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Text: 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.
And I have a rhetorical question for you: where would you rather be than right here right now?
Let's jump into the business of the day.
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.
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 in the previous quarter.
This quarter's results included $4 million of seasonal fees arising from tax preparation work we undertake for clients, as well as the result of the growth in assets under management in the wealth and institutional businesses.
Service charges on deposit accounts were $99 million, compared with $93 million in the first quarter.
The primary driver of the increase were customer payments-related activity.
Operating expenses for the second quarter, which exclude the amortization of intangible assets and merger-related expenses, were $859 million.
The comparable figure was $907 million in the linked quarter.
Salaries and benefits declined by $62 million to $479 million from the prior quarter.
Recall that the first quarter's results included $69 million of seasonal salary and benefit costs.
Our deposit insurance increased by $4 million to $18 million during the quarter, primarily reflecting higher levels of criticized loans, which factor into the FDIC's assessment calculation.
Other costs of operations for the past quarter included an $8 million addition to the valuation allowance on our capitalized mortgage servicing rights.
Recall there was a $9 million reversal from the allowance in 2021's first quarter.
The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 58.4% in the recent quarter, compared with 60.3% in 2021's first quarter, which included the seasonally elevated compensation costs.
Next, let's turn to credit.
As I noted at the start of the call, we're pleased with the signs of spending and revenue trends for our customers as the overall economy continues to improve.
That said, some industries are improving more rapidly than others, and the supply chain issues and pressures on costs go beyond just the automotive sector.
The allowance for credit losses declined by $61 million to $1.6 billion at the end of the second quarter.
That reflects a $15 million recapture of previous provisions for credit losses, combined with $46 million of net charge-offs in the quarter.
The allowance for credit losses as a percentage of loans outstanding declined to 1.6% -- 1.62%.
That ratio was little changed from 1.65% of loans at the end of the prior quarter.
Annualized net charge-offs as a percentage of loans were 19 basis points for the second quarter, compared with 31 basis points in the first quarter.
The allowance for credit losses at the end of the quarter reflects our assessment of credit losses in the portfolio under the CECL loss measurement methodology, which includes our macroeconomic forecast.
As we've previously indicated, our macroeconomic forecast uses a number of economic variables, with the largest drivers being the unemployment rate and GDP.
Our forecast assumes the national unemployment rate continues to be at elevated levels, on average, 5.4% through 2021, followed by a gradual improvement, reaching 3.5% by mid-2023.
The forecast assumes that GDP grows at a 7.4% annual rate during 2021, resulting in GDP returning to pre-pandemic levels during 2022.
Nonaccrual loans increased by $285 million to $2.2 billion or 2.31% of loans at the end of June.
This was up from 1.97% at the end of March.
We expect to disclose an increase in criticized loans with our second quarter 10-Q filing.
This reflects the prolonged recovery in certain sectors of the economy, notably hospitality and healthcare.
M&T's commercial loan grades reflect the performance of individual properties with limited consideration of property values or guarantor ability to sustain cash flows from other sources.
Notwithstanding those increases, loss emergence on troubled loans continues to be moderate.
Interest reserves are healthy, sponsors remain supportive and collateral values are well within our underwriting assumptions.
The allowance for credit losses continues to reflect our ultimate loss expectations.
Loans 90 days past due, on which we continue to accrue interest, were $1.1 billion at the end of the recent quarter, and 96% of these loans were guaranteed by government-related entities.
M&T's common equity Tier 1 ratio was an estimated 10.7%, compared with 10.4% at the end of the first quarter, and which reflects lower risk-weighted assets and earnings net of dividends.
As previously noted, while the People's United merger is pending, we don't plan to engage in any stock repurchase activity.
Now turning to the outlook.
As we reach the halfway point of the year, the cautious outlook we conveyed on the January and April earnings calls has been well aligned with what we're actually seeing.
The fiscal and monetary stimulus programs, along with the vaccination programs, have clearly brought a turnaround in economic growth and employment.
But the downside effects from these actions continues.
Excess liquidity in the system has suppressed loan growth, particularly commercial loans for M&T in the broader industry.
Customer deposits are at all-time highs and grew faster than our ability to deploy them into assets that earn above our cost of capital.
The fundamental aspects of our outlook haven't changed.
Total loan growth, roughly flat on a year-over-year basis, excluding the PPP loans, with pressure on C&I, especially dealer floor plan and CRE loans being offset by growth in consumer loans.
Net interest income down low single-digit percentage from full year 2020.
Low single-digit growth in total fees.
We see the potential for a slowdown in mortgage banking in the second half, offset by stronger trust income, payments-related fees and commercial loan fees.
Expenses for the first half of the year have been mostly in line with our expectations with year-over-year growth largely attributable to expenses directly tied to revenue growth such as Entrust, and to higher corporate incentive accruals coming as a result of improved overall profitability compared to last year.
As these trends continue, together with costs associated with the reopening of the economy and costs incurred in preparation for the People's United merger, we expect there to be a little more pressure on expenses in the second half of 2021.
The credit environment continues to improve along with the overall economy, but some segments are recovering more slowly than others.
We're encouraged by the progress we're seeing in our hospitality portfolio with respect to bookings and cash flows, but that sector's return to normal will lag the overall economy.
Lastly, the planned merger with People's United remains on track, and our estimated time line for approval by the regulators, closing and integration remains unchanged.
Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Now let's open the call to questions before which Erica will briefly review the instructions.

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q2 operating earnings per share $3.45.
q2 gaap earnings per share $3.41.
m&t bank - net interest income expressed on a taxable-equivalent basis totaled $946 million in recent quarter, compared with $961 million in q2 of 2020.

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