Driven by lower provisions, M&T Bank Corporation's (MTB) second-quarter 2014 net operating earnings of $2.02 per share outpaced the Zacks Consensus Estimate of $1.90. However, this compared unfavorably with $2.65 per share reported in the prior-year quarter.
The quarter reflected improved credit metrics and a strong capital position. However, lower top line and increased expenses were the headwinds.
On a GAAP basis, M&T Bank reported net income of $284.0 million or $1.98 per share, compared with $348.0 million or $2.55 per share in the prior-year quarter. Results for both the quarters included certain non-recurring items.
Quarter in Detail
M&T Bank's total revenue was recorded at $1.19 billion, down 5.5% from the prior-year quarter. However, the figure outpaced the Zacks Consensus Estimate of $1.12 billion.
M&T Bank's taxable-equivalent net interest income came in at $675 million, down slightly on a year-over-year basis. Further, net interest margin declined to 3.40% from 3.71% in the prior-year quarter.
M&T Bank's other income decreased 10.4% year over year to $456 million. Notably, prior-year quarter included net pre-tax gains of $56 million from the sale of investment securities. Excluding these gains, non-interest income was up around 1% in the reported quarter, driven by increased mortgage banking revenues and trust income.
Non-interest expenses were $681 million, up 13.7% from the prior-year quarter. Excluding certain non-operating items, expenses came in at $672 million, up 16.3% from the prior-year quarter. The rise in non-interest operating expenses was mainly due to an increase in costs related to professional services along with salaries associated with BSA/AML activities, compliance, capital planning and stress test, risk management and other costs of operations.
Efficiency ratio increased to 59.4% from 50.9% in the prior-year quarter. A rise in efficiency ratio indicates a fall in profitability.
Loans and leases, net of unearned discount, dropped around 2% year over year to $64.7 billion at the end of the quarter. However, total deposits rose around 6% year over year to $69.8 billion.
M&T Bank's net operating income reflected an annualized rate of return on average tangible assets and average tangible common shareholder equity of 1.35% and 14.92%, respectively compared with 1.81% and 22.72% recorded in the prior-year quarter.
Credit Quality
Credit quality exhibited continued improvement in the reported quarter. Provision for credit losses decreased 47.4% year over year to $30 million. Net charge-offs of loans came in at $29 million, down 49.1% year over year.
Net charge-offs as a percentage of average loans outstanding were 0.18%, down from 0.35% in the year-ago quarter. Moreover, the ratio of non-accrual loans to total net loans was 1.36%, down from 1.46% in the prior-year quarter. Further, non-performing assets decreased 10.2% year over year to $939.9 million.
Capital Ratios
M&T Bank’s capital ratios were strong during the quarter. The company's estimated Tier 1 common ratio was 9.62%, up from 8.55% as of Jun 30, 2013. Further, the company’s estimated common equity Tier 1 to risk-weighted assets ratio under the new capital rules, approved in Jul 2013, on a fully phased-in basis was 9.35% as of Jun 30, 2014.
Our Viewpoint
Following the financial crisis, the market witnessed a rise in the number of distressed banks ready to be taken over by their stronger counterparts. M&T Bank capitalized on such opportunities. In fact, strategic acquisitions have been a part of M&T Bank’s business expansion policy. The deal with Hudson City Bancorp Inc. (HCBK) will expectedly provide upside to M&T Bank’s top line by leveraging the former’s retail network as well as product and balance sheet diversification.
The company, with its solid business model and strategic acquisitions, is well poised for growth. While the sluggish economic recovery, regulatory issues and low interest rate environment remain headwinds for M&T Bank, we believe that its sound capital position, improving credit quality and growing core deposit bode well in the long run.
M&T Bank currently carries a Zacks Rank #3 (Hold).
Performance of Other Large Wall Street Firms
The second-quarter earnings season kick started with Wall Street biggie – Wells Fargo & Company (WFC). Driven by prudent expense management, Wells Fargo earned $1.01 per share in second-quarter 2014, thereby surpassing 98 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.
Continuing the positive note, Citigroup Inc. (C) reported impressive second-quarter 2014 results. Adjusted earnings per share came in at $1.24, outpacing the Zacks Consensus Estimate of $1.08. However, earnings were below the year-ago figure by a penny.
Results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA). Moreover, results included charges worth $3.8 billion ($3.7 billion after-tax) related to the aforementioned deal. Including these, Citigroup reported net income of $181 million or 3 cents per share in the second quarter compared with $4.2 billion or $1.34 per share in the prior-year quarter.
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