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MTB > SEC Filings for MTB > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for M&T BANK CORP

Form 10-Q for M&T BANK CORP


7-Aug-2014

Quarterly Report


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

Overview

Net income for M&T Bank Corporation ("M&T") in the second quarter of 2014 was $284 million or $1.98 of diluted earnings per common share, compared with $348 million or $2.55 of diluted earnings per common share in the year-earlier quarter. During the initial quarter of 2014, net income aggregated $229 million or $1.61 of diluted earnings per common share. Basic earnings per common share were $1.99 in the recent quarter, compared with $2.56 in the second quarter of 2013 and $1.63 in the first 2014 quarter. For the first half of 2014, net income totaled $513 million or $3.59 of diluted earnings per common share, compared with $623 million or $4.53 of diluted earnings per common share in the first six months of 2013. Basic earnings per common share for the six-month periods ended June 30, 2014 and 2013 were $3.62 and $4.56, respectively.

The annualized rate of return on average total assets for M&T and its consolidated subsidiaries ("the Company") in the recent quarter was 1.27%, compared with 1.68% in the year-earlier quarter and 1.07% in the first quarter of 2014. The annualized rate of return on average common shareholders' equity was 9.79% in the second quarter of 2014, compared with 13.78% and 8.22% in the three-month periods ended June 30, 2013 and March 31, 2014, respectively. During the six-month period ended June 30, 2014, the annualized rates of return on average assets and average common shareholders' equity were 1.17% and 9.02%, respectively, compared with 1.52% and 12.47%, respectively, in the first half of 2013.

The recent quarter's results reflect two noteworthy, but largely offsetting, items. The resolution with tax authorities of previously uncertain tax positions required M&T to reduce its accrual for income taxes and increase net income by $8 million, while an increase in M&T's accrual for litigation-related costs of $12 million reduced net income by $7 million after applicable tax effect. Both accrual items were associated with pre-acquisition activities of M&T's Wilmington Trust entities.

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 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 that quarter the Company reversed an accrual for a 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. In the aggregate, those noteworthy items contributed net income of $49 million, or $.38 per diluted common share, in 2013's second quarter.

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. ("Hudson City"), headquartered in Paramus, New Jersey, 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). The estimated purchase price considering the closing price of M&T's common stock of $124.05 on June 30, 2014 was $5.4 billion.

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As of June 30, 2014, Hudson City reported $37.7 billion of assets, including $23.3 billion of loans (predominantly residential real estate loans) and $8.2 billion of investment securities, and $32.9 billion of liabilities, including $20.5 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 conditions, including regulatory approvals.

On June 17, 2013, M&T and M&T Bank, the principal Bank subsidiary of M&T, entered into a written agreement with the Federal Reserve Bank of New York. Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank of New York a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations ("BSA/AML") and to take certain other steps to enhance their compliance practices. The Company commenced a major initiative, including the hiring of outside consulting firms, intended to fully address those regulator concerns. M&T and M&T Bank continue to make progress towards completing this initiative. In view of the 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 extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed to December 31, 2014. Nevertheless, M&T's pending acquisition of Hudson City remains subject to regulatory approval, including approval by the Federal Reserve, and certain other closing conditions and, as a result, there can be no assurances that the merger will be completed by that date.

Recent Legislative and Regulatory Developments

As discussed in M&T's Form 10-K for the year ended December 31, 2013, 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.

A discussion of the provisions of the Dodd-Frank Act is included in Part I, Item 1 of M&T's Form 10-K for the year ended December 31, 2013.

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 Board'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 Board 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 Board. In March 2014, a panel of the

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United States Court of Appeals for the District of Columbia overturned the U.S. District Court's ruling almost in its entirety, remanding to the Federal Reserve Board for further consideration or explanation of the issue of its treatment of transactions-monitoring costs.

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 preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies' Tier 1 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 25% of M&T's trust preferred securities will be includable in Tier 1 capital, and in 2016 and thereafter, 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. In the first quarter of 2014, M&T redeemed $350 million of 8.50% junior subordinated debentures associated with the trust preferred capital securities of M&T Capital Trust IV and issued a like amount of 6.45% preferred stock that qualifies as Tier 1 regulatory capital. A detailed discussion of the New Capital Rules is included in Part I, Item 1 of M&T's Form 10-K for the year ended December 31, 2013 under the heading "Capital Requirements."

Management believes that the Company will be able to comply with the revised capital adequacy requirements upon their implementation. More specifically, management estimates that the Company's ratio of Common Equity Tier 1 ("CET1") to risk-weighted assets under the New Capital Rules (and as defined therein) on a fully phased-in basis was approximately 9.42% as of June 30, 2014, 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.

On December 10, 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission adopted the final version of the Volcker Rule, which was mandated under Dodd-Frank. The Volcker Rule is intended to reduce risks posed to banking entities from proprietary trading activities and investments in or relationships with covered funds. Banking entities are generally prohibited from engaging in proprietary trading. The Company does not believe that it engages in any significant amount of "proprietary trading" as defined in the Volcker Rule and that any impact would be minimal. In addition, a review of the Company's investments was undertaken to determine if any meet the Volcker Rule's definition of "covered funds." Based on that review, the Company believes that any impact related to investments considered to be covered funds would not have a significant effect on the Company's financial condition or its results of operations.

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Nevertheless, the Company may be required to divest certain investments subject to the Volcker Rule by mid-2015.

On October 24, 2013, the Federal Reserve Board and other banking regulators issued an interagency proposal for the U.S. version of the Basel Committee's Liquidity Coverage Ratio ("LCR"). The LCR requires a banking organization to maintain a minimum amount of liquid assets to withstand a standardized supervisory liquidity stress scenario. The proposed effective date is January 1, 2015, subject to a two-year phase-in period. The period for commenting on the interagency proposal closed on January 31, 2014. Although the proposed rules have not yet been finalized, the Company has added securities to its investment portfolio through purchase and securitization transactions in contemplation of the final LCR requirements.

Supplemental Reporting of Non-GAAP Results of Operations

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. 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 June 30, 2014, June 30, 2013 and December 31, 2013. 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, was $6 million during each of the two most recent quarters ($.04 per diluted common share in the recent quarter and $.05 per diluted common share in the initial quarter of 2014), compared with $8 million ($.06 per diluted common share) during the second quarter of 2013. For the six-month periods ended June 30, 2014 and 2013, amortization of core deposit and other intangible assets, after tax effect, totaled $12 million ($.09 per diluted common share) and $16 million ($.12 per diluted common share), respectively. The after-tax impact of merger-related expenses in the three-month and six-month periods ended June 30, 2013 was $5 million ($8 million pre-tax) and $8 million ($12 million pre-tax), respectively. There were no merger-related expenses in the first or second quarters of 2014. The merger-related expenses in 2013 were associated with M&T's pending acquisition of Hudson City. 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 $290 million in the recent quarter, compared with $361 million in the similar 2013 quarter. Diluted net operating earnings per common share for the second quarter of 2014 were $2.02, compared with $2.65 in the year-earlier quarter. Net operating income and diluted net operating earnings per common share were $235 million and $1.66, respectively, in the initial quarter of 2014. For the first six months of 2014, net operating income and diluted net operating earnings per common share were $525 million and $3.68, respectively, compared with $646 million and $4.71, respectively, in the corresponding 2013 period.

Net operating income in the second quarter of 2014 expressed as an annualized rate of return on average tangible assets was 1.35%, compared with 1.81% and 1.15% in the second quarter of 2013 and initial 2014 quarter, respectively. Net operating income represented an annualized return on average tangible common equity of 14.92% in the recently completed quarter, compared with 22.72% and 12.76% in the quarters ended June 30, 2013 and March

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31, 2014, respectively. For the first six months of 2014, net operating income represented an annualized return on average tangible assets and average tangible common shareholders' equity of 1.25% and 13.86%, respectively, compared with 1.65% and 20.76%, respectively, in the similar 2013 period.

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

Taxable-equivalent Net Interest Income

Taxable-equivalent net interest income aggregated $675 million in the recent quarter, down 1% from $684 million in the second quarter of 2013. The impact of a 31 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, was largely offset by a $5.6 billion or 8% rise in average earning assets as compared with the second quarter of 2013. Taxable-equivalent net interest income in the recent quarter was 2% higher than $662 million recorded in the first quarter of 2014. That improvement resulted from a $3.3 billion increase in average earning assets that reflects higher average balances of investment securities of $1.7 billion, interest-bearing deposits held at the Federal Reserve Bank of New York of $1.0 billion and loans and leases of $579 million. Partially offsetting those factors was a 12 basis point narrowing of the net interest margin in the recent quarter to 3.40% from 3.52% in the initial 2014 quarter.

For the first half of 2014, taxable-equivalent net interest income was $1.34 billion, slightly below $1.35 billion in the first six months of 2013. That decline was largely attributable to a 25 basis point narrowing of the net interest margin to 3.46% in 2014 from 3.71% in 2013 reflecting lower yields on average loans outstanding, offset by higher average earning assets, which rose $4.8 billion or 7% from $73.2 billion in the first half of 2013 to $77.9 billion in the first six months of 2014. Contributing to the growth in average earning assets were higher balances of investment securities and interest-bearing deposits at the Federal Reserve Bank of New York, partially offset by lower average balances of loans outstanding.

Average loans and leases declined 2% to $64.3 billion in the recent quarter from $66.0 billion in the second quarter of 2013. Average commercial loans and leases were $19.0 billion in the second quarter of 2014, up $1.3 billion or 7% from $17.7 billion in the year-earlier quarter. Commercial real estate loans averaged $26.1 billion in each of the recent quarter and the second quarter of 2013. Average residential real estate loans outstanding declined $2.1 billion to $8.7 billion in the second quarter of 2014 from $10.8 billion in the similar quarter of 2013. Included in that portfolio were loans originated for sale, which averaged $421 million in the recent quarter, compared with $977 million in the second quarter of 2013. The further decrease in residential real estate loans was largely due to securitization activity during the second and third quarters of 2013. During the second quarter of 2013, the Company securitized approximately $296 million of residential real estate loans and during the third quarter of 2013 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 were retained by the Company in the investment securities portfolio. Average consumer loans and leases totaled $10.5 billion in the recent quarter, $931 million or 8% lower than $11.4 billion in 2013's second quarter. That decline was largely due to lower average balances of automobile loans. In September 2013, the Company

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securitized and sold approximately $1.4 billion of automobile loans that had been held in its loan portfolio. The Company 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 rose $579 million from the initial quarter of 2014. Average commercial loan and lease balances increased $502 million, or 3%, average balances of consumer loans increased $179 million, or 2%, while average residential real estate loans declined $98 million, or 1%, from 2014's first quarter. Average commercial real estate loan balances were $26.1 billion during each of the two most recent quarters. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES

(net of unearned discount)

Dollars in millions



                                                          Percent increase
                                                          (decrease) from
                                      2nd Qtr.      2nd Qtr.           1st Qtr.
                                        2014          2013               2014
        Commercial, financial, etc.   $  18,978             7 %                3 %
        Real estate-commercial           26,140            -                  -
        Real estate-consumer              8,746           (19 )               (1 )
        Consumer
        Automobile                        1,567           (38 )                9
        Home equity lines                 5,744            -                  -
        Home equity loans                   322           (24 )               (7 )
        Other                             2,846             5                  2

        Total consumer                   10,479            (8 )                2

        Total                         $  64,343            (2 )%               1 %

For the first six months of 2014, average loans and leases totaled $64.1 billion, $1.9 billion or 3% below $65.9 billion in the year-earlier period. The most significant factors contributing to that decline were the 2013 loan securitizations noted earlier.

The investment securities portfolio averaged $11.0 billion in the second quarter of 2014, up $5.7 billion or 107% from $5.3 billion in the year-earlier quarter and $1.7 billion above the $9.3 billion averaged in the first quarter of 2014. For the first six months of 2014 and 2013, investment securities averaged $10.1 billion and $5.5 billion, respectively. Each of those increases reflects the net effect of purchases, securitization transactions and sales during 2013 and purchases during the first half of 2014, partially offset by maturities and paydowns of mortgage-backed securities. Beginning in the second quarter of 2013, the Company undertook certain actions to improve its regulatory capital and liquidity positions in response to evolving regulatory requirements. As a result, in the second quarter of 2013 approximately $1.0 billion of privately issued mortgage-backed securities held in the available-for-sale portfolio were sold, as were the Company's holdings of Visa and MasterCard common stock. In the second and third quarters of 2013, the Company securitized approximately $1.3 billion of residential real estate loans guaranteed by the FHA that were held in its loan portfolio. A substantial majority of the Ginnie Mae securities resulting from those securitizations were retained by the Company. During the second quarter of 2013, the Company also began originating FHA residential real estate loans for purposes of securitizing such loans into Ginnie Mae mortgage-backed securities to be retained in the Company's investment securities portfolio. Approximately $1.6 billion of such loans were originated and securitized during 2013. Finally, beginning in May 2013 the Company purchased approximately $1.9 billion of Ginnie Mae securities and

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$250 million of Fannie Mae securities that were added to the investment securities portfolio during 2013, and another $3.3 billion of Fannie Mae securities and $239 million of Ginnie Mae securities were purchased during the first half of 2014. The Company has increased its holdings of investment securities in response to changing regulatory requirements.

The investment securities portfolio is largely comprised of residential mortgage-backed securities, debt securities issued by municipalities, trust preferred securities issued by certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company considers its liquidity position and its overall interest-rate risk profile as well as the adequacy of expected returns relative to the risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio in connection with a business combination.

The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as "other than temporary." Nevertheless, there were no other-than-temporary impairment charges recognized in either of the first or second quarters of 2014 or the second quarter of 2013. During the first quarter of 2013, the Company recognized other-than-temporary impairment charges of $10 million. Those impairment charges related to certain privately issued mortgage-backed securities. Persistently high unemployment, loan delinquencies and foreclosures that led to a backlog of homes held for sale by financial institutions and others were significant factors contributing to the recognition of the other-than-temporary impairment charges related to those securities. Substantially all of the privately issued mortgage-backed securities held in the available-for-sale investment securities portfolio were sold late in the second quarter of 2013. The impairment charge in the initial 2013 quarter related to a subset of those securities. Additional information about the investment securities portfolio is included in notes 3 and 12 of Notes to Financial Statements.

Other earning assets include interest-earning deposits at the Federal Reserve Bank of New York and other banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $4.3 billion in the recently completed quarter, compared with $2.7 billion and $3.3 billion in the second quarter of 2013 and the first quarter of 2014, respectively. Interest-bearing deposits at banks averaged $4.1 billion in the second quarter of 2014, compared with $2.4 billion in the year-earlier period and $3.1 billion in the first quarter of 2014. The rise in interest-bearing deposits at banks in the recent quarter as compared with the earlier quarters was due, in part, to increased Wilmington Trust-related customer deposits held at the Federal Reserve Bank of New York. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities and other earning assets, ongoing repayments, the levels of deposits, liquidity requirements, and management of balance sheet size and resulting capital ratios.

As a result of the changes described herein, average earning assets aggregated . . .

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