M&T Bank Corporation (MTB)

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M&T Bank (MTB)

Q3 2013 Earnings Call

October 17, 2013 11:00 am ET

Executives

Donald J. MacLeod - Vice President and Assistant Secretary

René F. Jones - Chief Financial Officer, Executive Vice President, Chief Financial Officer of M & T Bank and Executive Vice President of M & T Bank

Analysts

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Keith Murray - ISI Group Inc., Research Division

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Erika Najarian - BofA Merrill Lynch, Research Division

Kenneth M. Usdin - Jefferies LLC, Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Keith Horowitz - Citigroup Inc, Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Donald J. MacLeod

Thank you, Maria, and good morning. This is Don MacLeod. I’d like to thank everyone for participating in M&T's Third Quarter 2013 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.

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 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

Now I'd like to introduce our Chief Financial Officer, René Jones.

René F. Jones

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today. As I noted in the press release, M&T's profit softened during the recent quarter as compared with the previous quarter. This reflects the impact from -- the impact to M&T from the industry-wide slowdown in mortgage banking activity, as well as higher operating expense, arising from our investments in risk management, capital planning and stress testing, regulatory compliance and technology and operating infrastructure. I'll cover more details on these investments in a moment. The recent quarter was also marked by continued strengthening of our Tier 1 common capital ratio, which increased by 52 basis points to 9.07%. Let me first review a few of the highlights from the quarter's results, after which Don and I will be happy to take your questions.

Turning to specific numbers. Diluted GAAP earnings per common share were $2.11 in the third quarter of 2013 compared with $2.55 in this year's second quarter and $2.17 in last year's third quarter. Net income for the recent quarter was $294 million, compared with $348 million in the prior quarter. Net income was $293 million in the third quarter of 2012. During the period, we completed the remainder of our actions initiated to strengthen our capital and liquidity position in an efficient -- in the most efficient manner. We converted some $1 billion of FHA loans on our balance sheet into Ginnie Mae securities, which we retained in our investment portfolio. In addition, we securitized and sold $1.4 billion of capital intensive lower returns indirect auto loans. These transactions generated $56 million of pretax securitization gains, which contributed $34 million to net income for the quarter or $0.26 per common share.

You will recall that M&T's results for the second quarter included net pretax gains on the sale of investment securities amounting to $56 million. Also, during the second quarter, we reversed an accrual amounting to $26 million pretax for a contingent compensation obligation assumed in the Wilmington Trust merger, and which had expired. Taken together, those items contributed $50 million after tax to net income for the second quarter or $0.38 per common share. Since 1998, M&T has consistently provided supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effect of amortization of intangible assets, as well as expenses and gains associated with mergers and acquisitions when they occur. After-tax expense from the amortization of intangible assets was $6 million or $0.05 per common share during the third quarter, compared with $8 million or $0.06 per share in the prior quarter. There were no merger-related expenses incurred in the third quarter of 2013. In the second quarter, merger-related expenses amounted to $5 million after-tax effect or $0.04 per common share. M&T's net operating income for the quarter, which excludes amortization -- intangible amortization and merger-related expenses was $301 million, compared with $361 million in the linked quarter. Diluted net operating earnings per share -- per common share were $2.15 for the recent quarter, compared with $2.65 in the linked quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholder's equity of 1.48% and 17.64% for the recent quarter. The comparable returns were 1.81% and 22.72% in the second quarter 2013. In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP, non-GAAP results, including tangible assets and equity.

Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $679 million for the third quarter of 2013, down by $5 million from the linked quarter. The net interest margin was 3.61% during the third quarter, compared with 3.71% in the second quarter. The narrowing of the net interest margin was largely the result of a $13 million decline in prepayment fees and interest on non-accrual loans. This accounted for 7 basis points of the decline in margin. The remaining 3 basis points of the decline reflects the core margin pressure that we've been projecting for some time and that we continue to expect to unfold over the course of the year -- over the course of the next year. The higher level of earnings assets would have been sufficient to grow net interest income despite core margin pressure, were it not for the return to normal levels of prepayment fees and cash basis interest. As for the balance sheet, average earnings assets grew by an annualized 4% or about $700 million from the second quarter. This included a $1.7 billion increase in average investment securities and a $1.1 billion decline in average loans, both of which reflect the securitization activity, primarily the FHA securitization that I mentioned earlier.

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