M&T Bank Corp (MTB) 2007 Q1 法說會逐字稿

Good afternoon. My name is Corlete, and I will be your conference operator. At this time, I would like to welcome everyone to the M&T Bank first quarter 2007 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] Thank you. It is now my pleasure to turn the floor over to your host, Mr. Don MacLeod, Director of IR. Sir, you may begin your conference.

Thank you, Corlete, and good afternoon, everyone. I would like to thank everyone for participating in M&T's first quarter 2007 earnings conference call, both by telephone and through the web cast. If you have not read our earnings release you may access it along with the financial table from our web site www.mandtbank.com and by 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 go the banking industry and to M&T Bank Corporation. M&T encourages participates 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 would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don. Good afternoon, everyone. Before I respond to questions, I would like to highlight and possibly expand on a few points from this morning's earnings release. Diluted earnings per share, which include the amortization of core deposit and other intangible assets were $1.57 in this year's first quarter compared with $1.77 earned in the first quarter of 2006 and $1.88 earned in the linked quarter. Amortization of core deposit and other intangible assets amounted to $0.10 per share in the first quarter of 2007. Compared with $0.07 per share in the first quarter of 2006 and $0.10 per share in the linked quarter. Diluted net operating earnings per share which exclude the amortization of core deposit and other intangible assets were $1.67 compared with $1.84 in the first quarter of 2006 and $1.98 in the linked quarter.

This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including intangible assets in equity. There were no merger related charges in the recent quarter nor in the first or fourth quarters of 2006. Net income for this year's first quarter was $176 million compared with $203 million in the year earlier quarter and with $213 million earned in the sequential quarter. Net operating income was $187 million compared with $211 million in the first quarter of 2006 and $225 million in the linked quarter. Our results for the first quarter include several items of particular interest that I would like to highlight. As we announce odd March 30th, pricing and liquidity for so called Alt -A residential mortgage loan's has deteriorated somewhat. Accordingly, we reconsidered our willingness to sell Alt-A mortgages that we previously originated for sale. Given prices which we do not believe reflect loan's true economic value. In accordance with Generally Accepted Accounting Principles we reduced the carrying value of $883 million of previously held for sale loans by $12 million and transferred these loans into our held for investment residential mortgage portfolio.

In addition, M&T has contractually obligated to repurchase previously sold Alt-A loans that do not meet investor sale criteria. We have reserved $6 million to provide for declines in the value of Alt-A loans we may need to repurchase in the future. It is our intention to continue to originate Alt-A mortgaging for sale to outside investors. That said, we have modified our approach such that we will no longer hold mortgages for sale in large blocks but will instead sell them almost on a loan by loan basis at the time of commitment. In addition, we will continue to focus our efforts on originating loans in the high-end of the Alt A spectrum and won't originate high loan to value mortgages without appropriate insurance. I will discuss what we believe this means for the mortgage banking revenues in a moment.

Also on February 5th of this quarter we completed our minority investment in Bayview Lending Group, which I will refer to as BLG. BLG originates and securitizes small balance commercial mortgages in the United States, Canada and the United Kingdom. BLG was a going concern from the date of our investment but started out with a minimal amount of loans in portfolio. Therefore the partnership will incur modest operating losses until the critical mass of loans -- until a critical mass of loans are originated and securitized. As we noted earlier in the quarter, the BLG transaction is projected to be dilutive in the first half of 2007 but accretive for the full year for both GAAP and net operating earnings per share. For the first quarter our investment in BLG was dilutive by roughly $0.03 per share. This includes the cost of carry on our investments and our pro rata portion of the partnerships pretax operating loss.

Turning to the net interest margin, the margin in the first quarter was 3.64% compared with 3.73% in both the first quarter of last year and the linked quarter. This reflects tangible equivalent net interest income for the quarter of $456 million on an earnings asset basis of 50.7 billion. The 9 basis point decline in margin from the linked quarter breaks down as follows, 4 basis points was due to a $5 million decrease in prepayment penalties and interest received a nonaccrual loans; 2 basis points of the decline was due to the funding of our February 5th investment in BLG. An additional 2 basis points of the decline was due to a lower level of noninterest-bearing funds largely from seasonally lower commercial command deposits deposits which tend to be slightly elevated in the fourth quarter. We experienced a similar decline in last year's fourth quarter and 4 basis points of the decline was due to higher rates on consumer time and money market deposits partially offsetting these was a 4 basis points lift resulting from two less days in the first quarter.

Competition for deposits remained high although we believe we will see some easing of rates for consumer time and money market deposits as we move into the second quarter. In fact, we saw some evidence of rates moving down in March and in certain of our markets. Also, it is note worthy that the investment in BLG will reduce the full year average net interest margin by 3 basis points from what is otherwise would have been. In terms of loans, end of period loans at March 31, 2007, totaled $43.5 billion compared with 42.9 billion at the end of 2006. Average loans for the first quarter were 43.1 billion compared with 42.5 billion in the linked quarter giving an annualized growth rate of 6%. Average loans also grew 6% from the first quarter of 2006. Average commercial and industrial loans were up 7% from last year's first quarter and grew at an annualized rate of 8% from the fourth quarter of 2006.

Commercial real estate loans were up 5% on a year-over-year basis but were essentially flat with the linked quarter. Average consumer loans were up annualized 1% compared to the linked quarter reflecting a decline in home equity lines of credit offset by an increase in auto loans. While the growth in auto loans wasn't robust it marks the first quarterly increase in average auto loans in the last two years. Included in the held for investment loans at March 31 were approximately 1.3 billion of Alt-A mortgages. This includes 883 million referenced in our March 30th press release as well as about 400 million of Alt-A mortgages originated in 2006 for our discretionary portfolio. The entire 1.3 billion features solidly prime credit quality loans with average FICO score of 704 and an average loan to value of 74. What characterizes the loans at Alt-A is the alternative documentation required of the borrowers. Turning to credit, nonperforming loans totaled 273 million at the end of the quarter compared with 224 million at the end of last year and 143 million at March 31, 2006. The nonperforming loan ratio was 63 basis points at the end of March compared with 52 basis points at the end of last year. That ratio was 35 basis points at the end of March 2006, which was very near the cyclical high point for credit quality. Approximately, 40 million of the full $49 million increase in nonperforming loans from the linked quarter was due to two borrowers. The first is a manufacturer of residential heating equipment, the second is a commercial real estate project which the principle owner--- in which the principle owner passed away unexpectedly. The project is being liquidated as part of his estate. Both loans are current.

Net charge-offs for the quarter were 17 million representing an annualized rate of 16 basis points on average loans, that compares with 24 million or 23 basis points in the linked quarter and was unchanged in dollar terms from the first quarter of 2006. The provision for credit losses for the first quarter of 2007 of 27 million exceeded charge-offs for the quarter by $10 million and resulted in allowance for credit losses of 660 million or 1.52% of loans at the end of March. Up from an allowance level of 1.51% at the end of 2006. This compares to an allowance level of 1.56 at the March 31, 2006. Loans past due 90 days or more but still accruing interest were 118 million at the end of the recent quarter compared to 111 million at the end of the year and 109 million at March 31, 2006. At March 31, 2007, this category included $71 million in loans that are guaranteed by government related entities. Overall the credit picture is playing out as we thought it would at the beginning of the year. Our feeling was that credit costs would likely trend higher in 2007 given the low levels of credit loss experienced in 2006. We continue to expect that they should remain moderate by historical standards.

Turning to fee income, noninterest income was 236 million in the first quarter. This includes the two charges totaling 18 million from the mortgage related actions I previously discussed. Excluding that $18 million, noninterest income was 254 million compared with 253 million in the first quarter of last year and 256 million in the linked quarter. Service charges on deposit accounts were 95 million for the quarter compared with 89 million in last year's first quarter and 96 million in the final quarter of 2006. The change from the linked quarter included seasonal lower consumer and assess and debit card interchange partially offset by seasonally higher commercial fees. Mortgage banking revenues were 14 million reflecting the $18 million of mortgage related charges. Excluding those charges mortgage banking revenues were $32 million compared with 35 million a year ago quarter and 30 million in the linked quarter. Our revised business practice in mortgage banking which I mentioned earlier will likely reduce our volume of non-agency mortgages sold and originated and sold. Origination from conforming mortgages and selected origination of non-agency products will drive our gain on sale revenues going forward.

With respect to mortgage, it is important to note that historically gains on sale of residential mortgages has comprised about 30% of our mortgage banking revenues, 30% of our total mortgage banking revenues. With our reduced origination and sale of Alt-A mortgages, gains on sale will decline somewhat from levels we saw in 2006. The other 70% of revenue from our mortgage banking business which represent largely mortgage servicing and in the commercial mortgage business have been unaffected by the recent turmoil in the marketplace. Other revenue from operation were 69 million in the first quarter this compares to 74 million in last year's first quarter and 68 million in the sequential quarter. The comparison with last year's first quarter includes $7 million of lower gains from the sale of student loans and commercial equipment leases. Revenues from bank-owned life insurance were also lower. Other revenues from operation is also where we recorded our pro rata share of results from the BLG partnership, as I mentioned the partnership incurred a net loss this quarter, but we expect the BLG investment to be additive to revenues and earnings in the second half of the year.

Operating expenses which exclude the amortization of intangibles was 381 million for the first quarter compared with 369 million for the first quarter of 2006 and 365 million in the linked quarter. The recent quarter's results include 1 million of partial reversal of the valuation allowance for capital residential mortgage services rights compared to a reversal of 7 million in last year's first quarter and a $1 million addition to the allowance in the linked quarter. Exclusive of these changes in the value of mortgage services rights, M&T's operating expenses increased by just 1.6% compared with last year's first quarter. The comparison of the--- with the first quarter of 2006 includes a 13 million or 6% increase of salaries and benefits partially offset by a $7 million decline in staff expense, exclusive of the MSR revaluation. The comparison with the linked quarter includes a $24 million increase in salaries and benefits partially offset by a $7 million decrease in other expense categories also exclusive of the MSR revaluation. As noted in years past M&T's first quarter compensation expense is impacted by the recognition of equity compensation arising from Statement of Financial Accounting Standards 123-R, which calls for the accelerated recognition of expense from equity compensation granted to retirement eligible employees. That expense was $8 million for the quarter. In addition, benefit expense including FICA and the 401(k) match increased by 10 million also reflecting seasonal highs.

During the first quarter M&T repurchased 1.7 million shares of its common stock at an average cost of $119.69 per share. This quarter's repurchase activity completed the 5 million share repurchase program authorized by the Board of Directors on November -- in November of 2005. As of last Friday we repurchased some 590,000 shares at an average cost of $106.14 per share under the new recent repurchase program authorized by the Board of Directors in February 2007. There are approximately 4.4 million shares remaining outstanding on that authorization.

In terms of outlook, clearly our results for the first quarter fell well short of our internal expectations. The quarter's events also introduced an element of uncertainty regarding our outlook for the year, and I would like to provide some clarity. M&T has not experienced a decline in year-over-year earnings per share since 1989. Despite the current environment and the recent quarter's events, we see no reason to suggest that this will change in 2007. With respect to net interest -- the net interest margin, our current expectation is that the full year margin will be in the range of 3.60% to 3.70%. As I noted earlier relative to our view in January, and to the full year 2006 margin, we expect an approximate 3 basis point reduction as a result of the BLG transaction.

Our outlook for long growth is unchanged and remains consistent with our recent experience mid-single digit percentage growth in the aggregate with higher single digit commercial loan growth partially offset by low single digit consumer growth in consumer loans. As for fee revenues, aside from the mortgage impact we've already discussed, the outlook for other fee revenue categories remains unchanged. With the caveat that certain categories such as boley revenues, gains on leased equipment and investment banking fees may have some variability from quarter to quarter. With the first quarter's operating expense exclusive of MSR revaluation having increased 1.6% from last year's first quarter our expense outlook for the year is also unchanged from what it was 90 days ago. We remain intensely focused on expense growth. Our outlook for credit is unchanged. Similarly there is no change in our approach to capital management, in our target ratio of intangible equity to intangible assets. All of these projections are of course subject to a number of uncertainties, various assumptions regarding national and economic growth, changes in interest rates, political events and other economic factors which may differ materially from what actually unfolds over the course of 2007. We will now open up the call to questions before which Corlete will briefly review the instruction.

[OPERATOR INSTRUCTIONS] Your first question is coming from Joseph Fenech of Sandler O'Neill.

Good afternoon, Rene.

Good afternoon.

Rene, two sort of big picture questions for you here. First in terms of your long-term growth rate, Mike Pinto had always talked about a 12 to 15% EPS target which included about a 2 to 3% lift from buybacks, and I think you over the last few years talked about 10 to 13 percent target with that same 2 to 3% buyback lift. If you look back at the past two years on a core basis, it has been somewhat less than that, in light of the short fall this quarter do we need to ratchet down that longer-term growth expectation again or do you still think that you guys can grow in that low double-digit range longer-term? Well, two points there. I don't think the events of this quarter reflect anything about the fundamentals of our business. I think that our business is very strong. I actually think that the mortgage origination business is really a relatively small piece of our overall profits, 6% of overall profits in 2006. I think if you look at the other issue we saw this quarter, was margin, and there are two ways we can look at that. One, we had lower prepayment penalties and those tend to be lumpy, but I wouldn't want to make the mistake of suggesting that it is an easy environment for margins and deposits, and I think this is probably one of the toughest environments that most of the banking industry has seen in some time. Having said that, I think we're a healthy franchise and have some pretty good prospects for the future. What I would like to clarify, at any point in time maybe the statistics that Mike quoted or I quoted make a lot of sense over the long run, but our ultimate goal is to be an above average performer. As a commercial bank we won't be immune to the things that affect the overall banking environment. I think our measure of success over time will be to out perform the growth that is experienced by some of the better performers in the industry. Can I ask you then what your expectation then is for longer-term growth for the industry? I mean are you guys looking out and saying 6% is -- 6, 7% is realistic over a cycle for the group and we can do better than that or can you give us a sense of how you think about the group long are term maybe?

You guys are much better at that than I am. I think that clearly as we go back, this is one of the tougher cycles in a banking environment. The curve is not typically this flat or inverted, and I think we're coming off a cyclical lows in the credit cycle, but in terms of what the industry will do over the next five and ten years, I will have to leave that to you.

Okay. And then just not a follow-up but separately more of a big picture question also the management changes you had the past few years, granted a few people have shifted within the Company, but you've also had a few notable departures at senior levels. Looking back with so much shifting of responsibilities at some of those more senior levels, can you talk about whether or not you think that's any kind of disruption on day-to-day operations as maybe people adjust to new roles and others have departed or maybe address the management situation for us if you could?

I think as we look at our management committee, which is 13 individuals who sort of manage the direction of the bank on a day-to-day basis, the average experience there is 18 years with M&T Bank and seven years on the management committee. Our team today is led by Bob Wilmers, Mark's our[inaudible] who has been here for 30 years, Michael Pinto who you all know very well, we don't see any issue there. I think things are going pretty well, and I think those transitions have been very smooth. But other than for the fact that you hate to see a talent like Bob Sadler and others leave, having said that I think they left us in pretty good shape.

Great. Thank you.

Thank you. Your next question is coming from Mr. Bob Hughes of KBW.

Good afternoon, guys. A couple questions.

Good afternoon, Bob.

Rene, sounded like from the loan detail you gave that you still felt pretty good about the year-over-year and linked quarter growth in both commercial and the year-over-year and linked quarter growth in both commercial and consumer. I guess if we think about either on a period end or average basis, had you not sold or rather had you sold the 883 billion or million rather of Alt-A mortgages, looks to me like your loans would have actually been down quarter to quarter. How should we think about that? I didn't fully capture the numbers that you went through initially. Am I thinking about that correctly?

I don't think that is true. Remember, you got a pipeline of loans. If you think about the $883 million of loans, if you were to use that number and exclude it, I guess you would be right, but the way to look at it is the pipeline was running over the last several quarters between 1.5 billion and 1.9 billion, and we just took it down to a billion. The amount that we would have otherwise sold would have been the loans for one sale, so maybe in the month of March we might have sold 300 million or more if we hadn't pulled that sale off the market. If you average that and average balance is maybe that 100 or so, but the loan growth is still pretty consistent with what it has been for the last three quarters, I think.

Okay. Okay. Consistent with what you guys have guided towards, I guess.

Bob, the other thing I would mention is it is very difficult to talk about loan growth without talking about margin. There is plenty of loan growth out there, LIBOR at spreads of LIBOR plus 125 but you can't make any money at it. I think to the extent our loan growth stays where it is, our margin will be there, but if for some reason you see institutions growing much more rapidly, I think it will come at the expense of margin.

You mentioned early in your comments you guys would continue to originate sort of on the high-end of the Alt-A market. If we looked at that pipeline, the 883 million of loans that you ended up portfolioing in the quarter, what percentage of those loans would not qualify for what you're underwriting today?

Well, I gave you the 704 which is the average, right?

Right.

The 74 loan to value.

Correct.

The only thing I think we would change on the loan to value is that as you get over 80, 85%, we might start providing insurance for those. That's the change relative to credit scores, I mean those metrics. I think the way to think about the change in mortgages is as follows: over the last several quarters we made about $36 million in mortgage banking revenues on average. About $26 million of that comes from mortgage banking revenues for residential servicing and from about $2 million of ancillary fees related to those two businesses, so that $26 million run rate is completely unaffected by what we've talked about in the Alt-A mortgage market. The remainder is about 10 million, maybe 10 or 11 million on average from our mortgage origination franchise, and that's the business we're talking about.

Okay.

We were doing about 30 to 35% Alt-A. If you look at what we did in March after we made some changes, it was about 9%, so that would suggest that you would be taking that business down by about 25%. Okay?

Okay.

That helps you size the impact from the revenue side, and I would also mention it doesn't count for any actions that we would take on the expense side to offset.

Good point.

Go ahead. The one other point I would like to make is the big change we're making is that you won't see the pipeline as large as it was.

Okay. And this then just as a follow-up to that, have you seen an improvement in secondary market conditions there?

We haven't tried. We haven't been in the market. We won't be the best one to measure that going forward.

All right. Very good. Thanks, Rene.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Mr. Ken Usdin of Bank of America Securities.

Thanks. Good afternoon.

Hi, Ken.

Rene, can you level set us and at least give us the comparison you're using for '06 as far as earnings growth? Is it the 737 number?

Yes, that's what I was using.

Okay. Second question is then to get to that -- to get to earnings growth this year off of a number in the low 150's would just presume a really meaningful steep ramp up through the rest of the year, and given your comments for some of these line items you talk through, mid-360s, net interest margin, but relatively benign credit, the mortgage banking comments, just wondering if you can walk through what the really incremental drivers are off of this kind of first quarter base obviously backing out the $0.10 of all day stuff and the seasonal expense items. Seems like that is a real strong hockey stick from where you came in this quarter.

I can tell you how I think about it, I don't know if I can answer you literally there but I can tell you how I think about, we earned $1-- our earnings this quarter on an operating basis were $0.17 lower than a year earlier. If you look at that, $0.03 was from our investment in BLG. You had about $0.10 or $0.11 that was from the mortgage event that's behind us. You had the margin changes in and the lower prepayment penalty sincerely about $0.06, right? If we look at our margin as we look at what we saw in March, we think that deposit rates have come down a bit, and we feel we feel a little more comfortable with that margin. If you look at those items, right there you've got $0.19 which more than represents the difference on a year-over-year basis. Our first quarter because of the seasonally high expenses is going to be low, but you have a couple of items that just pretty clearly explained why you were lower. The other items that are probably note worthy are that the gain on sale of student loans and the gain on sale of leases, if you look at that overtime it was lumpy and our first quarter last year was high. We had $6.5 million of student loan sales because we accelerated the pace at which we were selling those, and then we had very high equipment lease sales as well. When I look at that, I can clearly see the things that made us have a quarter that was below the year earlier. The rest of it is sort of playing out our operating plan.

Okay. And then two more questions if I may. One is on the provisioning expense and credit quality. I guess first if you can remind us of what your outlook for credit quality for the year was and second part of that is you took a meaningful over provision this quarter. I am guessing that part was due to the increase in nonperformers, but I am wondering if we're at a new phase of the game here relative to providing for loans where that's going to have to be just more mechanically the norm going forward?

I think that as we said probably at the end of the third quarter, fourth quarter, we've seen a rise in nonperforming, and I think while you can look at any individual loan and say that it is isolated, I am not surprised to see we're seeing an upward trend in nonperformance. Do I think that's over? I don't think so. I don't think it works that way. Typically as you come off the bottom of the cycle your nonperformers rise relatively steadily. So I think they're going to be higher than they are today. I think; however, looking at the components of our nonperforming and our classified loan book, I think the fact that you added so much in the way of auto floor plans is sort of a reason that explains why our charge-offs haven't risen as much, so you have a lot of collateral from those auto floor plan loans you're bringing to nonperforming, and the loss content I think is a little bit lower. My sense is that charge-offs will be higher for the full year '07 than '06, but I don't think that it will be anything that's different from what we were expecting, nothing significantly higher.

And then a second part about provisioning expense and setting aside increment, you sit on one of the highest reserves to loan ratios of the industry, but looks like it is certainly this quarter you set aside a chunk on top of your charge-offs.

Well, our nonperforming went up from 50 -- 52 basis points to 63, and so we're directionally consistent. Our allowance ratio went from 151 to 152, and the reason the number is so high is because we had loan growth.

Right. So all things considered if we were to see a continued movement in nonperformers and loan growth, we would presume that you would be over providing? Conceptually?

I mean our parameter is very, very consistent if you go back over the quarters you can see what -- that's likely to be the case that if we have loan growth, you're going to provide for it.

Right. Okay.

It is pretty a straight forward I think.

My last question, if I look at your other expense line and take out the MSR impairment over recovery, the first quarter of '07 other expenses like the lowest it has been since like fourth quarter of '03, and I am just wondering how much were you able to control expenses this quarter in reaction to the weakness on the revenue side or how much more can you go even from this kind of low 90's base of other expenses? It would just seem you're really being super tight there.

Just in terms of the core expense base?

Especially on the other line?

On the other line. I think, what we would expect is for the full year is that our salaries and benefits would grow at about 5 or 6%, and that maybe not in the other line but in all nonsalary related categories for the full year that will be where our expenses actually decline over time to sort of get us back to that 2% expense growth or somewhere in that neighborhood. A lot of it is again continued from the March spend. I also think we got a number of the branch that is we added we've not yet fully integrated and finished the work that we did with the 21 branches, so I feel pretty positive on the overall expenses. It is pretty hard for me to predict any given line.

I am more getting at the overall picture of just it seems like you might have really ratcheted it down there. You have been running in like the 100 to 110 and to come in at 92, I am not aware of any seasonality per se in that line. I don't know if it was a specific big project that got finished or --

Hang on. Hang on one second. I think most of it is professional service fees. most of the professional service fees, improvement there which can be somewhat lumpy, advertising was down seasonally. That actually picks up in the second quarter because of the way you have your HELOC campaign, a lot is seasonality I think in any one period that's which is why we look at a year-over-year basis.

Low single digit year-over-year growth with expenses up mid-single digits and all other declining is the bottom line?

What we've been doing.

Thanks a lot.

Thank you. Your next question is coming from Mr. Sal DiMartino of Bear Stearns.

Hi, Rene.

Hi, Sal.

Most of my questions have been answered, but just a quick one on capital, on capital management rather. You were pretty aggressive on share repurchases this quarter. Can we expect to see the same level of repurchase activity in the-- over the rest of the year and also how low would you be willing to take your tangible capital ratios to?

Yes, we haven't changed at all. We have a target range of 5.4, and we're a little out of that range. Our intention would be to get back in our range of 5.2 to 5.6, and I think about 5.4 as being optimal for us.

Thanks, Rene.

Thank you. There are no further questions in the queue. I will now turn the floor over to Mr. Don MacLeod for closing remarks.

Again, we thank all of you for participating today, and as always, if there are any clarifications of the items on the all call or news release are necessary please call invest or Investor Relations at 716-842-5138. Thank you.

This now concludes today's conference call. You may disconnect, and have a wonderful day.