M&T Bank (MTB)

Q2 2012 Earnings Call

July 17, 2012 10:30 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

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

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

John G. Pancari - Evercore Partners Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

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

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

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

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

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Don MacLeod of Investor Relations. Sir, you may begin your conference.

Donald J. MacLeod

Thank you, Paula, and good morning. This is Don MacLeod. I’d like to thank everyone for participating in M&T Bank's Second Quarter 2012 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. Good morning, everyone, and thank you for joining us on the call today.

As we noted in the press release, this year's second quarter financial results reflects strong performance across most of our business. I'll share the details on these in a moment, but let me begin by reviewing the highlights, after which, Don and I will take your questions.

Turning to the specific numbers. Diluted GAAP earnings per common share were $1.71 in the second quarter of 2012, up 14% from the $1.50 earned in this year's first quarter. Net income for the second quarter was $233 million, up 13% from $206 million in the linked quarter.

For the purpose of comparison, recall that last year's second quarter marked the acquisition of Wilmington Trust Corporation, and as such, those results included several items related to the merger. Looking back, those items included $67 million of after-tax security gains amounting to $0.54 per common share, which was a result repositioning our securities portfolio in connection with the merger in May 2011. Also, included in GAAP earnings in the second quarter of 2011 was a $42 million net after-tax merger-related gain amounting to $0.33 per share. Finally, last year's second quarter included a net $9 million or $0.07 per common share after-tax impact related to our purchase of $370 million of TARP preferred stock that M&T had previously issued to the United States Department of the Treasury. That purchase resulted in the partial acceleration of the amortization of the discount on that preferred stock, which was reflected as a net after-tax $9-million decrease in our net income available to common shareholders.

Reflecting those items, diluted GAAP earnings per common share for last year's second quarter were $2.42 per share, and net income was $322 million.

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 intangibles, as well as expenses and gains associated with mergers and acquisition activity.

Included in GAAP earnings for the second quarter of 2012 were merger-related expenses attributable to the Wilmington Trust acquisition amounting to $4 million after-tax or $0.03 per common share. This compares with $2 million after-tax or $0.01 per common share in the first quarter. GAAP earnings in last year's second quarter included a $42-million after-tax net merger-related gain.

After-tax expense from the amortization of intangible assets was $10 million or $0.08 per common share in the recent quarter, unchanged from the first quarter. After-tax amortization expense was $9 million or $0.07 per common share in last year's second quarter.

M&T's net operating income for the second quarter of 2012, which as noted, excludes only the merger-related gains and expenses and the intangible amortization, was $247 million, up from $218 million in the linked quarter. Diluted net operating earnings per share were $1.82 for the recent quarter compared with $1.59 in the linked quarter. Net operating income, expressed as an annualized rate of return on average tangible assets and average tangible common equity -- shareholders equity, was 1.30% and 18.54%, respectively, for the recent quarter, improved from 1.18% and 16.79% in the first quarter of 2012.

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.

Next, I'd like to cover a few highlights from the balance sheet and the income statement. Tax equivalent net interest income was $655 million for the second quarter of 2012, up $28 million from $627 million in the prior quarter. As required by GAAP, we regularly revisit cash flow projections on which we base our valuations of acquired loans. In general, based on stabilizing economic conditions and our success at restructuring several large acquired loans, our estimated cash flows to be generated by acquired loans have increased about -- by about 1%. Those increases led us to recognize about $14 million of additional interest income last quarter on our $7 billion portfolio of acquired loans.

Certainly, as acquired loans repay and that portfolio reduces in size in future periods, the dollar amount of interest income earned on acquired loans will also reduce but we -- what we estimate that the incremental impact in each of the last 2 quarters of 2012 should remain at about $13 million to $14 million -- at the $13 million to $14 million level. Notably, lower than expected cash flows on loans must be reserved for immediately.

Reflecting those improved cash flows, the net interest margin expanded during the second quarter increasing to 3.74%, up from 3.69% in the first quarter. Major items impacting the comparison with the linked quarter as -- are as follows: The $14 million increase in net interest income on acquired loans that I just noted added 8 basis points to the margin this quarter. Cash basis interest received on loans previously classified as non-accruing, combined with the slightly higher level of prepayment fees, was $7 million higher in the recent quarter as compared with the prior quarter. More than half of the increase came as a result of one large non-accrual loan being fully repaid. This had a positive impact on the margin of approximately 4 basis points.

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