M&T Bank Corporation (MTB)

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M&T Bank (MTB)

Q1 2014 Earnings Call

April 14, 2014 10:00 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

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

Dan DelMoro - Deutsche Bank AG, Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Brian Foran - Autonomous Research LLP

Erika Najarian - BofA Merrill Lynch, Research Division

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

Ken A. Zerbe - Morgan Stanley, Research Division

Keith Murray - ISI Group Inc., Research Division

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

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

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

Kenneth M. Usdin - Jefferies LLC, Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Jennifer A. Thompson - Portales Partners, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the M&T Bank First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead, sir.

Donald J. MacLeod

Thank you, Lori, and good morning, everyone. This is Don MacLeod. I'd like to thank everyone for participating in M&T's First Quarter 2014 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.

Rene F. Jones

Thank you, Don, and good morning, everyone. Thank you for joining us today. As I noted in the press release, we got off to a bit of a slow start in 2014 with lower-than-normal levels of client activity in January and February, followed by a rebound in March. This was the case for both the balance sheet, as well as some of the fee income categories. Nonetheless, the quarter was a productive one. We received a non-objection to our capital plan from the Federal Reserve, access to debt markets and financed one of our trough issues with perpetual preferred stock, plus eliminating the need for additional amounts of preferred for the foreseeable future. And we continue to make progress on our BSA/AML compliance, risk management and capital planning and stress-testing capabilities.

I'll have further thoughts on some of these topics later in the call, but first, let me review a few of the highlights from our first quarter results, after which Don and I will be happy to take your questions.

Turning to the specific numbers. Diluted GAAP earnings per common share were $1.61 for the first quarter, compared with $1.56 in last year's fourth quarter and $1.98 in the first quarter of 2013.

Net income for the recent period was $229 million, compared with $221 million in the prior quarter. Net income was $274 million in the year-ago quarter.

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 in both the first quarter of 2014 and the fourth quarter of 2013.

M&T's net operating income for the first quarter, which excludes intangible amortization, was $235 million, up from $228 million in the linked quarter.

Diluted net operating earnings per common share were $1.66 for the recent quarter, up from $1.61 in the linked quarter.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.15% and 12.76% for the recent quarter. The comparable returns were 1.11% and 12.67% in the fourth quarter of 2013.

In accordance with the 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 $662 million for the first quarter of 2014, down by $10 million from the linked quarter. The decline was attributable to 90 days in the quarter compared with 92 days in the prior quarter. The net interest margin was 3.52% during the quarter, down by 4 basis points compared with 3.56% in the fourth quarter.

Although the reduced day count in the quarter had the effect of reducing net interest income, it added 2 basis points to the reported margins.

We'd estimate that the actions taken during the quarter to further build our liquidity asset buffer in connection with the liquidity coverage ratio reduced the reported net interest margin by about 4 basis points.

During the quarter, we issued $1.5 billion of senior banknotes and began to deploy the proceeds of that issuance into LCR qualifying investments. Finally, the remaining 2 basis points of margin compression represents our estimated core margin pressure, which includes the impact of new loans coming on at rates lower than those maturing and which is partially offset by a lower cost of funds.

The average interest-earning assets increased by $1.2 billion or 7% annualized as compared with the prior quarter. The increase included an $911 million increase in the average investment securities, as well as the $213 million or 1% annualized increase in average loans.

Average commercial and industrial loans or those loans to support business operations grew at a healthy 9% annualized rate. We saw strong double-digit growth in both Pennsylvania and in our New York City Metropolitan region, as well as continued growth in auto floor plan loans.

Average commercial real estate loans declined slightly at an annualized rate of 1%. While the origination activity remained steady, we experienced the higher level of paydowns, a high proportion of which were refinanced by CMBS conduits or life insurance companies at lower rates or longer terms.

The industry-wide slowdown in the residential mortgage loan volumes has resulted in a smaller portfolio of loans being held in the pipeline for eventual sale and that was the primary factor driving an annualized 7% decline in residential real estate loans.

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