M&T Bank Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank Fourth Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I will now turn the call over to Don McLeod, Director of Investor Relations, to begin.

Thank you, Laurie, and good morning. I'd like to thank everyone for participating in M&T's fourth quarter and full year 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 filing Chief Financial Officer, Darren King.

Thank you, Don, and good morning, everyone. As noted in this morning's release, M&T's results for the fourth quarter closed out a year of solid performance, which included 8% growth in earnings per common share, 11% growth in non-interest revenues with mortgage banking and trust fees leading the improvement, a stable year-over-year net interest margin, notwithstanding the interest rate volatility we experienced in 2019, and a credit environment that remains favorable, which, although non-accrual loans increased slightly, reflected the sixth consecutive year of credit losses below 20 basis points, and industry-leading returns on shareholder capital, with return on equity for the year improved slightly to 12.87% and return on tangible common equity exceeding 19% for the second consecutive year. We'll review the numbers for the full year in a moment, But first, let's turn our attention to the results for the fourth quarter. Diluted GAAP earnings per common share were $3.60 for the fourth quarter of 2019, compared with $3.47 per share in the third quarter of 2019 and $3.76 per share in the fourth quarter of 2018. Net income for the quarter was $493 million, compared with $480 million in the linked quarter and $546 million in the year-ago quarter. On a GAAP basis, M&T's fourth quarter results produce an annualized rate of return on average assets of 1.6% and an annualized return on average common equity of 12.95%. This compares with rates of 1.58% and 12.73%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $3 million or 2 cents per common share, down slightly from $4 million and 3 cents per common share in 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 fourth quarter, which excludes intangible amortization, was $496 million, compared with $484 million in the linked quarter and $550 million in 2018's fourth quarter. Diluted net operating earnings per common share were $3.62 for the recent quarter, compared with $3.50 in 2019's third quarter and $3.79 in the fourth quarter of 2018. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.67% and 19.08% in the recent quarter. The comparable returns were 1.66% and 18.85% in the third 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. Both GAAP and net operating earnings in the fourth quarter of 2018 were were impacted by certain noteworthy items. Included in the fourth quarter, 2018 results was a $20 million contribution to the M&T Charitable Foundation. That amounted to $15 million after tax effect, or 11 cents per common share. Also included in 2018's fourth quarter was a $15 million reduction in M&T's provision for income taxes arising from an IRS-approved change in the tax treatment of certain loan fees which was retroactive to 2017. This also amounted to 11 cents per common share. Turning to the balance sheet and income statement. Taxable equivalent net interest income was $1.01 billion in the fourth quarter of 2019, down $21 million from $1.04 billion in the linked quarter. The net interest margin declined to 3.64%, down 14 basis points from 3.78% in the linked quarter. A higher average balance of funds placed on deposit with the Fed had an estimated four basis points dilutive effect on margin. The higher cash balances were a result of elevated escrow deposits, seasonally high commercial deposits, and increased trust demand deposits. We estimate that the lower short-term interest rates, on the Fed's July, September, and October rate actions pressured the margin by as much as 10 basis points. The linked quarter 38 basis point decline in one month LIBOR was another factor in the decline. Included in that 10 basis point impact of lower rates was a decline in the overall cost of interest-bearing deposits, the cost of which declined by 9 basis points compared with the linked quarter, which provided a benefit to the margin of about two basis points. Average loans increased $167 million compared with the previous quarter. The ongoing and planned runoff of residential real estate loans, primarily acquired Hudson City mortgage loans, was more than offset by growth in other loan categories, which increased in total by $509 million, or 7 tenths of 1% from the third quarter. Looking at the loans by category on an average basis compared with the linked quarter, commercial and industrial loans were about 1% higher than in the prior quarter. This included $110 million seasonal increase in loans to vehicle dealers to finance their inventories, combined with an almost equal increase in other C&I loans. Commercial real estate loans were down less than 1% compared with the third quarter, reflecting payoffs as well as completed construction loans, which did not roll over into permanent financing, and a lower level of commercial mortgage loans held for sale. Residential real estate loans, approximately half of which were acquired in the Hudson City transaction, continued the expected pace of paydowns, and that portfolio declined by about 2% or $342 million. Consumer loans were up 3%, with growth in recreation finance loans and, to a lesser extent, indirect auto loans, outpacing further declines in home equity lines and loans. On an end-of-period basis, loan growth was stronger in the commercial portfolios, with commercial and industrial loans about 3% higher than at the end of the prior quarter, while commercial real estate loans were up about 2%. There were no particular regions or industries that stood out in terms of loan growth, during the fourth quarter. Average consumer deposits, which exclude deposits received at M&T's Cayman Islands office, as well as CDs over $250,000, were up about 3% compared with the third quarter. As noted earlier, elevated escrow deposits, seasonally high commercial deposits, and higher levels of trust demand deposits were the drivers of that increase. Turning to non-interest income. Non-interest income totaled $521 million in the fourth quarter, compared with $528 million in the prior quarter. The quarter's results included $6 million of securities valuation losses on our remaining portfolio of GSE preferred stock, compared with a $4 million gain in the third quarter. Mortgage banking revenues were $118 million in the recent quarter compared with $137 million in the linked quarter. Residential mortgage loans originated for sale were $697 million in the quarter, down about 16% compared with the third quarter. Nonetheless, origination revenues improved by $3 million to a total of $26 million as a result of higher gain-on-sale margin. Residential servicing revenues were little change from the previous quarter. Total residential mortgage banking revenues including both origination and servicing activities were $91 million compared with $88 million in the prior quarter. Commercial mortgage banking revenues were $27 million in the fourth quarter compared with what was a record $49 million in the link quarter. Trust income was $152 million in the recent quarter improved from $144 million in the previous quarter and up 12% from $135 million in 2018's fourth quarter. New business generation continues to be strong, while the strength in equity markets has been a modest tailwind. Service charges on deposit accounts were $111 million, essentially unchanged from the prior quarter. Trading and FX gains were $17 million, improved from $16 million in the previous quarter, primarily reflecting customer interest rate swap activity done on behalf of commercial customers in connection with loan originations during the quarter. Turning to expenses. Operating expenses for the fourth quarter, which exclude the amortization of intangible assets, were $819 million, down from $873 million in the third quarter. Salaries and benefits declined by $8 million to $469 million from the prior quarter, reflecting a lower headcount and seasonally lower benefit costs. Other costs of operation for the recent quarter reflect a $16 million reduction in the valuation allowance on our mortgage servicing rights. Recall that there was a $14 million addition to the allowance in the third quarter. Excluding the changes in the valuation allowance, other costs of operations declined by $825 million, driven largely by lower professional services expense. The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator, was 53.1% in the recent quarter, improved from 55.9% in the previous quarter. Next, let's turn to credits. Our credit quality continues to be pretty much in line with the trends we've been seeing for quite a while. Annualized net charge-offs as a percentage of total loans were 18 basis points in the fourth quarter of 2019, compared with 16 basis points in the third quarter. The provision for credit losses was $54 million in the recent quarter, exceeding net charge-offs by $13 million. The excess provision primarily reflects loan growth. the allowance for credit losses was $1.05 billion at the end of December. The ratio of the allowance to total loans was 1.16% at the end of 2019, unchanged from the end of the third quarter and up one basis point from the end of 2018. Non-accrual loans declined by $42 million at December 31st, compared with the prior quarter end. The ratio of non-accrual loans total loans fell six basis points to end the quarter at 1.06%. Loans 90 days past due, on which we continue to accrue interest, excluding acquired loans that have been marked to a fair value discounted acquisition, were $519 million at the end of the quarter. Of those loans, $480 million, or 93%, are guaranteed by government-related entities. We'll address CECL and in a few moments during the discussion of our outlook for 2020. Turning to capital, M&T's common equity Tier 1 ratio was an estimated 9.72% at the end of 2019, compared with 9.81% at the end of the third quarter. The decline reflects earnings retention during the quarter, share repurchases, and the impact of loan growth. which in turn led to slightly higher end-of-period risk-weighted assets. M&T repurchased 1.7 million shares of its common stock during the past quarter, costing an aggregate $282 million. Next, I'd like to take a moment to cover the key highlights of 2019's full-year results. Gap-based diluted earnings per common share were $13.75. up 8% from $12.74 in 2018. Net income was $1.93 billion, improved from $1.92 billion in the prior year. These results produced returns on average assets and average common equity of 1.61% and 12.87% respectively. Net operating income, which excludes intangible amortization, was $1.94 billion, up slightly from the prior year. Net operating income for 2019, expressed as a rate of return on average tangible assets and average tangible common shareholders' equity, was 1.69% and 19.08% respectively. Average diluted common shares declined by 7% as a result of repurchase activity, while the total payout ratio, including common stock dividends, was 102%. Tangible book value per share grew to $75.44 at the end of 2019, up 9% from the end of 2018. As we reflect on our 2019 performance through the lens of relative performance against our peer group of large regional banks, we are particularly gratified by our growth in earnings per common share, our return on tangible common equity, and the absolute level of our net interest margin, which remains at or near the top of the peers.