M&T Bank Corp (MTB) 2006 Q2 法說會逐字稿

Good morning. My name is Toni and I will be your conference facilitator today. At this time, I would like to welcome everyone to the M&T Bank second quarter 2006 earnings conference call. 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 floor over to your host, Don MacLeod, Vice President and head of Investor Relations. Sir, you may begin your conference.

Thank you, Toni, and good morning. This is Don MacLeod and I'd like to thank everyone for participating in M&T's second quarter 2006 earnings conference call, both by telephone and through the webcast. If you have not read our earnings release, you may access them 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 10-K, 10-Q and 8-K for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning everyone. Before I respond to questions, I would like to highlight a few points from this morning's press release.

First, as most of you are aware, we completed the acquisition of 21 Western Europe branches from Citibank on June 30. The branches contributed no income or operating expense in the second quarter and had a minimal effect on the average balance sheet, but the end-of-period balance sheet reflects the acquisition of approximately $269 million of loans and the assumption of nearly a $1 billion of deposits. The deposits assumed in excess of the loans acquired and premium paid were used to repay wholesale funds.

In connection with the acquisition, M&T recorded $2 million of after-tax transaction costs in the second quarter related to integrating the branches and introducing former Citibank customers to M&T's products and services. We were expecting to incur additional costs for the transaction in the third quarter.

Now to focus on some financial highlights, diluted earnings per share, which reflect the amortization of core deposits and other intangible assets, were $1.87 in the second quarter of 2006, up 11% from the $1.69 earned in the second quarter of 2005 and up 6% from the $1.77 recorded in the linked quarter. Amortization of core deposit and other intangible assets on an after-tax basis amounted to $0.06 per share in the second quarter of 2006 compared with $0.07 per share in the second quarter of 2005 and this year's first quarter.

Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets as well as the transaction cost I mentioned a moment ago, were $1.95, also up 11% from the $1.76 in the second quarter of 2005 and up from $1.84 in 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 second quarter was $213 million, up 8% from a year earlier, and compares with $203 million earned in the sequential quarter. Net operating income was $222 million, compared with $205 million in the second quarter of 2005 and $211 million in the linked quarter. Return on average assets was 1.54%, improved from the 1.46% in the second quarter of 2005 and the 1.49% in the first quarter of 2006. Net operating return on average tangible assets was 1.69%, up from the 1.62% in the second quarter of 2005 and 1.64% in the sequential quarter.

Return on average common equity was 14.35%, improved from 13.73% in the same period of 2005 and 13.97% in the linked quarter. Net operating return on average tangible common equity was 30.02%, up from 29.88% in the second quarter of '05 and 29.31% in the linked quarter.

The net interest margin in the second quarter was 3.66%, down 7 basis points from the linked quarter and down 12 basis points from the similar period in 2005. Three basis points of the linked quarter decline in margin was due to the additional day in the second quarter. The remainder of the linked quarter decline was due to a lower level of prepayment fees on commercial real estate loans.

Average loans for the second quarter were $41 billion, up an annualized 4% from the linked quarter. Loan growth was led by the commercial side with C&I loans up 8% on an average basis from last year's second quarter and CRE loans up 4% for the same period. On a linked-quarter basis, C&I loans grew an annualized 9% while average and CRE loans grew by 7% annualized.

The commercial loan pipeline was 1.5 billion at June 30, as compared with 1.3 billion at the end of the last quarter and 1.1 billion at year end 2005.

The results for our consumer loan portfolio reflect continued attrition in automobile lending due to our determination not to extend such credit at unfavorable margins.

On the deposit side, the second quarter produced 4% annualized growth in non-wholesale deposits versus the first quarter. Our time deposit campaigns this year focused on offering promotional rates to customers who maintained one of our premium checking accounts.

Credit quality was strong during the second quarter. Non-performing loans totaled 156 million at the end of the recent quarter, up from 143 million at the end of the first quarter, but down from 184 million at the end of June 2005. The increase from March is largely due to two relationships -- an automobile dealer and a farming and distribution company. The non-performing loan ratio was 38 basis points at the end of June, up from 35 basis points at the end of the first quarter. That ratio was 46 basis points at the end of June 2005. Net charge-offs for the quarter were $10 million, including small losses on the loans I just mentioned. This represented an annualized rate of 10 basis points of average loans and compares with net charge-offs of $17 million, or 17 basis points, in this year’s first quarter, and $14 million, or 14 basis points, in the second quarter of 2005.

Provision for credit losses in the second quarter of 2006 was $17 million -- $17 million more than covered net charge-offs for the quarter, and resulted in an allowance for credit losses of $646 million, or 1.55% of loans, at the end of June. This compares with allowance levels 1.56% at the end of March 2006 and 1.60% at the end of June 2005.

Loans past due 90 days that are still accruing were 101 million at the end of this recent quarter, down from 109 million at the end of the first quarter of 2006 and down from 123 million at the end of June 2005. At June 30, 2006, this category includes $79 million in loans that are guaranteed by government-related entities.

Turning to non-interest income, service charges were 96 million in the second quarter, up 3 million from the second quarter of 2005 and up $7 million from the first quarter of 2006. The linked-quarter increase was due to a return to normal levels of activity on the consumer side following seasonal slowness in the first quarter.

Mortgage banking revenues were $42 million, up $10 million from last year’s second quarter and up $7 million from the linked-quarter. The year-over-year comparison reflects the impact of the region's mortgage business we assumed last May, while three full months of revenue are included in this year’s second quarter results. In addition to higher volumes, the recent quarter benefited from wider gain on sale margins.

Other revenues were $70 million compared with $68 million in the second quarter of last year and $74 million in the first quarter of this year. The linked-quarter decline is due to lower income from educational lending and commercial leasing, partly offset by increases in several other categories, including credit-related fees.

Operating expenses, which exclude amortization of intangible assets and costs related to the integration of Citibank branches, were $362 million, down $5 million from the second quarter of 2005, and $7 million lower than the first quarter of 2006. The second quarter's results include an $8 million partial recovery of the valuation allowance for capitalized residential mortgage servicing rights compared to an addition to that allowance of $5 million in last year's second quarter and a $7 million partial recovery in the first quarter of 2006.

Excluding the impact of MSR revaluation, operating expenses were up about 2% on a year-over-year basis and down $6 million from the linked quarter. Adjusted to exclude securities gains and intangible amortization, M&T's efficiency ratio in the second quarter was 50.7%, compared with 52.6% in the second quarter of 2005 and 52.4% in the first quarter of 2006.

During the quarter, M&T repurchased 605,700 shares of common stock at an average cost of $114.61 per share. There are still 3.1 million shares remaining on the repurchase authorization announced in November of 2005.

Before we turn to questions, I also note some of the highlights related to the first half of 2006. Most of these were covered in detail in the earnings release.

Diluted net operating earnings per share was $3.79, up 10% from 2005. Net operating income was $433 million, up 7%. Net operating return on average tangible assets was 1.67%, compared with 1.61% a year ago. Diluted GAAP earnings per share, which include the amortization of core deposits and other intangible assets, were $3.64 for the first half of 2006, up 10%. GAAP basis net income was up 8%. Average loans were up 5% to 40.8 billion. Net interest margin of 370 was down 11 basis points from last year. The net charge-offs for the first half were $27 million, or an annualized 13 basis points of average loans for the first half of 2006, compared with $33 million, or 17 basis points, for the same period last year. Non-interest income was $516 million, up 7% from 2005. Operating expenses, which again exclude intangible amortization and the Citibank-related transactions cost, was $731 million, up 2%. The efficiency ratio for the first half of 2006 was 51.5%, improved from the 52.1% in the first half of 2005.

Finally, our day-to-day results for the first six months of 2006 have generally been on track with our expectations. In addition to the 11% increase in earnings per share from last year's second quarter, we are particularly pleased with our increased returns both on assets and on equity, which we believe reflect our discipline on not booking business with inadequate margins.

Our outlook for the remainder of this year is unchanged. Despite the fact that we have seen four rate increases by the Fed through the first half of 2006, which is double what the futures markets were implying back in January. Our net interest margin has performed in line with the estimates that we provided back in January.

Our outlook for loan growth is consistent with what we saw in the first half with strength on the commercial side, offset by slow or even contraction on the consumer side. Finally, the purchase of the Citibank branches should add 1 to 2 basis points to what the margin would have otherwise have been on a full-year basis.

Of course, this outlook remains subject to a number of future factors, including changes in interest rates, credit performance, spreads on assets and liabilities, asset valuations and local and national business and economic conditions.

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

(Operator Instructions). Brent Erensel, Portales Partners.

Good morning. I barely heard you when you talked about the rise in non-performing loans, and I think you said farming and a distribution company?

The rise was caused primarily by two credits. One was an auto dealer and the other was a company that's in the farming and distribution business.

And, what region where they in?

Those were in western New York and Pennsylvania, different regions.

One follow-up. Just on your stock buyback, is there some price where you're going to slow that down or stop buying back stock?

We think about our stock buyback the way we think about every single investment, and we look to generate a positive return there. So if you think about this quarter, one of the reasons why our shares repurchase was slower is that we just had a better alternative return for those, and that was to use it to fund the Citibank.

Great, thanks.

Todd Hagerman, Fox-Pitt Kelton.

Good morning, everybody. A couple of questions. Rene, I was wondering if you could just touch a bit more on the expense side. Expenses, again, very well controlled, the initiatives that you have undertaken continue to reap benefits. I am just curious what kind of the outlook is for the rest of the year, and particularly how you factored kind of the Citigroup branch acquisition. You mentioned some of the benefit on the margin side, I was just wondering how you guys are thinking about expenses kind of on a go-forward basis and just the sustainability there?

I think it's a little bit too early for me to comment about the Citibank piece of it, but what I will do is, if you look from first to second, I think the expenses were down when you normalize for certain things about $6 million. And most of that obviously was influenced by the fact that we did not have the 123 (R) expense any more, so we got a benefit of $6 million on that front. You still saw a slight rise year-over-year on the salaries and benefits, and as I've been saying now for about six months, is that with our work last year, you would expect to see a more normal growth in salaries this year, but you would expect to see savings in a lot of the other categories because our smart spend initiative is sort of getting in full gear and the money and the benefits are coming. So my sense is that, excluding the acquisition of the 21 branches is that our expenses should be relatively flat going forward for the next couple of quarters. And to the extent that we can maintain that, we will be pretty happy.

And then just again on the branch acquisition, you mentioned the margin. Is that -- and I don't know if I heard you correctly -- just in terms of your accretion assumption and just in terms of what you have been saying, you mentioned that you paid down some borrowings in the quarter with some of the deposits there. What has changed, if any, just in terms of your accretion assumptions from that acquisition?

There has been no change in our assumptions there. Just to review, we acquired $1 billion of deposits and about $270 million of loans. And so it's a very deposit-rich transaction. I think -- so we were able to take down wholesale borrowings as an initial step. I think that the effect on margin comes from the fact that 30%-plus of the deposits that we acquired were transaction accounts. So these are very profitable accounts that we've acquired.

On the whole, nothing has changed with our outlook for accretion or dilution. I think for 2006, we will be a couple of pennies accretive to operating EPS, and we will be maybe a couple of pennies dilutive to GAAP EPS.

Thanks very much.

Jason Goldberg, Lehman Brothers.

Thank you, good morning. Just a follow-up on that last question. I guess you were looking to like I think 50 million in efficiency improvements at some point during this year. I guess where are you in terms of those programs?

I think, Jason, we seem to be right on track. It seems to be bearing out. Again, as I mentioned, and as I think we have in some of our recent investor presentations, that most of these savings are going to be coming in those non-salary categories, and that appears to be happening. Those categories were down this quarter and down year-over-year, and I think we're pretty please. I think we're right on track.

Okay. And then secondly, I guess you said your margin outlook is unchanged, and I think at the start of the year, you said 360 to 380. I guess was that guidance for the full year, or kind of for each individual quarter?

We're not that good. That was for the full-year. And if you think about it, we're at 370 for the first six months. So we're right, smack in the middle of that, which again, I think we're pretty pleased with. We had a little bit more tightening -- or actually, twice as much more tightening from the Fed than the forward curves were projecting, but I think what's probably key -- so there's been a lot of talk in the industry about inversion of the yield curve. But what I'm not sure everybody is getting is that, relative to what the forward curve said in January or even a year ago, the spread from Fed funds to 10-year LIBOR, which is what our loans are priced, or two-year LIBOR, was actually wider in the second quarter than the forward curves we're calling for. So I think that gave us a little bit of a benefit. I also think we've benefited a bit because our balances and our securities portfolio came down a bit.

Okay. And then just lastly, in terms of -- I know it's hard to call, but kind of just in terms of commercial I guess real estate prepayments I guess hurt you on the margin this quarter. I guess how should we think about that going forward?

From a six-month perspective, I think we had prepayment penalties in the range of $12 million. So I think on a half-year -- you know, fully -- that's a pretty normalized rate from what we have been seeing. If you look at the second quarter, though, that was only $3.6 million. So it's relatively low. I wouldn't expect to see that rebound dramatically simply because rates are higher. And even when you do have a prepayment penalty that kicks in, it's going to be worth less, right, because rates are higher and value differently. So we're pretty low in terms of what we saw this quarter for prepayment penalties.

Okay, thanks.

Jennifer Thompson, Oppenheimer.

Hi, good morning. Can you give us any more color on the gain on sale margin in the mortgage business in terms of magnitude versus linked quarter?

Yes. I think that there are really two things that are giving us -- gave us the lift in terms of gain on sale. The easiest way for me to do it is to look back to, say, December. And I think back then, we were getting gain on sale in the neighborhood of 60 basis points, somewhere around there, and we were above 100 in this most recent quarter. And I think that's really attributable to a couple of factors. The market for servicing seems a bit rich, and so we sold more of our loans, servicing release, in this particular quarter. And on top of that, for nonconforming mortgages, we also think that that market -- the appetite seems to be very, very high, and we had higher gain on sales on nonconforming mortgages. So I think that I can talk -- I will talk in a minute about our volumes. I think we have momentum on volumes going into the third quarter, but I wouldn't expect to see that level of gain on sale quarter in and quarter out.

In terms of the total gain on sale, but with the margins you think are a little higher --?

In terms of the margin.

Okay.

It could happen, but I wouldn't bet on it.

Okay. And how about in terms of the volumes?

We saw in our mortgage application, our pipeline last quarter, we had $3.1 billion worth of volume. And then in the second, this quarter, second quarter, we had $3 billion. So down slightly. In terms of closed loans, last quarter, we closed 1.1 billion; this with, we closed 1.6 billion. So, again, some momentum. I think a lot of the loans we closed this quarter, we also happened to settle a bunch of those and sell those loans as well, but I still think we have a little bit of momentum going into quarter three. Having said that, I wouldn't be surprised to see lower gain on sale margin.

Great, thanks very much.

Ed Najarian, Merrill Lynch.

Good morning, Rene. Ken pretty much asked my question, but let me just ask one quick follow-up related to that. Can you give us a number for how much extra revenue or how much mortgage revenue that you generated this quarter based on selling servicing or based on selling loan servicing released above and beyond the kind of numbers you would have had in prior quarters?

No, I cannot give you a number -- that's my short answer. Ask me another question.

That was really -- well, did you sell some of your existing servicing portfolio, or are you just talking about selling current origination volume servicing (MULTIPLE SPEAKERS)?

No, it's all flow, it's all current origination volume that was in the pipeline, and we just were a bit opportunistic because we thought that the price being paid for servicing was fairly rich. So I don't think there's really anything significant to worry about it, but you did see nice growth from the first to the second quarter. And I think to assume that you get the same kind of growth for the third quarter, I wouldn't do to that.

Okay, that helps. Thanks.

Christopher Chouinard, Morgan Stanley.

Hello, good morning. I was wondering if you could give some color on home equity loan growth this quarter and how that sort of jibes with the consumer loan growth that you guys reported?

I think we had about 2% annualized growth -- 2.5% annualized growth in our home equity. Last quarter, we were down some, so we saw a little bit of a rebound. I think the market there has gotten fairly competitive. If you think about it, a year ago, we were all still talking about double-digit growth there. I've talked in the past about the fact that in Pennsylvania, the market is just very, very, very competitive. They are so -- it slowed a bit. I think though on a -- [as at] basis, if you to exclude the Citibank transaction, we saw pretty decent growth. Don, I don't know, do you?

About 7%, end of March to end of June.

So that looks somewhat positive.

Okay. And if you could talk a bit about commercial loan growth or any other loan growth that that you can by region, it would be helpful to see how New York is doing (MULTIPLE SPEAKERS) mid-Atlantic.

Sure, hang on one second. In our upstate New York markets, we had annualized loan growth grow from a linked quarter of 3%. In metro, which is New York and Philly, we had 1% loan growth. In Pennsylvania, we had about 16% loan growth. And then in the mid-Atlantic, we had 4.4%, or call it 4.5% growth in loans, for a total of 4%.

So Pennsylvania looks strong. Could you talk a little bit about -- you know, that seems an outlier?

Yes. In one way, obviously, it's a bit of an outlier, but I think when I look back at a year ago, and on that same basis, we also had 15.5% growth. And I think really the behavior that you see in that market is that people are drawing on their lines in the second quarter. So I think there's a bit of seasonality in that. In addition, we did make some headway in penetrating in our asset-based landing area there, so we had nice growth in that product set in Pennsylvania.

Great, thanks very much.

(Operator Instructions). Ken Usdin, Banc of America Securities.

Questions following up on the margin side. Can you just confirm again -- you said that, from the Citibank deal, you would expect 1 to 2 basis points on a full-year basis relative to what it would have been otherwise?

Yes, that's correct.

So that means you get a little more benefit if we just think about it on a quarterly basis?

Yes, if you would like to use two or three, that's fine (MULTIPLE SPEAKERS) somewhere in there.

And the other just side of that, I just want to understand how the rest of the balance sheet now is acting as far as the competitive side. Could you give us some color on incremental spreads on new loans coming on and -- on the loan side? And also on the deposit side, whether or not you've had to start to increase pricing more than the Fed on the deposit side?

Yes. Ken, on the loan side, we have been talking for so long about how competitive the loan environment is. I guess I have to say that there's not much change. Everybody we talk to in any region is sort of saying that it's still relatively competitive. In terms of spread, I haven't heard any noise, other than the fact that on the real estate side, the pressure is still on there, particularly in New York City. I think in that portfolio, one of the unique things is that while we've had decent growth in our real estate book, we have actually taken year-over-year our New York City portfolio down just because that multi-family market is still competitive. I'm not sure that that will stop any time soon.

On the deposit side, I would still say that most of the competition, at least from what we are seeing, is in the time account area. It's hard to talk about competitive rates, and that's because many of you have been saying that we have had some of the highest time deposit rates. But I think what I would say is that, our time deposit rates, especially as of -- through this last six-month cycle, have all been to customers who either have one of our premium checking accounts already or who are willing to bring money over and do that. And I think from that standpoint, if you think about it, we don't think of those high rates necessarily as competitive, we think about that as sort of maintaining those relationships over time. If you look at it, one of the things that, if we were to look 12 months out, we in the past and going forward, we continually [to] expect that the deposits will move from non-maturity to time. And I think if you don't have that assumption embedded in your asset liability projections, you probably would be remiss. So things have behaved pretty much as we thought. It is very competitive out there, both from the loan and deposit side, but nothing that we haven't -- we're not seeing anything that we didn't expect.

Okay. So then when you wrap that all in and you X out the prepays, as was asked about before, and the [day count] issue going forward, if we take the benefit from the Citi deal and then kind of these continuing mix shifts in competition, are we past the point of margin compression from here, or will there still be just natural [leak] because of the loan to deposit mismatch?

I'll start by saying, one, I don't know. Two, I think my projection is relatively stable with all of those things taken in for the next couple of quarters.

Great, thanks. And could you just update us also on your current philosophy on the M&A environment and what you guys are seeing out there, if anything?

I don't see much change. And as you know, we may not be the people to ask because we tend to wait and look for someone who may want to come to us and come up with a partnership. We don't tend to go looking for acquisitions. I think that any time we have the opportunity to do a transaction like we just did with 21 branches, we will react very quickly there. I think those are huge wins for us, but it usually happens when someone calls us.

Okay, thanks, Rene.

Sure.

[Ed Timmons], Stifel Nicolaus.

Adam just had to step out for a quick second, so just a few questions on his behalf. Did you guys give the valuation allowances as of the end of the second quarter? Did I miss that?

The reserve?

No, the MSR.

What it is today?

Yes.

$5 million.

5 million? Okay. Quick question on the deposit fees. Obviously, most of that bounce-back was seasonal weakness in the first quarter. But what we heard a lot industry-wide was maybe there was a more permanent shift in consumer behavior, they were becoming more aware of some of the fees, and that maybe some of that weakness in that quarter was more permanent in nature. What are you guys seeing there? Could you comment on that briefly?

Our performance year-over-year, second quarter over second quarter, is exactly the same as we saw it one year ago. So there has really been very little change. I think that's a good thing to be watching if you're -- you've got to be very sensitive to what your customer is doing. I also would say that a lot of the fee income growth, however, is -- not just at M&T -- has been done in a way where the customers have the choice to avoid the fees, and that's a little bit different than where we were a couple of years ago. So I think you have to watch it, but we haven't really seen any noise on our -- in our book.

Okay, no major shifts in the trends?

No.

Last question. You guys have done a fairly good job of keeping reserve levels pretty stable. Maybe you can just give some color on what we're seeing or what we believe we're seeing is industry-wide trend of bleeding reserves the last three or four quarters. Any opinion on that?

Yes. I guess I would say that I think for us, this quarter, our credit results were mixed. Obviously, it's easier to focus on the 10 basis points of charge-offs, but the reality was that we saw non-performings go up. We saw -- one of the causes of that was related to auto dealers, and we know that the manufacturers have been having significant problems for some time now. And so we're very cautious about those things. We think that the assumption of 10 basis points or low charge-offs at this time is probably not that prudent. So that's what really our behavior is all about there.

Okay, thanks guys.

[Roz Luby], [Carlson] Capital.

Thanks, good morning, Rene. I guess I wanted to ask if you guys had any comments on the resignation of Emerson Brumback, both from management and the Board. It was kind of a surprise to me. Can you comment on that for us?

Yes, sure. I think the first thing I will say is that we will miss Emerson. Emerson actually retired, just to sort of correct you there. We will miss him. He worked with us for nine years. I worked very, very closely with him and he was responsible for adding a lot of value to the bank. I think at the end of the day, though, his outlook was that he had been looking for some time to not stay on and work forever, and that was sort of his choice about that.

I think one of the nice things, though, is that in thinking about his retirement, one of the best things he was able to do was to groom and leave behind a lot of people that really understand how he operates and how M&T operates. And so in terms of bench strength, that was probably one of his biggest pluses, was leaving behind a pretty great team. So I think we will move ahead fine, but we will miss him.

Fair enough, thanks very much.

(Operator Instructions). Ed Najarian, Merrill Lynch.

My question was answered. Thank you.

Thank you. At this time, there appear to be no further questions. I would like to turn the floor back over to management for any further or closing remarks.

Thank you. And again, I would like to thank everybody for participating on the call today. As always, if a clarification of any items on 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 M&T Bank conference call. You may disconnect your lines at this time and have a wonderful day.