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MTB > SEC Filings for MTB > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for M&T BANK CORP

Form 10-Q for M&T BANK CORP


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

M&T Bank Corporation ("M&T") recorded net income in the third quarter of 2013 of $294 million or $2.11 of diluted earnings per common share, compared with $293 million or $2.17 of diluted earnings per common share in the year-earlier quarter. During the second quarter of 2013, net income aggregated $348 million or $2.55 of diluted earnings per common share. Basic earnings per common share were $2.13 in the recent quarter, compared with $2.18 in the third quarter of 2012 and $2.56 in the second quarter of 2013. The after-tax impact of net acquisition and integration-related expenses (included herein as merger-related expenses) was $5 million ($8 million pre-tax) or $.04 of basic and diluted earnings per common share in the second quarter of 2013. Such expenses were associated with M&T's pending acquisition of Hudson City Bancorp, Inc. ("Hudson City") headquartered in Paramus, New Jersey. There were no merger-related expenses in either of the third quarters of 2013 or 2012. For the first nine months of 2013, net income was $917 million or $6.64 of diluted earnings per common share, compared with $733 million or $5.37 of diluted earnings per common share during the corresponding period of 2012. Basic earnings per common share were $6.69 and $5.39 for the first nine months of 2013 and 2012, respectively. The after-tax impact of merger-related expenses during the first nine months of 2013 was $8 million ($12 million pre-tax) or $.06 of basic and diluted earnings per common share, compared with $6 million ($10 million pre-tax) or $.05 of basic and diluted earnings per common share during the nine-month period ended September 30, 2012.

The annualized rate of return on average total assets for M&T and its consolidated subsidiaries ("the Company") in the recent quarter was 1.39%, compared with 1.45% in the third quarter of 2012 and 1.68% in the second quarter of 2013. The annualized rate of return on average common shareholders' equity was 11.06% in the third quarter of 2013, compared with 12.40% in the year-earlier quarter and 13.78% in 2013's second quarter. During the nine-month period ended September 30, 2013, the annualized rates of return on average assets and average common shareholders' equity were 1.48% and 11.98%, respectively, compared with 1.23% and 10.55%, respectively, in the first nine months of 2012.

Reflected in the recent quarter's results were after-tax gains from loan securitization transactions of $34 million ($56 million pre-tax), or $.26 per diluted common share. During the recent quarter, the Company securitized approximately $1.0 billion of one-to four family residential real estate loans previously held in the Company's loan portfolio into guaranteed mortgage-backed securities with the Government National Mortgage Association ("Ginnie Mae") and recognized gains of $35 million. The Company retained the substantial majority of those securities in its investment securities portfolio. In addition, the Company securitized and sold in September 2013 approximately $1.4 billion of automobile loans held in its loan portfolio, resulting in a gain of $21 million. The Company retained the servicing rights for such loans, resulting in capitalized servicing rights of $9 million being recorded.

Reflected in the results for the second quarter of 2013 were certain noteworthy items. The Company sold the majority of its privately issued mortgage-backed securities ("MBS") that had been held in the available-for-sale investment securities portfolio for an after-tax loss of $28 million ($46 million pre-tax), or $.22 per diluted common share. In addition, the Company's holdings of Visa and MasterCard shares were sold for an after-tax gain of $62 million ($103 million pre-tax), or $.48 per diluted common share. Finally, during the second quarter the Company reversed an accrual for a

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contingent compensation obligation assumed in the May 2011 acquisition of Wilmington Trust that expired, resulting in a $26 million reduction of "other expense - other costs of operations" having an after-tax impact of $15 million, or $.12 of diluted earnings per common share.

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City common shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of September 30, 2013, total consideration to be paid was valued at approximately $4.8 billion. At September 30, 2013, Hudson City had $39.2 billion of assets, including $24.7 billion of loans and $10.0 billion of investment securities, and $34.5 billion of liabilities, including $22.1 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

On April 12, 2013, M&T announced that additional time would be required to obtain a regulatory determination on the applications for the proposed merger with Hudson City. M&T had learned that regulators identified certain concerns with the Company's procedures, systems and processes related to the Company's Bank Secrecy Act and anti-money-laundering compliance program. On June 17, 2013, M&T and Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking subsidiary, entered into a written agreement with the Federal Reserve Bank of New York ("Federal Reserve Bank"). Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank a revised compliance risk management program designed to ensure compliance with anti-money-laundering laws and regulations and to take certain other steps to enhance their compliance practices. M&T has commenced a major initiative, including the hiring of outside consulting firms, intended to fully address those regulator concerns. In view of the potential timeframe required to implement this initiative, demonstrate its efficacy to the satisfaction of the regulators and otherwise meet any other regulatory requirements that may be imposed in connection with these matters, M&T and Hudson City believe that the timeframe for closing the transaction will be extended substantially beyond the date previously expected. Accordingly, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed from August 27, 2013 to January 31, 2014. Nevertheless, there can be no assurances that the merger will be completed by that date.

Recent Legislative Developments

As discussed in the Company's Form 10-K for the year ended December 31, 2012, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") that was signed into law on July 21, 2010 has and will continue to significantly change the bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, and the system of regulatory oversight of the Company. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress, many of which are not yet completed or implemented. The Dodd-Frank Act could have a material adverse impact on the financial services industry as a whole, as well as on M&T's business, results of operations, financial condition and liquidity.

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Many aspects of the Dodd-Frank Act still remain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on M&T, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees directly impact the net income of financial institutions. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of M&T and M&T Bank could require M&T and M&T Bank to further seek other sources of capital in the future.

A discussion of the provisions of the Dodd-Frank Act is included in Part II, Item 7 of the Company's Form 10-K for the year ended December 31, 2012.

On July 31, 2013, the U.S. District Court for the District of Columbia issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the Federal Reserve's rule concerning electronic debit card transaction fees and network exclusivity arrangements (the "Current Rule") that were adopted to implement Section 1075 of the Dodd-Frank Act - the so-called "Durbin Amendment." The Court held that, in adopting the Current Rule, the Federal Reserve violated the Durbin Amendment's provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are "reasonable and proportional to the costs incurred by the issuer" and therefore the Current Rule's maximum permissible fees were too high. In addition, the Court held that the Current Rule's network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule. The Court's judgment was stayed in September 2013 pending appeal by the Federal Reserve. The Federal Reserve filed its appeal in October 2013. The fee limits in the Current Rule will remain in effect until the Federal Reserve revises the rule, if it is ultimately required to do so. If the Federal Reserve is not successful in its appeal and re-issues rules for purposes of implementing the Durbin Amendment in a manner consistent with this decision, the amount of debit card interchange fees the Company would be permitted to charge likely would be reduced. The amount of such reduction cannot be estimated at this time.

In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved final rules (the "New Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision's (the "Basel Committee") December 2010 final capital framework referred to as "Basel III" for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including M&T and M&T Bank, as compared to the current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions' regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee's 1988 "Basel I" capital accords, with a more risk-sensitive approach based, in part, on the "standardized approach" in the Basel Committee's 2004 "Basel II" capital accords. In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of
Section 939A to remove references to credit ratings from the federal agencies' rules. The New Capital Rules are effective for the Company on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.

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Among other matters, the New Capital Rules: (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1") and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and
(iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, including M&T, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules' specific requirements.

Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:

4.5% CET1 to risk-weighted assets;

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").

The New Capital Rules also introduce a new "capital conservation buffer", composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to the Company will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss ("AOCI") items included in shareholders' equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including the Company, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of the Company's periodic regulatory reports in the beginning of 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies' Tier 1

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capital, subject to phase-out in the case of bank holding companies, such as M&T, that had $15 billion or more in total consolidated assets as of December 31, 2009. As a result, beginning in 2015, only 25% of M&T's $1.2 billion of trust preferred securities currently outstanding will be includable in Tier 1 capital and in 2016, none of M&T's trust preferred securities will be includable in Tier 1 capital. Trust preferred securities no longer included in M&T's Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

With respect to the insured depository institution subsidiaries of the Company, the New Capital Rules revise the "prompt corrective action" ("PCA") regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by:
(i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and
(iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.

The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.

Management believes that the Company will be able to comply with the targeted capital ratios upon implementation of the revised requirements, as finalized. More specifically, management estimates that the Company's ratio of CET1 to risk-weighted assets under the New Capital Rules on a fully phased-in basis was approximately 8.75% as of September 30, 2013, reflecting a good faith estimate of the computation of CET1 and the Company's risk-weighted assets under the methodologies set forth in the New Capital Rules.

The Company's regulatory capital ratios under risk-based capital rules currently in effect are presented herein under the heading "Capital."

Supplemental Reporting of Non-GAAP Results of Operations

As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.6 billion at each of September 30, 2013 and December 31, 2012 and $3.7 billion at September 30, 2012. Included in such intangible assets was goodwill of $3.5 billion at each of those dates. Amortization of core deposit and other intangible assets, after tax effect, totaled $6 million ($.05 per diluted common share) during the third quarter of 2013, compared with $9 million ($.07 per diluted common share) during the year-earlier quarter and $8 million ($.06 per diluted common share) during

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the second quarter of 2013. For the nine-month periods ended September 30, 2013 and 2012, amortization of core deposit and other intangible assets, after tax effect, totaled $22 million ($.17 per diluted common share) and $29 million ($.22 per diluted share), respectively.

M&T consistently provides supplemental reporting of its results on a "net operating" or "tangible" basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and gains and expenses associated with merging acquired operations into the Company, since such items are considered by management to be "nonoperating" in nature. Although "net operating income" as defined by M&T is not a GAAP measure, M&T's management believes that this information helps investors understand the effect of acquisition activity in reported results.

Net operating income was $301 million in the recent quarter, compared with $302 million in the third quarter of 2012. Diluted net operating earnings per common share for the third quarter of 2013 were $2.16, compared with $2.24 in the year-earlier quarter. Net operating income and diluted net operating earnings per common share were $361 million and $2.65, respectively, in the second quarter of 2013. For the first nine months of 2013, net operating income and diluted net operating earnings per common share were $947 million and $6.87, respectively, compared with $768 million and $5.64, respectively, in the similar 2012 period.

Net operating income in the recent quarter expressed as an annualized rate of return on average tangible assets was 1.48%, compared with 1.56% in the year-earlier quarter and 1.81% in the second quarter of 2013. Net operating income represented an annualized return on average tangible common equity of 17.64% in the recently completed quarter, compared with 21.53% in the third quarter of 2012 and 22.72% in 2013's second quarter. For the first nine months of 2013, net operating income represented an annualized return on average tangible assets and average tangible common shareholders' equity of 1.59% and 19.66%, respectively, compared with 1.35% and 19.03%, respectively, in the corresponding period of 2012.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.

Taxable-equivalent Net Interest Income

Taxable-equivalent net interest income totaled $679 million in the third quarter of 2013, compared with $669 million in the year-earlier quarter. That improvement reflected a $4.0 billion, or 6%, increase in average earning assets, offset in part by a 16 basis point (hundredths of one percent) narrowing of the Company's net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets. The increase in average earning assets was attributable to a $2.3 billion increase in lower yielding average interest-bearing deposits held at the Federal Reserve Bank and higher average loan balances of $1.4 billion. The higher average loan balances outstanding were largely attributable to increased demand for commercial loans and commercial real estate loans. Taxable-equivalent net interest income was $684 million in the second quarter of 2013. The decline in such income in the recent quarter as compared with the immediately preceding quarter was largely due to a 10 basis point narrowing of the net interest margin, partially offset by a $706 million increase in average earning assets. The narrowing of the net interest margin was largely the result of lower levels of prepayment fees and interest on nonaccrual loans. The rise in average earning assets resulted largely from recent quarter purchases of Ginnie Mae mortgage-backed securities.

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For the first three quarters of 2013, taxable-equivalent net interest income was $2.03 billion, up 4% from $1.95 billion in the corresponding period of 2012. That increase was largely attributable to higher average earning assets, which rose $3.8 billion or 5% to $73.7 billion in the first nine months of 2013, partially offset by a 5 basis point narrowing of the net interest margin. Contributing to the growth in average earning assets were higher balances of commercial loans and commercial real estate loans due to increased demand for such loans, and higher residential real estate loan balances resulting from the Company's decision to retain more of such loans rather than selling them during the first eight months of 2012.

Average loans and leases rose $1.4 billion, or 2%, to $64.9 billion in the recent quarter from $63.5 billion in the third quarter of 2012. Commercial loans and leases averaged $17.8 billion in the third quarter of 2013, up $1.3 billion or 8% from $16.5 billion in the year-earlier quarter. Average commercial real estate loans increased to $26.1 billion in the recent quarter, up $1.1 billion or 5% from $25.0 billion in the third quarter of 2012. The growth in commercial loans and commercial real estate loans reflects higher loan demand by customers. Average residential real estate loans outstanding declined $660 million or 6% to $9.6 billion in 2013's third quarter from $10.3 billion in the year-earlier quarter. Included in that portfolio were loans originated for sale, which averaged $1.1 billion in the recently completed quarter, compared with $549 million in the third quarter of 2012. Excluding loans held for sale, average residential real estate loans decreased $1.2 billion from the third quarter of 2012 to the third quarter of 2013. That decrease was largely due to securitizations during the second and third quarters of 2013 of residential real estate loans previously held by the Company in its loan portfolio. During the second quarter of 2013, the Company securitized approximately $296 million of residential real estate loans and during 2013's third quarter approximately $1.0 billion of residential real estate loans were securitized. The residential real estate loans were guaranteed by the Federal Housing Administration ("FHA") and a substantial majority of the resulting Ginnie Mae mortgage-backed investment securities have been retained by the Company in the investment securities portfolio. Consumer loans averaged $11.3 billion in the recent quarter, $365 million or 3% below 2012's third quarter average of $11.7 billion. That decline was largely due to lower average balances of automobile loans and home equity loans and lines of credit. In September 2013, the Company securitized and sold approximately $1.4 billion of automobile loans held in its loan portfolio. The Company has securitized loans to improve its regulatory capital ratios and strengthen its liquidity and risk profile, including the ability to pledge any of the retained assets, as a result of changing regulatory requirements.

Average loan balances in the recent quarter declined $1.1 billion, or 2%, from the second quarter of 2013. Average outstanding commercial loan and lease balances increased $85 million and commercial real estate loan average balances rose $78 million, while average residential real estate loans decreased $1.2 billion, or 11%, and average consumer loans declined $114 million, or 1%, from 2013's second quarter. The significant decline in average outstanding residential real estate loans balances was the result of the second and third quarter FHA loan securitization transactions previously noted and payments received. The accompanying table summarizes quarterly changes in the major . . .

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