M & T Bank (NYSE:MTB)
Q2 2021 Earnings Call
Jul 21, 2021, 11:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good day, and thank you for standing by. Welcome to the M&T Bank second quarter 2021 earnings conference call. [Operator instructions] Please be advised that today’s conference is being recorded. [Operator instructions] I would now like to hand the conference over to Don MacLeod.
Thank you. Please go ahead.
Don MacLeod — Vice President and Director of Investor Relations
Thank you, Erica, and good morning. I’d like to thank everyone for participating in M&T’s second quarter of 2021 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 and then on the Events and Presentations link. Also before we start, I’d like to mention that today’s presentation may contain forward-looking information.
Cautionary statements about this information, as well as reconciliations of non-GAAP financial measures are included in today’s earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our Investor Relations web page, and we encourage participants to refer to them for a complete discussion of forward-looking statements and risk factors. These statements speak only as of the date made, and M&T undertakes no obligation to update them. I’m happy to say that our Chief Financial Officer, Darren King, will be leading the call today.
Also joining us today is Brian Klock, who started with M&T in May and who will take over as the Head of Market and Investor Relations at the end of this year. Darren?
Darren King — Chief Financial Officer
Thanks, Don. Good morning, everyone. Welcome back, Brian, after a 17-year hiatus. Welcome to the other side of the table.
And I have a rhetorical question for you: where would you rather be than right here right now?
Brian Klock — SVP and Head of Markets and Investor Relations
You got it, Mark — I mean, Darren.
Darren King — Chief Financial Officer
All right. Let’s jump into the business of the day. As we noted in this morning’s press release, we were pleased with the continued rebound in the economy from the pandemic-induced slowdown. We continue to see improved customer activity across all sectors of the economy.
Notably, while not back to pre-pandemic levels, we’re seeing improvements in the leisure and hospitality sectors. While nonaccrual and criticized loans increased from prior quarter, loss emergence remains subdued, leading us to recognize a further moderate release from the allowance for credit losses. The balance sheet continues to strengthen as both capital and liquidity grew from already elevated levels, positioning the bank to continue to be a source of strength for our customers. We continue to make progress toward the fourth quarter close of the People’s United merger, and we were pleased with the overwhelming shareholder support of the combination.
Looking at the results for the quarter. Diluted GAAP earnings per common share were $3.41 for the second quarter of 2021, improved from $3.33 in the first quarter of 2021 and $1.74 in the second quarter of 2020. Net income for the quarter was $458 million, compared with $447 million in the linked quarter and $241 million in the year-ago quarter. On a GAAP basis, M&T’s second-quarter results produced an annualized rate of return on average assets of 1.22% and an annualized rate of return on average common equity of 11.55%.
This compares with rates of 1.22% and 11.57%, respectively, in the previous quarter. Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $2 million or $0.02 per common share, little changed from the prior quarter. Also included in the quarter’s results were merger-related charges of $4 million related to M&T’s proposed acquisition of People’s United Financial. This amounted to $3 million after tax or $0.02 per common share.
Results for this year’s first quarter included $10 million of such charges amounting to $8 million after-tax effect or $0.06 per common share. Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions. M&T’s net operating income for the second quarter, which excludes intangible amortization and the merger-related expenses, was $463 million, compared with $457 million in the linked quarter and $244 million in last year’s second quarter. Diluted net operating earnings per common share were $3.45 for the recent quarter, up from $3.41 in 2021’s first quarter and up from $1.76 in the second quarter of 2020.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders’ equity of 1.27% and 16.68% for the recent quarter. The comparable returns were 1.29% and 17.05% in the first quarter of 2021. In accordance with the SEC’s guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Now let’s take a look at some of the underlying details in our results.
Taxable equivalent net interest income was $946 million in the second quarter of 2021, compared with $985 million in the linked quarter. A decrease in PPP-related income accounted for approximately half of the quarter over quarter decrease in net interest income as the first round of PPP loans continues to wind down. The net interest margin for the past quarter was 2.77%, down 20 basis points from 2.97% in the linked quarter. Higher levels of cash on deposit at the Federal Reserve continued to contribute pressure to the margin, which we estimate accounted for seven basis points of the decline from the first quarter.
Lower fee amortization from the PPP loan portfolio, both scheduled amortization and accelerated recognition from forgiven loans, contributed about six basis points of the margin pressure. The impact of interest rates, primarily lower income from our hedge program, partially offset by a lower cost of deposits, accounted for about three basis points of the decline. All other factors accounted for some four basis points of margin pressure. Compared with the first quarter of 2021, average earning assets increased by some 2%, reflecting a 13% increase in money market placements, primarily cash on deposit at the Fed and a 6% decline in investable securities.
Average loans outstanding declined just under 1%, compared with the previous quarter. Looking at the loans by category on an average basis compared with the linked quarter, overall, commercial and industrial loans declined by $668 million or 2.4%. Dealer floor plan loans declined by $859 million, reflecting the well-documented auto production and inventory issues experienced by the industry. Due to the late first quarter timing of round two originations and delays in forgiveness of loans over $2 million in size, average PPP loans declined by less than $50 million from the prior quarter.
All other C&I loan categories grew slightly over 1%. Commercial real estate loans declined by about 0.5%, similar to what we saw in the first quarter. We continue to see very low levels of customer activity. Residential real estate loans declined by 2%.
We’ve seen little opportunity for additional buyouts of loans from Ginnie Mae servicing pools, as delinquency and payment trends continue to improve. Absent those, the ongoing runoff of acquired Hudson City mortgage loans continues at a moderate pace. Consumer loans were up 3%, consistent with recent quarters, as growth in indirect auto and recreation finance loans has been outpacing declines in home equity lines and loans. On an end-of-period basis, total loans were down 2%, reflecting the same factors I just mentioned.
PPP loans totaled $4.3 billion at June 30, compared with $6.2 billion at the end of the first quarter. Average core customer deposits, which exclude deposits received at M&T’s Cayman Islands office and CDs over $250,000 increased over 3% or $4 billion, compared with the first quarter. That figure includes $2.6 billion of noninterest-bearing deposits. On an end-of-period basis, core deposits were up by just under $700 million.
I’ll note here that the repeal of the prohibition of paying interest on commercial checking deposits has led us to reconsider the need for a Cayman Islands office. It held no deposits at the end of the quarter. Turning to noninterest income. Noninterest income totaled $514 million in the second quarter, compared with $506 million in the linked quarter.
The recent quarter included $11 million of valuation losses on equity securities, largely on our remaining holdings of GSE preferred stock, while the prior quarter included $12 million of such valuation losses. Mortgage banking revenues were $133 million in the recent quarter, compared with $139 million in the linked quarter. Revenues for our residential mortgage business, including both origination and servicing activities, were $98 million in the second quarter, compared with $107 million in the prior quarter. Lower gain on sale margins were the primary driver of the decline.
In addition, residential mortgage loans originated for sale were down about 5% to $1.2 billion, compared with the first quarter. Commercial mortgage banking revenues were $35 million in the second quarter, compared with $32 million in the linked quarter. Trust income rose to $163 million in the recent quarter, improved from $156 million…
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