M&T Bank Corp (MTB) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's M&T Bank first quarter 2006 earnings conference call. At this time all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the call over to your host, Mr. Don McLeod, Director of Investor Relations. Sir, you may begin.

Thank you, Jason, and good afternoon. This is Don MacLeod, and I would like to thank everyone for participating in M&T's first quarter 2006 earnings conference call, both by telephone and through the webcast. If you have not read our earning release, you may access it, along with the financial tables from our website, www.mandtbank.com, and by 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, Rene Jones.

Thank you, Don. Good afternoon, everyone. Before I respond to questions, I'd like to cover a few points from this morning's press release. I'll begin with a summary of the first quarter, focusing on changes from the first and fourth quarters of 2005. Diluted earnings per share, which include the amortization of core deposit and other intangible assets, were $1.7 -- $1.77 in this year's first quarter, up 9% from the $1.62 earned in the first quarter of 2005, and compares with $1.78 earned in the linked quarter. Amortization of core deposit and other intangible assets amounted to $0.07 per share in the first quarter of 2006, compared with $0.08 per share in the first quarter of 2005, and $0.07 per share in the linked quarter. Diluted net operating earnings per share, which exclude the amortization of core deposit and other intangible assets were $1.84, up 8% from the $1.70 in the first quarter of 2005, and down $0.01 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 this year's first quarter was $203 million, up 7% from a year earlier, and compares with $205 million earned in the sequential quarter. Net operating income was $211 million, compared with $199 million in the first quarter of 2005, and $213 million in the linked quarter. Return on average assets was 1.49%, improved from 1.44% in the first quarter of 2005, and 1.48% in the fourth quarter of 2005. Net operating return on average tangible assets was 1.64% compared with 1.61% and 1.63% in the first and fourth quarters of 2005. Return on average common equity was 13.97%, improved from 13.41% in the first quarter of 2005, and 13.85% in the linked quarter. Net operating return on average tangible common equity was 29.31%, compared with 29.67% in the first quarter of 2005, and 29.12% in the linked quarter.

The net interest margin in the first quarter was 7. -- was 3.73%, up 4 basis points from the linked quarter, and down 10 basis points from the similar period in 2005. The impact of fewer days in the quarter had a positive effect, relative to the linked quarter. Normalized for this effect, we continue to experience slight downward pressure on margin. End of period loans totaled $40.9 billion, up $500 million from the fourth quarter of 2005. Average loans for the first quarter were $40.5 billion, compared with $40.4 billion in the linked quarter.

Commercial -- average commercial and industrial loans were up 9% from last year's first quarter, and grew at an annualized rate of 11% from the fourth quarter of 2005. Commercial real estate loans were up 3% on a year-over-year basis, but were up an annualized 7% from the linked quarter. Partially offsetting the growth in commercial loans was a linked quarter decline in consumer loans, primarily in direct auto loans. Total loans, excluding those held for sale, grew at an annualized rate of 6% from the linked quarter. This was consistent with our expectations discussed in January.

On the credit front, the news continues to be good, with improving trends on both a year-over-year and linked quarter basis. Nonperforming loans totalled $143 million at the end of the recent quarter, down from $156 million at the end of last year, and down $37 million from the $180 million at March 31st, 2005. The nonperforming loan ratio was 35 basis points at the end of March, compared with 39 basis points at the end of last year. That ratio was 46 basis points at the end of March, 2005.

Net charge-offs for the quarter were $17 million, representing an annualized rate of 17 basis points on average loan. That was improved from $23 million, or 22 basis points in the linked quarter, and from $19 million or 20 basis points in the first quarter of 2005. The provision for credit losses for the first quarter of 2006 of $18 million exceeded net charge-offs for the first quarter, and resulted in an allowance for credit losses of $639 million, or 1.56% of loans at the end of March. This compares with the allowance levels of 1.58% at the end of 2005, and 1.62% at the end of -- at March 31st, 2005. Loans past due 90 days or more but still accruing interest were $109 million at the end of the recent quarter, compared with $129 million at the end of the year, and $125 million at March 31st, 2005. At March 31st, 2006, this category included $86 million in loans that are guaranteed by government-related entities.

Turning to fee income. Noninterest income was $253 million in the first quarter, up 8% from a year earlier, and showing 7% annualized growth from the linked quarter. Service charges on deposit accounts were $89 million for the quarter, compared with $88 million in last year's first quarter, and $94 million in the final quarter of 2005. The linked quarter decline was due to seasonal trends in consumer service charges, including NSF fees. Mortgage banking revenues were $35 million, compared with $33 million a year -- in the year-ago quarter, and $36 million in the linked quarter. Other revenues from operations were $74 million for the first quarter. This compares with $60 million in last year's first quarter, and $65 million in the sequential quarter. Contributing to the linked quarter increase were higher income from educational lending, commercial leasing, and bank-owned life insurance, partially offset by lower advisory fees.

Operating expenses, which exclude amortization of intangible assets, were $369 million, compared with $351 million from the first quarter of 2005, and $356 million in the linked quarter. The recent quarter's results include a $7 million partial reversal of the valuation allowance for capitalized residential mortgage servicing rights, compared to reversals of $4 million in last year's first quarter, and $6 million in the linked quarter. As noted in our press release, included in our results was an acceleration of $6 million of compensation expense arising from our January 1st adoption of FAS 123R. I'd also point out that FICA expense and the 401K match are seasonally high in the first quarter as a result of the annual incentive compensation cycle. This accounts for much of the remaining linked quarter increase in salaries and benefits. The non-personnel expense -- the non-personnel expense categories were all well controlled, flat on a year-to-year basis and down from the linked quarter.

Adjusted to exclude security gains and intangible amortization, M&T's efficiency ratio for the first quarter was 52.4%, compared with 51.6% in the first quarter of 2005. Excluding the accelerated expense related to the adoption of 123R, the efficiency ratio for the recent quarter would have been 51.5%. During the quarter, M&T repurchased just under 1.3 million shares of common stock at an average cost of 108.51 per share. There are approximately 37 million shares remaining on the repurchase authorization, announced in November of 2005. Overall, our results for the first quarter proved consistent with our internal expectations. Although the forward curve is currently suggesting higher short-term rates than at the time of our January conference call, our outlook for a net interest margin and for modest revenue growth remain the same.

Our outlook for a stable credit environment relative to the -- relative to 2005 also remains unchanged. And as a result, we will continue our efforts to contain expense growth, with most of the impact for 2006 coming from the procurement initiative that we've talked about in the past. This focuses primarily on the non-personnel expense categories. All of these projections are, of course, subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds over the course of 2006. Finally, at its meeting today, the Board of Directors of M&T has voted to increase the quarterly cash dividend to shareholders by 33%, from $0.45 per share to $0.60 per share, starting with this year's second quarter. We'll now open up the call to questions, before which Jason will briefly review the instructions.

Thank you. [OPERATOR INSTRUCTIONS] Brent Erensel, Portales Partners

I have a question on the change in dividend policy, which perhaps reflects the new CEO. But first of all, the timing of the increase was sooner than expected. And second, the amount was rather substantial. Does this change the way you view returning capital to shareholders? Could you walk us through that?

Yes, sure. There's no change in how we view distribution. But I think, let me first address the issue of timing. You know - how do I say this - over time, I guess our typical pattern would be to do a dividend every year. But every 5 quarters has been really what we've seen. So, the last time we had a dividend increase was the second quarter of 2005. The size of the dividends, a 33% increase, is pretty much consistent with what we had in the first quarter of 2004. And if you think about that, what happened at that time is we were somewhat reacting a little bit to the fact that the differential had gone away, relative to the rate of tax rate on capital gains versus dividends.

The other thing that I think is probably most important, though, is that given the success that we've had with all of the efficiency ratios that we've been talking about, quarter in and out throughout 2005, basically our bottom line has grown at a much faster pace than the asset growth that we're experiencing. And as a result of that, we have a fair amount of excess cash. So what you can see is that we're able to sort of increase the dividend without any change in our policies around share repurchase activity. But overall, I think there's really no big change in the process. Just returning cash to shareholders.

Thank you.

Adam Barkstrom, Stifel Nicolaus.

Yes, curious on the credit outlook. I mean, quarter after quarter after quarter, your credit continues to look better and better. And I mean, you guys got to be -- I would assume have to be sitting there scratching your heads wondering when -- because credit will inevitably always turn. Any signs of turning anywhere? Any sectors that you're perhaps looking at a little more closely? In the bank, any particular markets maybe you're looking at a little more closely?

Yes, Adam, I guess I'd start off by saying, is that it's always sort of been our experience that on the commercial side, the cycles tend to be long. And longer, maybe, than some people think. And so we've been in this phase for a fairly long time. And I guess what I would say is, our numbers are what they are. No change in the trends there.

In terms of the things that we're looking closer at, it probably wouldn't surprise you to know that we're looking very hard at things that are related to auto. And in particular there, we have about a $1.4 billion auto floor plan portfolio. And simply because of the difficulties that the manufacturers are having, and the fact that car sales was down, we've spent a lot of time looking at some of our smaller dealers. And some of our mono-line dealers, that have only 1 brand. And we go through a typical review of that portfolio. But overall, we see no change in the environment. And I probably would agree with you, that you can't, going forward, predict it to remain this low. But having said that, commercial cycles are long. All I can say on the consumer side, is we just see no signs in any of our statistics that suggest there's any change in the cycle. I guess that's as much as I can say.

Okay. Curious also on the lending side, in your markets. What kind of -- you know, we've talked about, or heard about from you guys and from others, pricing pressures out there. Competitive pricing on the loan front. Any signs that that's starting to ease with the sell-off in the 10 year here, or is it still pretty tough pricing out there?

No. There's no signs that there's any change in the environment. I think, when we look -- particularly in 2 markets. We can look at the mid-Atlantic market, we think that on the commercial side, the pricing remains pretty competitive. Particularly when we have to go up against some of the community banks. And then even in that same market on the consumer side, obviously there's a -- there's a bent towards the consumer now, as moving to fixed as the rates are ticking up on the long end. But that's been out there for some period of time.

We also think that what we call our metro area markets, which is New York City and Philadelphia, continue to see pretty strong competitive pressures. And there, it's in terms of loan structures. People are seeing increases in leverage, as they're relaxing things in terms of yield maintenance. That's not new; it's been happening for some time. So I would expect that that's going to continue. I think it's less about rates, and it's more about the fact that there are a lot of healthy banks out there.

Okay. And then last question real quick. Tax rate was down a little bit this quarter. Is that a good tax rate for the rest of the year, or is there any color you want to share on the tax rate?

Yes, I mean, it can -- if you go back, it will fluctuate a little bit from quarter to quarter. And part of that has to do with mix of business and where our income is coming from. One example would be that in the event that we have, for example, income on bank-owned life insurance, which we had this quarter. That is tax-exempt income. And I think that has an impact on this quarter's tax rate.

Okay, thank you.

Todd Hagerman, Fox-Pitt Kelton.

Rene, I was wondering if you could kind of give us an update in terms of kind of your strategic focus on the mid-Atlantic. Particularly, I'm kind of curious kind of where you are in terms of kind of hiring efforts on the lending side. As you guys have deployed more revenue producers to that region, can you give us any kind of a sense of like the commercial growth this quarter? What's coming out that region, and where are you in terms of building out on the revenue side in terms of producers?

I mean, in terms of loan growth, it continues to be our area that's generating some of the highest growth. We saw on a linked quarter -- annualized linked quarter basis, we had 8% growth in the mid-Atlantic. And then if you drill down into those regions, there are some regions which are actually - specifically on the commercial side - which -- on the commercial side, we have all double-digit growth within that region. And some particular pinpointed markets in that region, we're as much growth as 21%. So I give you that as backdrop, to say that we're always trying to expand. And that means that you need good people. I would say that as a whole, the market for people is pretty competitive.

Have you made any specific hires, though? If I think in terms of like the Trade Finance Group or like your Syndicated Lending Group, anything like that? Have you made any notable hires in any of the areas in recent months?

All I can say is we're hiring in most of those businesses, down in the mid-Atlantic region. I think if you look over a 2 year period, we've been fairly successful at doing that. But mentioning any specifics -- .

Thank you.

John Fox, Fenimore Asset Management.

Yes, hi, it's Fenimore Asset Management. Good afternoon. I have a few questions. Number 1, on the stock option expense, is that just in -- is that a first quarter expense, or will there be any continuing expense going on for the year?

Yes, that -- you'll see that $6 million blip will just be in the first quarter. And then, because it's expense that would have otherwise been recognized over in future quarters, for that particular issuance of options, expenses will be less. So in the second quarter, you'd expect not to see the $6 million, but you'd also see a little bit of reversal of that. But having said that, if you go forward in the years, every first quarter when we issue options, to the extent that we issue options to retiree or retiree-eligible people, all the value of those options will be expensed on that day.

Okay. That's fine. It's not a $24 million expense?

No, it's not.

Right, okay. Could you expand a little bit on the other revenue category that was up significantly? You mentioned a few things in the script. Is there anything more there to tell us?

No. I mean, if I repeat myself, I apologize. I think that, you know, the way I first look at it, is from a year-over-year basis. And on that basis, there were probably 2 I guess, little unusual items. The first is that our proceeds from secondary marketing of student loans were up about $6 million in the quarter. And I would say that maybe $3 million, $3.5 million of that is probably above what we would typically see on a run-rate basis.

Having said that, in the same quarter of last year, you'll recall that we had about $3.5 million of venture capital gains and higher advisory fees. So if you sort of remove that from the picture, you get a clear sense that even with that, we still have our 8% year-over-year growth. And if I look at the items, it's the items I mentioned. But we saw pretty good growth in commercial loan fees; that was up 9% on a year-over-year basis. Bank-owned life insurance was up. You'll remember that we acquired a small insurance agency in the middle of last year, end of last year. And then we also saw -- I'm sorry. That was insurance proceeds that were up. And then we also had bank-owned life insurance that was up. So what we like about this is that, as we've been seeing for probably close to 2 years now, we've got a much more diverse revenue source in our fee income than we would have had 2 or 3 -- 2,3,4 years ago. If you look at the variances from a linked quarter basis, it's very, very similar.

Okay. Thank you. Can you refresh my memory on the $10 billion in the consumer line? You know, kind of what is the mix of those loans? And you can talk about why it's down year-over-year. Thanks.

Yes, I mean, the lion's share of the decline in the consumer portfolio is going to be driven again by our auto loan portfolio. That is a portfolio that has about -- now has about $2.3 billion of loans in it. And that declined about $250 million during the quarter.

Okay. Thank you.

Christopher Chouinard, Morgan Stanley.

I was wondering if you could please sort of walk through mortgage trends? How did originations track this quarter and how gain on sales are trending for you guys?

Sure. Relative to the comments I made last quarter, if we look at our closing volume, this quarter was -- closed volume was $1.1 billion, relative to the $1.7 billion that we had closed in the fourth quarter -- in the linked quarter. And then on an application side, we did about $3.1 billion of applications, compared to $2.6 billion in the fourth quarter at the end of last year. So, up, in terms of applications, but closings were down. And again here, I think it's just simply a function of the rate environment. In fact, if I look over the last 2 quarters, I think we've done pretty well, given the fact that rates have been rising fairly steadily over that period. If you look in terms of gain on sale, our gain on sale has sort of migrated a little bit to that sort of lower end, 60 basis point range. And again, we talked about that in the second half of last year. Because we had, after assuming the region's offices, we were doing much more wholesale business, and that has thinner margin. But no change really, in pricing.

Okay. And if I could, sort of something off subject. Looking at the balance sheet, it looks to me when I look at the average balance sheet, that sequentially, kind of non-loan earning assets or securities were up a little bit sequentially. Was there a reason for that? Is that intentional? Are you -- it was about $100 million or so on an average balance basis.

No, I mean I think our goal there is to cover run-off, you know, loans that prepay there. We'll let it run down in this environment, if we can't find anything that meets our hurdle rate. So, I would expect -- my assumption on where we're going to be with our securities book, is relatively flat. Clearly, not growing as fast as the loan book. But we'll have to see if that changes. No picture that that's going to change today.

Okay. Thank you.

Ed Najarian, Merrill Lynch.

My question is pretty specific. It's related to deposit pricing. And I'm looking specifically on your average balance sheet, your savings account -- your savings deposit line. The $14.3 billion number. That number has been declining modestly. And the thing I'm noticing most, is that you're not -- don't seem to be passing on much in the way of deposit rate increases. It's been running about a 12 basis point increase per quarter, as the Fed has been going up about 50 basis points per quarter. And I guess I'm wondering what your thoughts are, in terms of deposit pricing sensitivity from here, in order to try to kickstart a little bit better deposit growth. That's it. Thanks.

Yes, Ed. I mean I'll step it up a little bit from the specific category. But I think as we look at the deposit reactivity over the last 5 quarters, we haven't seen it change that much. And quite frankly, we've been a little surprised that we've been able to hold it where it is. The run-off you're seeing is simply the fact that, in our estimation, we don't think we can fight the trends of time. And we think that it makes perfect sense for many of the retail customers to be going out 1 year and getting that rate differential. So we've focused on, at this point in time, monitoring that in terms of which households are we -- are we losing any households, and which households are migrating. But our choice is just not to fight that trend.

I guess if I could understand you, you're sort of saying, well, you know, even if we took that savings account item up 50 basis points or some material amount, it wouldn't stop people that are going to migrate from time, to go into time anyway. So we might as well not -- not take it up. Is that a fair characterization?

I think it's fair. I would say it this way: I think it might be the least efficient way to give the customer what they would like.

Okay. So in that regard, we should expect fairly modest deposit rate increases over the next couple quarters then?

When we look at our margin going forward, we assume similar reactivity to what we've had in the past. And we watch that closely. Because as you know, to the extend that that changes, it's going to have an impact.

Okay. Okay. That's helpful. Thank you.

[OPERATOR INSTRUCTIONS] Thomas Monaco, Sterne, Agee.

2 questions. On the net interest margin. Can you talk about the impact of multifamily prepay penalties on the improvement in net interest margin, if at all? And could you also talk about the -- I guess lease finance residuals? If there was a gain this quarter.

On the first topic, our prepayment penalties on multi -- I'm going to say prepayment penalties in total, most of which are multifamily, were up about $3 million in the quarter. So obviously, that has a positive effect on our margin. But when you sort of look at other fees, like nonacrual interest on loans that were nonperforming that pay off, that gets a little bit normalized from quarter to quarter.

Right.

So I think, when I look at the margin as a whole, my guess is that normalized for the day effect, that we have probably had 1, 2 basis points of margin compression, which would compare to the underlying trends that we've experienced, the 4 to 5 basis points there. So a little higher, but nothing overly unusual there. I would say that the one different trend that we've seen relative to, say, the third quarter of 2005, is that the prepays that -- fees that we received were on modified loans. So what I'm saying, is that these are customers that did not leave the bank. And they're focusing on rate and restructuring into a different structure given the fact that loan rates are going up. So nothing that worries us there.

In terms of -- we had $5.5 million of -- we had an increase of $5.5 million in our end-of-term lease income. And again, as I've talked about that in the past, I mean year in, year out, that tends to be pretty steady. It's just a little bit lumpy from quarter to quarter. The way I think about that business is that we're M&T. We're a little bit conservative when it comes to things like value and residual value. But it's real income. So if we had been more aggressive at the valuation of the asset, essentially that income stream would have come over time. If you look back, I would say 2 years ago, we had about $7 million of income from that. Last year, we probably had close to $10 million of income from that. So there's nothing unusual about the way that that performed.

Okay. Thank you.

Bob Hughes of KBW.

A follow-up on the topic of your multifamily commercial real estate customers. When you say those customers are opting for loans with different terms, or restructuring those loans, are those going from, say, a traditional sort of 5 year loan to a 7 year? What types of restructuring would you be talking about?

Bob, I think it's all - I'm probably using the wrong term - I think it's all rate.

Just extending?

Yes, I think that's right. And with the rates going up, people are sort of looking at it and saying, "this is the time for me to go in and refi," so to speak. And some people are willing to pay the terms. The -- where you also see it, and you can -- I think you see these in our trading income, in our derivatives business where we're brokering transactions for our customers, we just see an abnormally high amount of volume, because people are moving to fixed. They're swapping to fixed. So it's the same trends, regardless of what business we see, people are looking to go to fixed.

Okay. 2 other questions. 1, with respect to the balance sheet mix, or maybe more specifically, the loan mix. Should we expect to continue to see run-off in some of the consumer-related assets, offsetting growth in commercial? And then, I guess as a follow-up, could you maybe share with us what your loan pipeline looks like?

Yes. On the loan pipeline, hit that one first. Our pipeline was $1.3 billion this quarter -- at the end of this quarter, versus $1.1 billion at the end of the year. So that is up. And our utilization that we talk about from time to time was, I think, 44 -- 44.4, which was up from the fourth quarter and about equal to what we saw in the third quarter of '05. I'd be -- I'm not the guy to bet against the trend. I think we are very pleased with the commercial loan growth we're seeing. We have seen some drawdown in balances on the commercial side, on deposit balances. Which, in our mind, suggests that there will be more appetite on the commercial loan side. And then on the consumer side, again, fighting the trend doesn't make sense. We've actually seen a little bit of acceleration than run-off on the auto side, as rates continue to rise.

Great. Thanks, Rene.

Ken Usdin, Banc of America Securities.

Rene, I was wondering if you could take us further down the path of the regional differences in loan growth. You had mentioned the mid-Atlantic number. I was wondering if you could just take us through the rest of the footprint?

Yes, sure. In our upstate New York markets, we had linked quarter annualized growth of just 1.5%. In metro New York, that was -- metro, which is New York and Philly, it was 7% growth. 6% growth in Pennsylvania. And 8% growth in the mid-Atlantic.

Seems like the Pennsylvania number is a little better this quarter?

Yes, I think if you go back actually, we've been doing pretty well over the past year there. Yes, it's a 9% growth rate on a year-over-year basis.

Okay. The other question I wanted to ask you is on the expense side. Can you give us a little more color on how much of the expense control items are kind of already in the run rate on some of the -- you know, the 6 or 7 projects you guys have been working on for the better part of the last year or so? Are we kind of at a good base here, or are there still some cost saves to be harvested from where we are right now?

The way I would think about is, is that most of our savings from what we call the infrastructure project are complete. Most of those projects are completed. And that focused primarily on salary and occupancy. So this is, where are your people, how many sites do you have, that type of -- that type of activity. Most of that work is done, and you saw the benefit of that last year in the salaries line. I would expect to see the salaries increase to a more normalized growth rate that you would typically see at M&T. That typically is relatively controlled around 3% or so, depending on what events we're doing, and whether we're expanding at all.

On the flip side, though, what we would expect to see is that, we only saw about $3 million of net benefit last -- maybe -- let's say $5 million to $10 million of net benefit from our procurement initiatives, which affect the non-salary related categories. And so what we would expect to see, is that while the salary growth returns to a normal level, that we would begin to get a fair amount of savings in some of the other categories through the course of 2006. You're asking the question, is it already baked in. A lot of the work is done. We obviously have a number of other categories to get through on our procurement initiative. But having said that, we tried to hit most of the big items first, right? So -- .

Okay. That's helpful. And the last question is, can you give us an update on what you're seeing in the M&A market, as far as pricing and also just interest level from your perspective?

Just no change. I mean -- and again, I guess I can only point back to the differential between pricing at small banks, mid caps and large caps. It hasn't changed that much.

Okay. Thanks a lot.

Thank you. We have no further questions at this time. I now turn the floor back over to management for any closing remarks.

I'd like to thank you all again for participating today. And as always, if there are clarifications required for -- on any of the items in the call, please call our Investor Relations department at 716-842-5138. Thank you and good-bye.

Thank you, ladies and gentlemen, this does conclude today's conference. You may disconnect all lines at this time, and have a great day.