M&T BANK CORP quarterly report, Q2 FY2016

M&T Bank Corporation — Q2 2016 Form 10-Q

Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2016. M&T is a regional banking company. Results include Hudson City Bancorp, acquired November 1, 2015; consequently, year-over-year comparisons reflect a larger business as well as underlying changes.

Financial performance and condition

Amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total revenue (net interest income plus other income)	$1,312	$1,180	$2,605	$2,280
Net interest income, GAAP	$864	$683	$1,736	$1,343
Net income	$336	$287	$635	$528
Diluted earnings per common share	$1.98	$1.98	$3.71	$3.63
Provision for credit losses	$32	$30	$81	$68
Other expense	$750	$697	$1,526	$1,383

Q2 taxable-equivalent net interest income was $870 million, up 26% year over year, primarily reflecting higher average earning assets. Average earning assets rose 28% to $111.9 billion, including the impact of Hudson City.
Net interest margin was 3.13%, versus 3.17% in Q2 2015 and 3.18% in Q1 2016. Management cited higher rates paid on deposits, lower investment-security yields and increased low-yield balances at the Federal Reserve as pressures. For the first half, the margin was 3.15% versus 3.17%.
Q2 return on average assets was 1.09% and return on average common equity was 8.38%. The efficiency ratio improved to 55.1% from 58.2% a year earlier; the first-half ratios were 56.0% and 59.8%, respectively.
At June 30, total assets were $123.8 billion, loans and leases net of unearned discount were $88.5 billion, deposits were $94.7 billion and shareholders’ equity was $16.5 billion. Long-term borrowings were $10.3 billion; short-term borrowings were $407 million.
Six-month cash flow: $650 million provided by operations, $907 million used in investing and $173 million provided by financing. Cash and due from banks ended at $1.284 billion, down $84 million from year-end. Interest-bearing deposits at banks were $8.475 billion.
Consolidated regulatory capital ratios were 11.01% CET1, 12.29% Tier 1, 14.72% total capital and 9.99% Tier 1 leverage. Tangible common equity to tangible assets was 8.87%.

Material changes versus comparable periods

Q2 net income increased 17% year over year, while diluted EPS was unchanged at $1.98. Higher revenue—largely associated with the Hudson City acquisition—was partly offset by higher expenses and a larger average share count.
Q2 other income fell to $448 million from $497 million, partly because Q2 2015 included a $45 million gain on the sale of a retirement-services trade-processing business. Mortgage banking revenue also declined year over year.
Q2 net charge-offs were $24 million, or 0.11% of average loans annualized, versus $21 million and 0.13% a year earlier. First-half net charge-offs were $66 million versus $58 million.
Nonaccrual loans were $849 million, or 0.96% of loans, at June 30, compared with $797 million, or 1.17%, a year earlier and $799 million, or 0.91%, at year-end. Management attributed part of the increase from year-end to Hudson City residential loans that subsequently became more than 90 days delinquent.
The allowance for credit losses was $970 million, 1.10% of loans, versus $956 million, 1.09%, at year-end. The Q2 provision was $32 million; consumer lending accounted for most net charge-offs.
Deposits increased $2.7 billion from year-end, while other short-term borrowings declined from $2.0 billion to $200 million. Loans grew about $1.0 billion from year-end.

Outlook, management commentary, risks and unusual items

Capital returns: The Federal Reserve did not object to M&T’s 2016 capital plan. It provided for repurchases of up to $1.15 billion over the four quarters beginning July 1, 2016 and a potential quarterly dividend increase of up to $0.05, to $0.75, in Q1 2017, subject to Board declaration and regulatory limits. The Board authorized a new $1.15 billion repurchase program on July 19; M&T repurchased 1.15 million shares for $132 million in July. No specific earnings or revenue guidance is provided.
Hudson City integration: Q2 merger-related expense was $13 million; first-half expense was $36 million. Management stated it did not expect additional merger-related expenses in 2016. The acquisition added scale and geographic reach, but also increased operating costs and included acquired residential real estate credit exposure.
Liquidity and rates: Management said available liquidity was adequate for anticipated normal-course funding needs and that the Company complied with the phased-in liquidity coverage requirements. The filing emphasizes sensitivity to interest rates, funding availability, deposit costs and asset/liability repricing. Its modeled first-year net interest income impact was +$168 million for a gradual +100-basis-point scenario, +$295 million for +200 basis points, and -$119 million for -50 basis points; management cautioned actual outcomes may differ materially.
Credit and market risks: Management highlighted real estate collateral values, commercial real estate concentrations, consumer losses, and economic conditions in upstate New York and central Pennsylvania. Approximately 55% of loans were to customers in New York and Pennsylvania. Nonperforming assets were $1.02 billion, or 1.15% of loans and foreclosed assets. Criticized commercial and commercial real estate loans totaled $2.4 billion.
Legal and regulatory matters: M&T Bank paid $64 million in May to settle federal investigations into certain FHA, Fannie Mae and Freddie Mac loan underwriting, without admitting liability; the case was dismissed and the settlement was not material to reported results. Separately, Wilmington Trust Corporation, acquired in 2011, was indicted in a DOJ matter concerning pre-acquisition conduct; trial was scheduled for January 2017. Management reported reasonably possible aggregate litigation losses beyond recorded liabilities of $0–$40 million, while noting some outcomes could materially affect a particular future period. M&T and M&T Bank continued work to resolve outstanding issues under a 2013 Federal Reserve written agreement concerning BSA/AML compliance.
Other unusual items: Q2 2016 included $13 million of merger-related costs and $11 million of intangible amortization. Management’s non-GAAP net operating income was $351 million and diluted operating EPS was $2.07, excluding specified merger and intangible amortization effects. The filing also reports $67 million of gross unrealized investment-security losses; management said it did not intend or expect to be required to sell impaired securities at a loss and considered the declines temporary.

Most important facts for investors to verify

Whether Hudson City integration delivers anticipated scale and cost benefits, and how acquired-loan performance affects credit costs.
Trends in deposit pricing, net interest margin and loan growth, especially if market rates or deposit competition change.
Consumer charge-offs, residential delinquencies, criticized commercial real estate exposures and adequacy of the credit-loss allowance.
Execution and regulatory constraints on the announced repurchase program and potential dividend increase.
Developments in the Wilmington Trust DOJ case, the BSA/AML written agreement and other litigation or regulatory matters.
Assumptions and reconciliation underlying non-GAAP operating results and the modeled interest-rate sensitivity scenarios.