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M&T Bank Corporation’s (MTB - Analyst Report) second-quarter 2013 operating earnings of $2.65 per share beat the Zacks Consensus Estimate of $2.10. Additionally, this was up 29% from $2.06 earned in the prior quarter.

Better-than-expected earnings were primarily aided by higher revenues on the back of increased net interest and non-interest income. Moreover, declining expenses and improved capital ratios were the positives. However, higher provision for credit losses and increased net charge-offs were the headwinds.

On a GAAP basis, M&T Bank reported net income of $348 million or $2.55 per share, compared with $274 million or $1.98 per share in the prior quarter. Results for both the quarters included the impact of amortization of core deposit and other intangible assets, and merger-related gains and expenses.

Quarter in Detail

M&T Bank’s total revenue was recorded at $1.3 billion, up 8% from the previous quarter. Further, revenues surpassed the Zacks Consensus Estimate of $1.1 billion.

M&T Bank’s net interest income came in at $684 million, up 3% from the previous quarter. Further, net interest margin remained stable at 3.71% from the prior quarter.

M&T Bank’s non-interest income increased 2% sequentially to $452 million, driven by higher commercial mortgage banking revenues, partly offset by a decline in residential mortgage banking revenues.

M&T Bank’s non-interest expense was $599 million, down 6% from the prior quarter. Excluding amortization of core deposit and other intangible assets as well as merger-related expenses, non-interest operating expenses came in at $578 million, down 6% from the prior quarter.

The sequential decline was mainly due to lower salaries and employee benefits, including stock-based compensation, and the favorable resolution of the Wilmington Trust-related compensation contingency, partially offset by higher costs for professional services and advertising and promotion.  

Efficiency ratio improved to 50.9% from 55.9% in the previous quarter.

Loans and leases, net of unearned discount, nudged up 0.2% sequentially to $66.0 billion at the end of the reported quarter. Total deposits also rose 1% sequentially to $65.7 billion as of Jun 30, 2013 from $65.1 billion at the prior quarter-end.

M&T Bank’s net operating income reflected an annualized rate of return on average tangible assets and average tangible common shareholder equity of 1.81% and 22.72% respectively, compared with 1.48% and 18.71% recorded in the earlier quarter.

Credit Quality

Credit quality was a mixed bag at M&T Bank. Provision for credit losses increased 50% to $57 million and net charge-offs rose 54% to $57 million. Net charge-offs, as a percentage of average loans outstanding were 0.35%, up from 0.23% in the preceding quarter. However, the ratio of non-accrual loans to total net loans declined to 1.46% from 1.60% in the previous quarter.

Capital Ratios

M&T Bank's tangible common equity to tangible assets ratio was 7.85% as of Jun 30, 2013, improving from 7.51% as of Mar 31, 2013. The company’s Tier 1 common ratio was 8.55% as of Jun 30, 2013 compared with 7.93% as of Mar 31, 2013.

Our Viewpoint

The company, with its solid business model and strategic acquisitions, is well poised for future growth. While the sluggish economic recovery, regulatory issues and low interest rate environment remain headwinds for M&T Bank, we believe that a sound capital position and growing core deposit will aid it in the long run.

In Aug 2012, M&T agreed to take over Hudson City Bancorp Inc. (HCBK - Analyst Report) in a cash and stock deal worth $3.7 billion, based on M&T Bank’s closing stock price on Aug 24, 2012. However in Apr 2013, the Federal Reserve detected several loopholes in M&T Bank's efforts to fight money laundering and put a hold on the acquisition.

Nevertheless, in Jun 2013, the bank successfully reached an agreement with the Fed to improve compliance with respect to risky activities. Hence, it has managed to overcome all regulation hurdles.

M&T Bank currently carries a Zacks Rank #3 (Hold).

Among other major regional banks, State Street Corporation (STT - Analyst Report) is scheduled to announce results on Jul 19, while BB&T Corporation (BBT - Analyst Report) will report on Jul 18.

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