M&T Bank Corporation

Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank Q3 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Don McLeod, Director of Investor Relations. Please go ahead.

Thank you, Samantha, and good morning. I'd like to thank everyone for participating in M&T's third quarter 2019 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link, and then on the events and presentations link. Also, before we start, I'd like to mention that comments made during this call might 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, including those found on Forms 8K, 10K, and 10Q, for a complete discussion of forward-looking statements. Now I'd like to introduce our Chief Financial Officer, Darren King.

Thank you, Don, and good morning, everyone. As noted in this morning's earnings press release, M&T's results for the third quarter include several items that we think are worth highlighting. Total revenues grew from the prior quarter and the year-ago quarter, notwithstanding the lower interest rate environment and associated pressures on net interest income. Although we recognized an additional valuation allowance on our mortgage servicing rates, which reflects higher expected prepayments arising from lower interest rates, we also recorded an impressive increase in mortgage banking revenues. This demonstrates how mortgage loan originations can act as somewhat of a partial hedge for the mortgage servicing business. Loan growth continues to be steady and in line with our expectations for low single-digit aggregate growth in 2019. Credit quality is consistent with our recent experience with net charge-offs stable at rates well below our long-term average. A further decline in criticized loans was accompanied by an increase in non-accrual loans primarily the result of one large loan previously reported as criticized. Let's take a look at the specifics. Diluted gap earnings per common share were $3.47 for the third quarter of 2019, compared with $3.34 in the second quarter of 2019 and $3.53 in the third quarter of 2018. Net income for the quarter was $480 million, compared with $473 million in the link quarter and $526 million in the year-ago quarter. On a gap basis, M&T's third quarter results produced an annualized rate of return on average assets of 1.58% and an annualized return on average common equity of 12.73%. This compares with rates of 1.6% and 12.68% respectively in the previous quarter. Included in the GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $4 million or $0.03 per share or per common share, little change from the prior quarter. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur. M&T's net operating income for the third quarter, which excludes intangible amortization, was $484 million, compared with $477 million in the linked quarter and $531 million in last year's third quarter. Diluted net operating earnings per common share were $3.50 for the recent quarter, compared with $3.37 in 2019's second quarter, and $3.56 in the third quarter of 2018. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.66% and 18.85% for the recent quarter. The comparable returns were 1.68% and 18.83% in the second quarter of 2019. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Recall that both GAAP and net operating earnings for the second quarter of 2019 were impacted by a $48 million write-down of M&T's investment in an asset manager. which had been accounted for using the equity method of accounting. The write-down amounted to $36 million after-tax effect, or $0.27 per common share. In July 2019, M&T agreed to sell its investment in the asset manager, which had been obtained in the 2011 acquisition of Wilmington Trust Corporation. The sale was consummated in late September. There were no such noteworthy items in 2018's third quarter. Turning to the balance sheet and the income statement, taxable equivalent net interest income was $1.04 billion in the third quarter of 2019, down by $12 million, or 1% from the linked quarter. This reflects a narrower net interest margin, partially offset by growth in both loans and total earning assets. the margin for the quarter was 3.78%, down 13 basis points from 3.91% in the linked quarter. Contributing to that decline were several offsetting items. On the positive side, a more favorable mix of interest-earning assets, specifically a higher proportion of loans, added about two basis points to the margin. A higher level of cash on deposit at the Fed contributed accounted for an estimated two basis points of the decline in the margin. We estimate that lower short-term market rates, primarily LIBOR, accounted for some eight basis points of the decline. This is consistent with our expectations of a four to nine basis point decline in the margin over the ensuing 12-month period following a hypothetical 25 basis point cut in the Fed funds target and by application LIBOR. A higher cost of interest-bearing deposits, primarily mortgage escrow deposits, accounted for approximately five basis points of the decline. We continue to see inflows of these escrow deposits, a result of higher prepayment of mortgage loans we service or subservice on behalf of mortgage-backed security investors. Absent the higher level of escrow deposits, the total cost of interest-bearing deposits would have been approximately flat as we managed deposit rates lower. As expected, the migration of deposits into higher-yielding categories, notably commercial deposits into interest checking and on-balance sheet sweep, has slowed, and rates offered on new certificates of deposit have declined. Average loans grew by 1% compared with the previous quarter. Originations remain solid, while payoffs and paydowns remain consistent with levels we've experienced in the first half of 2019. Looking at the loans by category... on an average basis compared with the linked quarter. Commercial and industrial loans were roughly flat compared with the linked quarter as the usual seasonal softness in loans to auto dealers to finance inventories was offsetting growth in other categories. Commercial real estate loans grew 1% compared with the second quarter. Residential real estate loans declined by less than 1.5% compared with the linked quarter As was the case last quarter, the continued, comparatively steady pace of paydowns of mortgage loans acquired in the Hudson City transaction was partially offset by higher levels of loans originated for sale. Holding originations for sale aside, we expect the portfolio of acquired mortgage loans to continue its low double-digit rate of principal amortization in future quarters. Consumer loans were up 4%. As growth in recreation finance loans continues to outpace declines in home equity lines and loans. There were no particular standouts, positively or negatively, in our community banking regions from a loan growth perspective. From the line of business view, recreational vehicle financing as well as residential and commercial mortgage banking were particularly strong. Average core customer deposits which exclude deposits received at M&T's Cayman Islands office and CDs over $250,000, grew an estimated 3% compared with the second quarter. This primarily reflects the escrow deposits we referenced earlier. Turning to non-interest income. Non-interest income totaled $528 million in the third quarter compared with $512 million in the prior quarter. Mortgage banking revenues were $137 million in the recent quarter, compared with $107 million in the linked quarter. Residential mortgage loans originated for sale were $835 million in the quarter, up from $723 million in the second quarter, reflecting a new wave of refinancing activity in the face of the lower longer-term interest rate environment as well as seasonal strength. Total mortgage banking revenues, including origination and servicing activities, were $88 million in the third quarter, improved from $72 million in the prior quarter.