M&T Bank Corp (MTB) 2005 Q1 法說會逐字稿

Good afternoon, and welcome to the M&T Bank first quarter 2005 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 Don MacLeod, Director of IR. Sir, you may begin.

Thank you, Melissa, and good afternoon. This is Don MacLeod. I'd like to thank everyone for participating in M&T's first quarter 2005 earnings conference call both by telephone and through the webcast. If you've not read our earnings release, you may access it along with the financial tables and schedules from our website WWW.M&T Bank.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 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements. Now I'd like to introduce our Chief Financial Officer, Mike Pinto.

Thank you, Don, and good afternoon everyone. Before I respond to questions, I'd like to cover a few points from this morning's earnings release. I'll begin with the summary of the first quarter, focusing on the changes from the first and fourth quarters of 2004. Diluted earnings-per-share, which include the amortization of core deposits and other intangible assets, were $1.62 in the first quarter of 2005, up 25% from the $1.30 earned in the first quarter of 2004 and unchanged from the linked quarter. The amortization of core deposits and other intangible assets amounted to $0.08 per share in the first quarter of 2005, compared to $0.11 per share in the first quarter of 2004 and $0.08 per share in the fourth quarter of 2004. First quarter diluted net operating earnings-per-share, which exclude the amortization of core deposits and other intangible assets, were $1.70, up 21% from the $1.41 earned in the first quarter of 2004 and also unchanged from the linked quarter. This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.

Net income for the first quarter of 2005 was $189 million, up 19% from a year earlier and little changed from the $192 million in the sequential quarter. Net operating income for the quarter was $199 million, up 15% from the first quarter of 2004 but down a bit from the $202 million earned in the linked quarter. The return on average assets was 1.44% in the recent quarter, compared with 1.29% in the first quarter of 2004 and 1.45% in the fourth quarter of 2004. Net operating return on average tangible assets was 1.61% in the quarter, compared with 1.48% in the first quarter of 2004 and 1.62% in the fourth quarter of 2004. Return on average common equity was 13.41% for the quarter, compared with 11.19% in the first quarter of 2004 and 13.37% in the linked quarter. Net operating return on average tangible common equity was 29.67% for the quarter, compared with 26.02% in the first quarter of 2004 and 29.69% in the linked quarter.

The net interest margin in the first quarter was 3.83%, up 1 basis point from the linked quarter and down 90 points from first quarter 2004. The year-over-year decline reflects the impact of rising interest rates since the middle of last year and the fact that in general our liabilities have repriced more quickly than our earning assets. End of period loans totalled $39.1 billion, up approximately $675 million from the fourth quarter of 2004. Average loans for the first quarter were $38.6 billion, compared with $38.1 billion in the linked quarter. The end of period commercial loans, including commercial real estate, grew at an annualized rate of 12.8% from the fourth quarter of 2004. The commercial loan pipeline was $1.3 billion at the end of March, down from approximately $1.4 billion at the end of December, but up from $1.2 billion at the end of September. Commercial line usage improved 44.6% in the first quarter, up from 43.5% at the end of December. [inaudible] continued expectations for improvement in the level of economic activity in our footprint.

There continue to be mixed results in the consumer loan portfolio which declined at an annualized rate of 5.8%. Growth in home equity lines of credit was offset by a decline in auto loans and leases which decreased $249 million in total from the end of the year. Rising interest rates and our reluctance to book loans that don't meet our auto rates produced that result. Credit quality continued to be strong during the first quarter. Nonperforming loans totalled $180 million at the end of the recent quarter, up slightly from $172 million at the end of last year but down $76 million from March of 2004. Despite the modest increase in nonperformers, credit quality trends continue to be favorable with relatively low levels of nonperforming loans and net charge-offs. The nonperforming loan ratio was 46 basis points at the end of March, compared with 45 basis points at the end of the fourth quarter. That ratio was 70 basis points of total loans at the end of March 2004. Net charge-offs for the quarter were $19 million, representing an annualized rate of 20 basis points of average loans. That was a decrease from $27 million or 29 basis points in the linked quarter and little different from the $18 million or 20 basis points in the first quarter of 2004. The provision for credit losses for the first quarter of 2005 of $24 million more than covered net charge-offs for the quarter and resulted in an allowance for credit losses of $632 million or 1.62% of total loans at the end of March. This compares with allowance levels of 1.63% at the end of 2004, and 1.69% at the end of March 2004.

Loans past-due 90 days but still accruing were $125 million at the end of the recent quarter, compared with $155 million at the end of the fourth quarter of 2004 and $144 million at the end of March 2004. At March 31, 2005, this category included $102 million in loans that are guaranteed by government-related entities.

Noninterest income was $234 million in the first quarter, up 3% from a year earlier but down slightly from the linked quarter. Charges on deposit were down just under $5 million from the linked quarter with seasonal slowness in consumer service charges, including an assessed fees more than offsetting modest growth in commercial service charges. Mortgage banking revenues were comparable on a sequential basis but on a year-over-year basis were up $5 million or an 18% improvement. That proof was split almost evenly between our residential and commercial mortgage banking business. Other revenues were higher sequentially due to the gains and losses. Operating expenses which excluded amortization of intangible assets were $351 million, down $18 million from the first quarter of 2004 but up $6 million from the fourth quarter of 2004. The first quarter's results include a $4 million partial reversal of the valuation allowance for capitalized residential mortgage servicing rights compared to an addition to that allowance of $11 million in last year's first quarter. Even including -- even excluding the impact of the MSR revaluation, operating expenses were down on a year-over-year basis. On a linked quarter basis, excluding the reversal of the valuation allowance, operating expenses were up by $10 million. This is primarily due to a seasonal increase in FICA payments plus some increased costs associated with medical and retirement benefits.

Adjusted to exclude securities gains and intangible amortization, M&T's efficiency ratio in the first quarter was 51.6%, compared to 56.8% in the first quarter of 2004 and 50.6% in the fourth quarter of 2004. During the quarter, M&T repurchased 1.9 million shares of common stock at an average cost of $101.14 per share. There are just under 3 million shares remaining on our repurchase authorization which we announced in December, 2004.

Finally, as we mentioned in our press release, our outlook has not changed since the fourth quarter conference call in January. Our estimate of GAAP basis diluted earnings-per-share for 2005 remains in the $6.60 to $6.80 range. Of course, as I said in the press release, changing business or economic conditions or unusual circumstances could affect that estimate. We'll now open the call up to questions before which Melissa will briefly review the instructions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is coming from Jennifer Thompson with Oppenheimer.

Hi, good afternoon.

Good afternoon, Jennifer.

I had a question on the deposits, taking a look at some of the trends in average deposits. I notice that noninterest bearing deposits are down link quarter, although you had some pretty good growth in some of the other categories. Can you just give us a little color on the trends you're seeing in the markets? How concerned are you in the trend in noninterest bearing deposits and are you seeing a lot of pricing pressure there in the other categories?

Jennifer, I think if you look at noninterest bearing deposits year-over-year, they grew about 8 1/2%, so we're not really concerned with one quarter. It tends to be a seasonal product, and so we're not really concerned about that. We have seen a shift, however, to time deposits as rates have gone up. So we've seen that happening, but we don't think it's coming out of the demand deposit category.

Okay. How about pricing pressure in the markets that you operate in? How intense has it been and have you seen differentiation among your markets?

Yes. I think it's fair to say that the pricing pressure has started to heat up of late but I think it's mainly confined to time deposits. I think everyone's being pretty disciplined in terms of the savings deposits and the pricing pressure tends to be in money market and time deposit categories. Across our regions we tend to see more price competition in the Baltimore area and Maryland area and somewhat less in our traditional markets of Buffalo and Rochester.

Great, thanks very much.

Thank you, Jennifer.

Thank you. Your next question is coming from Adam Barkstrom with Legg Mason.

Hi, guys. Good afternoon.

Hi, Adam, good afternoon.

Kind of on the same subject, on the deposits. I want to talk about the deposit fee revenue line and was curious, is that the second quarter that we've seen that decline in a row? Is that more of a function of again pricing of deposits or is that more the earnings credit associated with that? What's going on there for that?

I think there's two answers to that. If you look at the commercial piece, the commercial service charges, our commercial service charges are actually down from last year and they're down about 7%. And almost all of that can be attributed to the fact that the earnings credit has gone up. Because all of our commercial deposits pretty much the earnings credit works off, is indexed off a T bill rate, and as short term rates and T bill rates have gone up, even though your gross fees might go up, the net fees that you collect in cash tend to come under pressure as rates are rising. So that's on the commercial side. On the retail side, we actually grew service charges from last year at a 5% rate. So I think you have to look at it in those two contexts.

If you look at the linked quarter, the trends are a little bit different. Linked quarter, our consumer service charges were down significantly and almost all of that can be traced to the NSF kind of fees and again that is a seasonal thing that we observe every year in the fourth quarter, those fees for NSF debit card transactions, those transaction driven fees, are heavier in the fourth quarter because of the fees not buying the consumers do and tends to drop-off in the first quarter. So if you look at it on a linked quarter basis to consumer deposit service charges were down, but commercial went actually up reflecting new services.

Okay. And then in the other income category, somewhat of a jump there versus fourth quarter although we note that fourth quarter was down pretty dramatically versus third quarter of last year. Any items in there that you could shed some light on?

The big thing in the other income, the other income, there was a swing. In the fourth quarter of last year, we added $2.7 million loss in our venture capital portfolio, and in the first quarter we had a $3 million gain, so you take the two together and that's a swing of about $6.5 million so that was the biggest item from -- on a linked quarter comparison.

Okay. And then I guess last question. What would be your commentary on the trust income line? Last year, it looks like we saw fairly steady growth throughout the year, you know, some noise in there, but at least link quarter first quarter down from fourth quarter. Is that is a seasonal issue? What should we expect for trust fees for 05?

I think the trust fees we're looking at flatish to slightly up trends in 05. We're not looking for any dramatic growth. A lot of those fees are based on assets under management and so depending on what the stock market does, the fees go up or down. And so it's hard to predict where they'll go, but our internal expectations are for them to be flat to slightly up.

And you mentioned the line usage rate. I didn't catch it. Could you go through that one more time?

The percentage,I believe, was 44% at the -- 44.6% at the end of March and 43.5% so an improvement of 1.1% from December to March.

Then just last question, the compensation benefit line up noticeably over fourth quarter. I think you mentioned this but is that more a function of the renewal of the FICA?

Yes. FICA was a big chunk of that and the other piece is that we restate on pension expenses. Our pension expenses this year are going to be higher than last year. So between 5 time pension expenses that pretty much explains why that compensation line was higher.

Great, thank you.

And there's some in medical benefits too but mainly FICA and pension.

Okay. Thank you.

Thank you.

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

Thank you, good afternoon.

Good afternoon, Brian.

Mike, can you just discuss a little bit more, I guess in your annual report, Bob Wilmers talked about $50 million in efficiency gains potentially. Can you sort of just sketch out for us how should we be thinking about those for this year and what potential could hit the bottom line?

I think that's a work in progress, and you're seeing some of the benefits offset on the expense line already. So we started this project somewhere in 2004, and you're starting to see some of the benefit on the expense line if you look at last year's first quarter versus this year's first quarter. I think the majority of these projects are slated to complete around 2006 at the end of this year and the beginning of next year. So I think we feel we'll be at that run rate of $15 million that Bob talks about in mid-2006.

Okay. So how much is baked into the expectation now that you've given some comfort in GAAP earnings between $6.60 and $6.80 for this year?

We're kind of trying to keep our expenses flat this year helped by those projects so that's what we're trying to do.

And the last thing is just in terms of the MSR recapture. Is this sort of the level that we should be thinking about in terms of that $6.60 to $6.80 guidance as well or how much is sort of baked into the expectations for recapture this year?

There's not much baked into the expectations for recapture. Whatever we've recaptured in the first quarter, we've already given up already due to the rally in the bond. So we try not to plan too much on recapture because you never knew which way it's going to go.

Thank you.

Thank you, Brian.

Thank you. Your next question is coming from Kenneth Usdin with Banc of America.

Thanks, good afternoon.

Hi, Ken.

Mike, I was wondering if you could walk through the margin? I think earlier in the year you'd talked about anticipating there'd be margin compression on a sequential quarter basis. It improved 1 basis point. I'm wondering, was there anything just strange or different that happened this quarter and then B) I was wondering if you could tell us about your outlook for margin progression from here?

I still think we'll see margin compression. The thing that's different in the first quarter from the fourth quarter is that they're two less dates. If you have a lot of mortgage kind of product which are 360 day products, they have a level interest income in every month regardless the number of days. Your margin gets a benefit in a shorter quarter. So there were two days less in this quarter. Our margin is higher this quarter than it would have been just because that day effect as compared to last quarter. So that's about 5 basis points we pick up.

That was the benefit?

Yes. That's what we figure internally. I mean you're going to do some calculations to try and come up and make some assumptions but we figure about 5 basis points. So as long as the FED keeps -- There are two factors that occur with our margin. One is the fact that as long as the FED keeps raising rates, we're going to see some pressure because our loans, our consumer loans, especially our consumer loans, tend to lag a little bit on repricing. The best example of that is the home equity portfolio which really prices with about a 45-day lag because it's based on prime as of the end of the prior month so in periods where the FED rapidly raises rates, you're always lagging behind on your home equity portfolio. Since we have a big one, that has an impact on us.

The second issue is more related to mix than anything else. Much -- because the deposit growth has not been as robust as our loan growth, we tend to fund most of our marginal loan growth with more wholesale of costly funds so the margin on the marginal business tends to creep down. It has an impact on the margin so again we feel, we feel that you're going to see that trend throughout the year and that is baked into our $6.60 to $6.80 estimate.

That was my follow-up question, that that's already assumed in your estimates.

Becoming good at guessing your next question.

Very good. Thanks, Mike. Thank you.

Thank you. Your next question is coming from Chris Chouinard with Morgan Stanley.

Hi, Chris.

Question on the securities book and I guess it's sort of related to the last question as well. You had mentioned that deposit growth is not as strong and you're having to fund on the margin with wholesale borrowings. I was a little surprised to see, on an average balance basis, the securities book rise a little bit sequentially. Why not just let that run down and sort of fund the loan book with runoff from that securities book?

As far as I recall, that wasn't a dramatic increase. It was a small increase. We tend to know how much we're going to buy in every quarter and then that balance increase or shortfall tends to happen because of prepayments which are driven by the interest rate environment. We have a lot of [ inaudible ] in our investment book so that's the deposit. It's not any intentional and reach the securities book kind of action. It's more because we missed on our focus of prepayments.

I see. So prepayments were slower than you had expected.

Rates were higher in the quarter.

And prospectively, should we expect the securities book to decline over the course of the year or are you trying to try to keep it in roughly the same area that it is today?

If we look at our securities portfolio, it tends to be on the low side for banks so we probably will keep it the same level unless we start feeling real pressure on funding. We still make marginally, we still make money on it and from a regulatory point of view, it doesn't absorb as much capital as the loans so we're comfortable, I think, where we are in terms of the percentage of earning assets. And I said before that we try to keep that he percent of earning assets below 20%.

And if I could follow up, just a question about the loan growth this quarter. Could you give us some color on the trends throughout the different regions you operate in?

Yes. I think clearly we've seen much more growth in our Maryland area and just to give you an idea of some of of those numbers. In the Baltimore, Maryland area in the first quarter, loans grew at a 15% annual rate, 15.7% annual rate. Then in our metro area which really is New York City, Philadelphia, Tarrytown and just environs outside New York City, again that was a high growth area where commercial loans grew at about 15%. And then the total for the commercial loan growth, the total loan growth was about 7.6%.

And --

You can clearly see that those two areas were growing at a much more rapid pace than the rest of the markets.

And the Baltimore, you're just talking about commercial or commercial plus commercial real estate?

No. We're talking about all loans, but we tend to book our consumer loans regardless of region. I mean, so we don't classify consumer loans on region so most of these loans I'm talking about will be commercial real estate, middle market, and small business banking loans.

Thank you very much.

Thank you, Chris.

Thank you. Your next question is coming from Cameron Hertz of [ ] Partners.

I'm sorry. I didn't get the name.

It's Cameron Hertz at [ ] Partners.

Hi, Cameron.

In terms of reserve ratio, your credit is obviously looking very good but a lot of what we've seen this quarter in some of the peers or competitors has been a drawdown or at least a relaxing of the reserve ratio. It seems as though you padded a little bit more on the provision this quarter to keep that ratio fairly flat. I think it was down 1 basis point. I was just wondering what your thinking was there.

As we see credit quality improve, I think you'll see us try to lower that reserve in lock step. However, we tend to be quite conservative in the way we look and consistently conservative in the way we look at that number. So over a large period of time and many years, you'll note that we've run ourselves as higher than the normal typical bank. So I think you should expect to see directionally that as credit improves, our reserve ratio goes down but we probably won't do what other banks appears to.

You don't feel that you've hit that point yet where you need to start leveling it off?

If you notice, we're trying to cover charge-off and a little bit more for growth but we feel very nervous not covering charge-offs so typically we try to at least cover charge-offs.

Also, I was wondering on the NSF fees, I was wondering if there's any effect apart from the seasonality, some of the recent OCC guidance, and the rules that they brought out?

Not that I know of. What we've got is our retail people -- I mean, you've probably seen that most banks that have reported have seen the same kind of decline in fee income service charge income, so we've got our retail people studying that to see if there's anything really systematic that's changed or whether it's just seasonal.

And lastly on the brokerage line again against some of your competitors it seemed you had a bit of outperformance there where other banks had some under performance. I was wondering if you could comment on that.

It's not dramatic to my mind. I mean, we saw some good growth in mutual fund sales, but the growth from the first quarter to the fourth quarter was only about 7%.

Okay. Thank you.

Thank you.

Thank you. Once again, if you do have a question, you may press star 1 on your touchtone phones at this time. Your next question is coming from Bob Hughes with KBW.

Hi, Mike. Forgive me if I missed this earlier but did you comment on the size of your commercial or residential pipelines and utilization rates?

Yes. The commercial pipeline we said was $1.3 billion at the end of March and the line utilization rate was up to 40 -- 44.6%. I believe the retail pipeline was also $1.3 billion.

Great. And a follow-up on the All First franchise, we've certainly read a lot in the press recently about PMC and other smaller banks down in the region sort of changing some of their practices in preparation of Commerce's entrance to the market, extending branch hours, waiving ATM fees. Have you guys anticipated changing any of your practices on the retail side, in that market?

Not really. We've noted with great interest the stories on that but we want to see what actually happens and what impact it has before we decide what to do. And keeping these long hours can be a very costly proposition.

Sure.

And we'd rather see it impacting our business before we react to something like that. So we're studying it very carefully.

Okay. Thank you, guys.

Thank you, Bob.

Thank you. Your next question is coming from Ken Usdin with Banc of America.

Hey, Mike just two quick follow-ups. First, you did have the big stepup in salaries this quarter. Do you typically see a fall off in the second after you get that FICA bounce in the first quarter or is this kind of a new established run rate that starts to build up from here?

Well, because of the way FICA works, the taxes due in the first X amount of salary, so when we hit that point, so what you'd expect is that the FICA goes down every quarter sequentially. So you'll see it go down right through the fourth quarter.

Okay.

You know what I mean?

Yes.

The clock starts on January 1.

I know, right, I know that happens generally speaking for most companies but I was just wondering do you guys typically have a seasonality, first to second, as far as stepping down off of a first quarter expense rate?

I wouldn't say dramatically. I think it's more dramatic first to fourth quarter. So when you look at fourth quarter to first quarter that's where the dramatic is, and then vice versa first quarter to fourth quarter.

And the second thing is is can you tell me what the mortgage production was this quarter?

Yes. The mortgage -- are you talking about the applications or the closings?

If you have both that'd be great but I was thinking really the closings.

The closings were about $950 million.

And do you have apps?

The apps were $1.1 billion so the apps are pretty strong. The -- the apps -- I'm sorry. The apps were $2 billion which is pretty much what we've been running every quarter. It's on the high side and the closings were 957 million.

Okay. Great, thanks.

Thanks.

Thank you. Once again, if you do have a question you may press star 1 on your touchtone phone at this time. Your next question is coming from Jennifer Thompson with Oppenheimer.

Thanks, actually that was my question on the personnel expenses, but it was answered.

Thank you, Jennifer.

Thank you. There appear to be no further questions at this time. I would now like to turn the floor back over to management for any closing remarks.

Again, I'd like to thank you all for participating today. And as always if any clarifications of any items on the call or press release is necessary, please call our Investor Relations department at 716-842-5138. Thank you.

Thank you.

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