M&T Bank Corporation (MTB)

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M&T Bank (MTB)

Q4 2013 Earnings Call

January 17, 2014 10:30 am ET

Executives

Donald J. MacLeod - Vice President and Assistant Secretary

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

Analysts

Kenneth M. Usdin - Jefferies LLC, Research Division

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

Keith Murray - ISI Group Inc., Research Division

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

Erika Najarian - BofA Merrill Lynch, Research Division

Jennifer A. Thompson - Portales Partners, LLC

Brian Foran - Autonomous Research LLP

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

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Sachin Shah

Adam Rupert

Robert Herz

Presentation

Operator

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Donald J. MacLeod

Thank you, Jackie, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's Fourth 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 at 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.

Rene F. Jones

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today.

As we noted in the press release, M&T's results for the fourth quarter included an elevated level of professional services expense, reflecting our continued focus on building out our regulatory, risk management and technology infrastructure, including our BSA/AML compliance program. This represents our second quarter in a row where our costs are above what we would consider the natural level required to operate the bank, even in what was we might refer to as the new banking environment.

More positive elements in the recent quarter's results included higher fee revenue and continued improvement in our credit, capital and liquidity measures. I'll review a few highlights from both the quarter and the past year, after which, Don and I will be happy to take your questions.

Turning to the specific numbers. Diluted GAAP earnings per common share were $1.74 during the period, compared with $2.11 in last year's third quarter and $2.16 in 2012's fourth quarter. Net income for the recent quarter was $246 million, compared with $294 million in the prior quarter. Net income was $296 million in the fourth quarter of 2012.

Recall that M&T's results for the third quarter of 2013 included gains in connection with our securitization of FHA loans to Ginnie Mae securities, which we retained in our investment portfolio, and our securitization of indirect auto loans, which were not retained. These transactions contributed $34 million to net income for that quarter, or $0.26 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 expenses from the amortization of intangible assets were $6 million, or $0.05 per common share, in each of the third and fourth quarters of 2013.

M&T's net operating income for the fourth quarter, which excludes intangible amortization, was $252 million, compared with $301 million in the linked quarter. Diluted net operating earnings per common share were $1.79 for the recent quarter compared with $2.16 in the linked quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.22% and 14.12% for the recent quarter. The comparable returns were 1.48% and 17.64% in the third quarter of 2013.

In accordance with SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Turning to the balance sheet and the income statement. Taxable equivalent net interest income was $673 million for the fourth quarter of 2013, down by $7 million from the linked quarter. The net interest margin was 3.56% during the quarter, down 5 basis points, compared with 3.61% in the third quarter.

While average earnings assets increased by some 2% annualized, as compared with the prior quarter, the mix of those assets changed primarily as a result of the securitization transactions we undertook in the third quarter. The results included a $1.4 billion increase in average investment securities, offset by $1.3 billion of decrease in average loans. We estimate that this shift in the mix of earnings assets accounts for about 3 basis points of the linked quarter decline in the margin.

The core margin pressure, which is primarily the result of new loans coming on at rates lower than those maturing, and which is partially offset by lower cost of funds, amounted to about 2 basis points and was in line with our prior outlook.

On an end-of-period basis, investment securities were about $500 million higher at December 31, as compared with the end of the prior quarter, which reflects further use of the proceeds from the third quarter's auto loan securitization to purchase additional liquid investment securities.

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