of about 5 years for each of the loans, to repricing. So I don't think you're going to see a dramatic 1-quarter change in the margin due to flattening of the yield curve, given our position -- our balance sheet position.

Also if you look at the change from last quarter to this quarter, there was 1 big item in that change, when our margin came down from 392 to 385. And that 1 big item was interest in nonaccrual loans. Last quarter we had about 5.5 basis points in interest from nonaccrual loans in that 392 number. So that was a big change which seemingly brought our margin down for this quarter.

Could you give me a little more detail on that? Remind me of what went on there with the interest on nonaccrual loans. Were those loans that were returned to current right before the end of the quarter, and then you can book the interest on them? Is that what happened?

What happened is that they were nonaccrual loans, and we had not been accruing interest on them. We got rid of those loans. We actually sold those loans (multiple speakers) during last quarter. So on sale we got some of that interest which we had not accrued. We actually realized that in cash. That is what we took in, and it was about 5.5 basis points or $6.2 million last quarter.

Thank you very much. What did that contribute in basis points to the margin?

5.5 basis points.

Great. Thank you, guys.

Mark Fitzgibbon, Sandler O'Neill.

The first question I had relates to other fee income. If you exclude the 1-time $3 million venture capital gain, it still looks like other income is up quite bit, about 7 million versus last quarter. Are there any other items in there that are nonrecurring?

First of all, the venture capital is 5 million on a pre-tax basis; the 3 million was an after-tax number. So that is $5 million. I wouldn't describe any of the other things as nonrecurring. We did have some loan syndication fees, and I have referred to that as credit-related fees. But that is an ongoing business for us, so I would not describe that as nonrecurring.

Okay. Secondly, I wondered if you could give us an update on the Allfirst integration? Perhaps outline some of the profitability improvements you have made there.

It is so well integrated that I can't give you many details on it, Mark. Because right now all of the operations are consolidated and the systems are consolidated. So it has become hard to split that out. But I will point you to a couple of things.

If you notice our operating expenses, if you adjust for the impairment and the charitable contribution, they are actually down from last year and down from last quarter. So I think that is an indication that we're getting some of that operating leverage that we thought we would get from the Allfirst merger.

Also, the loan growth is back again; so the negative impact that we had from the discontinued portfolio -- deemphasized portfolios -- has dissipated somewhat.

Basically, we are very happy with the Allfirst results. There are more accretive to us than we ever thought. If you look at the pieces of it, the loan portfolio has performed slightly worse than we thought, again mainly due to the deemphasized portfolios. So we didn't totally factor in how much we were going to deemphasize in the portfolios.

As a result of those portfolios running off, which I've talked about before, we could invest the proceeds in investment securities for the time being till loan growth comes back. So we didn't see a total loss of net interest income, just a slipping in the margin that we would have realized from that business.

On the deposit side, deposits are about 3 percent higher than when we acquired Allfirst, which again is very encouraging, given that we typically estimate 5 to 10 percent decline in deposits after a merger. The expenses came in on schedules in December; we had that run rate of $100 million. I think we will still get some more as we go along.

Finally the most important thing, the credit experience was phenomenal compared to what we had modeled in our acquisition assumption. In fact the credit experience at the old Allfirst portfolio has actually been better than ours. So overall I think we are very happy with the results, and I think it is reflected in our numbers.

One last question. There have been a fair amount of acquisition rumors floating out there in the market in the Northeast. I wondered if you could share with us your thoughts on the kinds of acquisitions that you all might consider doing?

The only acquisitions we like to do are those that are accretive to our shareholders and create value for our shareholders. That is my first answer.

The second thing, Mark, I think internally our management has focused on the fact that we still need to do a lot of fine-tuning on the Allfirst merger. There is much more opportunity there in getting best practices across the 2 franchises than chasing any acquisitions. So I don't think you will see us really chasing after any acquisitions. But if some opportunity came up which was tremendously accretive to our shareholders, we would definitely take a look at it.

Thank you, Mike.

Brian Harvey, Fox-Pitt Kelton.

Just had a couple questions. First on the loan growth side, Mike, can you shed a little more light on the commercial loan growth activity? Maybe talk about some of the end-of-period balances; because it appeared that the end-of-period loan growth was not as strong as the average loan growth for the total portfolio.

Then the second question is just on deposit growth, if you could just give us an update of what you're seeing and hearing in terms of pricing as well as what you're seeing on the growth side?

I will take the loan piece. We have definitely seen a slowdown in loan growth in the third quarter from the second quarter. The second quarter pace was pretty high, and you're right to observe that the asset (ph) balances on the commercial side grew slower than the average balances.

The average balances of course reflect all the volume we put on in the second quarter. So I think there has been a slowdown in loan growth. We were at, say, about the high-single digit numbers during the second quarter. But now we are around 5 percent mid-single digit numbers. So we have seen a slowdown.

Offsetting that, what we have seen is that the pipeline is about $200 million higher than it was at the end of last quarter. So that kind of says that the activity in the fourth quarter should be better than the third quarter. That is on the commercial loan, C&I, side.

Commercial real estate really grew on as asset basis too. So we are seeing quite a lot of activity in that sector. And the consumer, as I have said before, seems to have slowed down tremendously. In fact our auto loan portfolio is not growing at all right now.

So overall, I would say slower loan growth than last quarter, but still healthy enough for us to get our double-digit earnings growth.

Just on the commercial real estate, you said there was a reclassification. Between what categories was that?

These were loans to developers of 1 to 4 family mortgages; and they had been classified in consumer real estate before, so we reclassed them to commercial real estate because they are actually loans to developers.

Okay.

On the deposit side -- you also asked about deposits, Brian, if I'm not mistaken. On the deposit site, we haven't really seen much pressure on pricing. I think pretty much everyone has held the line on pricing, because for so long we were kind of compressed with the floors on deposit rates. So I think it is time to get some margin out of the deposits, so most banks have nagged (ph) their margins.

Where we are seeing price competition is mainly in the time deposit and money market savings kind of products, but we still have not seen any dramatic movement in deposit rates.

In terms of the flows, though, it seems there was a little bit of slowdown in some of the savings deposits this quarter and maybe a tickup in the time. Is that a trend that you're seeing throughout the quarter?

Yes, that is a trend which I think we saw more towards the end of the quarter. I think we will see more of that in the future, but because what happens -- as rates go up, the money will flow away from savings into time. It is the same money, it just moves into time deposits. So you should expect to see that in the future.

The other thing that we expect is that our money funds will also take some of that savings, some of the savings deposits. Just as the money funds gave to the savings deposits when you could get more interest in savings than you were getting in the money funds, I think that is reversing now with money market rates going up. So you will see money fund balances grow at the same time as savings, and will flatten out or stop growing or even decline a little bit.

Okay, thank you.

Ed Najarian, Merrill Lynch.

We seem to have lost Ed.

Chris Chouinard, Morgan Stanley.

I was just wondering if you could give us a little bit of a regional flavor to your loan growth this quarter. How is New York doing versus Maryland or New York City in terms of commercial real estate and C&I?

I think during the quarter, we have seen better growth in our Baltimore regions than we have seen in our New York regions. With regard to commercial real estate, that tends to come more from our New York City franchise. But on a regional basis, the loan growth in Baltimore in the Maryland area is higher than in our New York area.

Okay. If I could just follow up; unrelated, but on the expense side, looking at your occupancy expense this quarter, down from last quarter. Just kind of wondering if there is anything driving this down in terms of a 1-time blip? Or if this is kind of a run rate at about $43 million?

I can't specifically think of any 1-time blips in there. However, there are timing issues with real estate. The big issue with real estate is real estate taxes. So I think in the fourth quarter, you should see a seasonal jump in occupancy costs due to taxes being in the fourth quarter. So I would definitely look at it on a quarter-by-quarter basis, seasonally, compared with last year.

I see. Thank you.

(OPERATOR INSTRUCTIONS) Ed Najarian, Merrill Lynch.

Good morning Mike. Sorry about that. Just a quick question on the addition to the MSR impairment reserve, the $7 million. Given the decline in long-term interest rates during the quarter, sort of, or the drop from June 30 to September 30, which was in the range of about 60 basis points, I would have expected a bigger number than 7 million.

Can you comment on how that 7 million sort of stacks up, given how big of a swing we saw in rates? You don't have to go into sort of the methodology; but just why it was so low? Thanks.

I can't comment specifically on it. We run a model with prepayment assumptions from the Street, which are typically based on the mortgage rate. Based on that, is what we took our 7 million impairment. Now the mortgage is a very convex instrument, as you know, because of the prepayment. So the results are fairly different. They are not linear.

For example right now -- not right now, but at the end of September, for a 50 basis point increase in rates, we would have a $10 million reversal, according to our model. Just modeling out in the future.

On the other hand for a 50 basis point decrease, we would have a $12.5 million impairment charge. So it is not linear, and that is one of the issues with this whole thing.

Would it be safe to say then, because of all the prepayment activity that we had in '03, that as we see the 10-year treasury yield move up and down lately that you're seeing less increase and decrease proportionately in the amount of prepayment activity that you would expect? Because obviously a lot of those loans have already prepaid.

Yes, I think that is right. I think the prepayment tables that we get from the Street kind of reflect that already, because much of the loans -- many of the loans, many of the coupons have already refinanced that were going to refinance. So I think that is generally a true statement. But there is also the lack of linearity, which it is hard to extrapolate in a linear fashion for changes in the interest rates.

All right, thank you.

Jay Weintraub, KBW.

I would like to actually follow up. Most of my questions were asked and answered. But I was curious about the mortgage demand during the quarter; and month by month how it ebbed and flowed, and how the pipeline stood at the end of the quarter?

First of all, to address your question on the applications, first of all, the applications were in the $550 million per month range for the quarter in September and actually were down about 6 percent from last quarter. The rate was down about 6 percent.

On the pipeline, we had a pipeline at the end of about $700 million; and that was slightly up from 723 -- sorry; $706 million, and that was slightly up from 660 million in the prior period. I apologize. That was not the pipeline; that was the loans held for sale.

So what is your expectation going into October for closings?

The pipeline is roughly flat. It is about $1.3 billion, and it was about $1.3 billion at the end of June. That is the applications that have not been processed. So I would expect activity in the fourth quarter to be more or less similar to the third quarter.

Okay, thanks.

Jackie Reeves, Ryan Beck.

I apologize, I missed the answer, hello, to the reserve question that came up earlier. I had to step out. Could you just briefly highlight again your position on the reserve coverage? Because that did come down modestly, and as was cited earlier the reserve for the industry is lower. Again I apologize for this.

No problem, Jackie. What I said earlier is that traditionally and over a long period of time we have been at the higher end of the more conservative end of reserving, and I think you should expect to see no change from that. We tend to be more conservative. And as long as we are consistently conservative, I think we feel very comfortable in that position. We would rather be more conservative than less.

Having said that, when the credit indicators improve as dramatically as ours have improved, then we feel that we have to reflect that in the level of our allowance. So if you will note that our allowance has come down, and that is really directly a result of the fact that our nonperforming loan ratios have come down and our chargeoffs have come down. It just reflects the credit quality in the portfolio improving.

Thank you very much.

At this time I would like to turn the floor back over to Mr. Don MacLeod for any closing or further remarks.

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

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