M&T Bank Earnings Call Insights: Cash Balance Levels, Mortgage Pipeline

On Wednesday, M&T Bank Corp (NYSE:MTB) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cash Balance Levels

Erika Penala – Bank of America: I apologize Rene if I missed this in your prepared remarks, but could you give us a sense if in that mortgage banking number, if there were any unusually large MSR hedge gains?

Rene F. Jones – EVP and CFO: No.

Erika Penala – Bank of America: So it was 100% production?

Rene F. Jones – EVP and CFO: We don’t hedge our MSRs actually.

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Erika Penala – Bank of America: So it’s a 100% production I guess is the best way to think about it. And in terms of the – you mentioned that the origination level doubled in resi mortgage, that has nothing to do with you choosing to sell off more of your production, because you mentioned that that happened late in September; that was all just volume?

Rene F. Jones – EVP and CFO: No. So let me kind of give you those numbers again and I’ll give you some clarity there. So we did – we locked $856 million in the second quarter and it was $1.8 billion in the third quarter. Of that there was about $500 million of that increase came from our decision beginning of September to lock those for sales instead of our portfolio. So you still have a pretty big gain but there is about $500 million of the mortgages that we believe kind of flipped and are planning to sell, so that give you a bit of a boost. So when you look at the $37 million increase on a liked quarter basis, I would guess that my rough estimate is that $15 million sort of came from that — $15 million of the $37 million came from that decision and we still had — I think we still locked maybe $350 million in the quarter for our portfolio which next quarter we would not do.

Erika Penala – Bank of America: With regard to the cash balance levels, is this a more normal rate of cash balances for you going forward meaning we don’t expect any fluctuations higher even if those trust deposits are coming in end of fourth quarter?

Rene F. Jones – EVP and CFO: You can expect continued fluctuation because the nature of the business which really came to us with Wilmington Trust. The swings can be fairly large but the earnings rate on those amounts are pretty low, so if I were — my personal model, I tend to take a look at those and put very low earnings rate on them because they move the printed margin, but they really don’t do much to the net interest income. So if you miss that, it can be a little confusing sometimes. But that will continue to fluctuate. It’s very hard to predict because as we get business related to our (trustee) work around securitizations and those types of things, oftentimes we get paid in balances as opposed to fees and that trend is relatively high I guess based on relative to past experience.

Mortgage Pipeline

Bob Ramsey – Friedman Billings Ramsey: Just a follow up on Erika’s questions about mortgage banking, so you said you locked a $1.8 billion in the third quarter and that without the portfolio activity it could have been $350 million more. Based on your pipeline (indiscernible) into the fourth quarter, is your expectation that you could do over $2 billion of volume or is there any shift in pipelines that gives you a different sense?

Rene F. Jones – EVP and CFO: We have what we call a mortgage pipeline which is all the applications that we received during the quarter minus anything that’s been withdrawn or anything that’s actually already closed and that’s still on an uptick. So in the first quarter it was $1.4 billion, in the second quarter it was $1.8 billion, and then at the end of the third quarter it was $2.3 billion. So it still has a bit of an upward trend associated with it.

Bob Ramsey – Friedman Billings Ramsey: So looks like you’ll be doing more volume and selling even more of volume in the last quarter. And is your expectation that margins will be relatively consistent third quarter to fourth or any view there?

Rene F. Jones – EVP and CFO: I think when you normalize for the amount, it took a while for the HARP programs to kind of catch up and normalize at that level, so you saw margins rising, but I think that’s probably right, but until that program dissipates over time, I think you’ll see that margins kind of remain where they were I would guess. So, I don’t think the fourth quarter is really all that hard to predict. I think the bigger question is how long does this last and then we are kind of thinking about it is at the end of the day, it allows us to build our capital, but we are not thinking that that this trend can continue forever.

Ken Usdin – Jefferies & Co.: Then on the resi loan fund, I guess there was a little surprise by the amount of growth I thought you all had scaled back the portfolio and activity earlier in the quarter than it sounds like you did, but given that you have made those changes in September, would your expectation be that from this level that both securities and resi mortgages that you don’t see a lot of growth in either of those portfolio?

Rene F. Jones – EVP and CFO: Ken, the accounting has some effects that can get you little confusing, right. So, the $1.1 billion that you saw this quarter were loans that we locked in the second quarter. So, that means that the amount of 353 or so that we originated for our portfolio in the third quarter still is yet to roll on and that will come in the fourth quarter. So you still see some growth, nothing like the same size that you saw this quarter, but it takes about, in a normal times, about 45 days to go from locked to close and with the pipeline is so full, we’ve expanded our capacity sort of as much as we can, but that 45 days might be a little long, maybe it’s 60 days, right. So I think you’ll see it continue to rise a little bit in the fourth quarter, and then, I would guess it should level off.

Donald J. MacLeod – Assistant VP and Assistant Secretary: Even on a normal basis, there’s a certain amount of non-conforming that we originate and contain, prime jumbos, biweeklies and that sort of thing and that’s typically couple hundred million a quarter.

Rene F. Jones – EVP and CFO: To sustain the portfolio, it’s maybe compensate for normal run off.

Ken Usdin – Jefferies & Co.: Last question and I’ll hop off. You mentioned that the Wilmington costs are largely in the numbers at this point or there could be some lingering near-term benefits I think you said. Could you just talk a little bit about what some of those opportunities might be or how material they could be?

Rene F. Jones – EVP and CFO: Think about it this way. We just completed our integration, so some of the remaining impacts of that you’re yet to see. I think near-term I wouldn’t be surprised to see expenses can be control, maybe even slightly down, but then longer term, even though there’ll still be some benefit that lingers into the next year, as we begin to think about 2013 or thinking about our investments in technology, obviously our investment in the network associated with the pending deal with Hudson. So my sense is that I feel pretty good about ’13 meaning that some of that lingering benefit will help us to pay for investment, that means our expense are likely be relatively controlled in 2013, but not necessarily down. So we’re beginning to think about – I’ll talk more about in January but that’s sort of kind of my thinking today.

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