M&T Bank Corporation — Q2 2014 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2014, with comparisons to 2013. M&T is a bank holding company with commercial, retail, mortgage, trust and other banking businesses. Unless noted, figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $669 million | $678 million | $1.326 billion | $1.334 billion |
| Other income | $456 million | $509 million | $877 million | $942 million |
| Net income | $284 million | $348 million | $513 million | $623 million |
| Diluted EPS | $1.98 | $2.55 | $3.59 | $4.53 |
| Provision for credit losses | $30 million | $57 million | $62 million | $95 million |
| Net charge-offs | $29 million | $57 million | $61 million | $94 million |
Reported Q2 revenue, measured as net interest income plus other income, was approximately $1.126 billion, down from $1.186 billion. Net interest margin was 3.40%, down 31 basis points year over year and 12 basis points sequentially. Average earning assets rose 8% year over year to $79.6 billion, partly offsetting lower asset yields.
Q2 return on average assets was 1.27%, versus 1.68% a year earlier; return on average common equity was 9.79%, versus 13.78%. The efficiency ratio was 59.4%, compared with 50.9% in Q2 2013. Management’s non-GAAP net operating income was $290 million and operating diluted EPS was $2.02, excluding specified acquisition-related items.
Balance sheet, liquidity and capital
- At June 30, total assets were $90.8 billion, up from $85.2 billion at year-end 2013. Net loans and leases were $63.8 billion after the $918 million allowance; deposits were $69.8 billion.
- Investment securities totaled $12.1 billion, versus $8.8 billion at year-end. Management said securities purchases and mortgage securitizations were, in part, intended to support regulatory liquidity requirements.
- Long-term borrowings were $7.4 billion, up from $5.1 billion at year-end. Shareholders’ equity was $12.2 billion, including $1.2 billion of preferred stock. Common dividends were $0.70 per share for the quarter.
- For the first half, operating cash flow was $470 million, investing cash outflow was $5.313 billion and financing cash inflow was $5.088 billion. Cash and cash equivalents ended the period at $1.917 billion.
- Reported June 30 regulatory capital ratios were 12.36% Tier 1 and 15.34% total capital for M&T consolidated; its estimated fully phased-in CET1 ratio under the new rules was 9.42%. Management stated it expected to meet revised capital requirements.
Changes, outlook and significant matters
- Earnings declined year over year. Lower net income reflected weaker net interest income, the absence of prior-year securities gains and higher operating costs. Q2 2013 included a $103 million pretax gain on Visa and MasterCard shares, a $46 million pretax loss on sales of private-label mortgage securities, and a $26 million expense reversal; together these items increased that quarter’s net income by about $49 million, or $0.38 per diluted share.
- Expenses and unusual Q2 items. Q2 2014 expenses included increased professional-service and personnel costs for BSA/AML compliance, risk management, capital planning and other initiatives. A $12 million litigation accrual reduced Q2 net income by $7 million after tax; resolution of uncertain tax positions added $8 million to net income. No Hudson City merger expenses were recorded in the first half of 2014.
- Credit trends improved in the comparison. Nonaccrual loans were $880 million, or 1.36% of loans, versus $965 million, or 1.46%, a year earlier. The allowance was 1.42% of loans. Management described its allowance assessment as cautious, citing real estate valuation uncertainty, regional economic weakness and loan growth.
- Hudson City acquisition remains conditional. The proposed acquisition was valued at approximately $5.4 billion. It remained subject to regulatory approvals and other closing conditions; the parties extended the termination date to December 31, 2014. The filing gives no assurance the deal would close by then.
- Regulatory and legal risks. A Federal Reserve Bank of New York agreement requires an enhanced BSA/AML compliance program. M&T reported ongoing SEC and DOJ investigations concerning pre-acquisition Wilmington Trust matters. Possible litigation losses beyond existing accruals were estimated at $0–$40 million in aggregate, though outcomes could affect results in a future period.
- Interest-rate and funding exposure. Management warned that low rates and spread changes could pressure net interest income. Its model estimated first-year net interest income increases of $114 million for a gradual 100-basis-point rise and $215 million for a 200-basis-point rise; declines of $74 million and $96 million, respectively, for equivalent rate decreases. The filing cautions that actual outcomes may differ materially.
- Guidance. The filing provides no specific earnings or revenue guidance. Management said available liquidity was adequate for anticipated normal-course needs and it would take further steps as needed for final liquidity rules.
Investor facts to verify
- Whether M&T’s BSA/AML remediation satisfies regulators and how it affects costs, controls and the Hudson City transaction timetable.
- Whether net interest margin stabilizes and whether deposit and earning-asset growth can offset lower asset yields.
- Whether credit quality and the allowance remain adequate, particularly in commercial real estate, residential mortgages and home-equity loans.
- How ongoing Wilmington Trust investigations and litigation develop, including potential losses beyond recorded amounts.
- How planned liquidity and capital rule changes affect securities holdings, funding costs and capital ratios.