M&T Bank Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2013. M&T is a bank holding company with commercial, retail, mortgage, trust and other banking businesses. Comparisons below are with Q2 2012 unless stated otherwise; balance-sheet comparisons are with December 31, 2012.
Financial results and key metrics
| Metric | Q2 2013 | Comparable period / change |
|---|---|---|
| Net interest income | $678 million | $648 million; up 5% |
| Provision for credit losses | $57 million | $60 million; down 5% |
| Other income | $509 million | $392 million; up 30% |
| Other expense | $599 million | $627 million; down 5% |
| Income before taxes | $531 million | $352 million |
| Net income | $348 million | $233 million; up 49% |
| Diluted earnings per common share | $2.55 | $1.71 |
| Net interest margin | 3.71% | 3.74%; down 3 basis points |
| Efficiency ratio (non-GAAP operating measure) | 50.9% | 56.9% |
For the first six months, net income was $623 million versus $440 million, and diluted EPS was $4.53 versus $3.20. GAAP net interest income was $1.334 billion versus $1.268 billion. The filing also reports non-GAAP “net operating” income of $361 million and diluted operating EPS of $2.65 for Q2; these exclude specified acquisition-related costs and intangible amortization.
- Unusual Q2 items: M&T recorded a $103 million pretax gain from selling Visa and MasterCard shares, a $46 million pretax loss from selling about $1.0 billion of privately issued mortgage-backed securities, and a $26 million expense reversal for an expired Wilmington Trust contingent compensation obligation. Management reported respective after-tax EPS effects of +$0.48, −$0.22 and +$0.12.
- Balance sheet at June 30: total assets were $83.2 billion; net loans and leases $65.0 billion; deposits $65.7 billion; long-term borrowings $5.1 billion; and shareholders’ equity $10.7 billion. Versus year-end, loans were down about $0.6 billion, deposits were broadly unchanged, and long-term borrowings were up about $0.5 billion.
- Credit: the allowance for credit losses was $927 million, or 1.41% of loans. Net charge-offs were $57 million in Q2, equal to an annualized 0.35% of average loans, versus $52 million and 0.34% a year earlier. Nonaccrual loans were $965 million, or 1.46% of loans, down from $968 million and 1.54% a year earlier. Nonperforming assets totaled $1.047 billion, or 1.59% of loans plus foreclosed assets.
- Cash flow, first half: operating activities provided $616 million; investing activities used $792 million; financing activities used $337 million. Cash and cash equivalents ended at $1.475 billion, down $512 million from the start of the year.
- Capital and shareholder returns: regulatory capital ratios at June 30 were 11.31% Tier 1 and 14.47% total capital for M&T consolidated; M&T Bank reported 9.65% and 12.62%, respectively. The quarterly common dividend remained $0.70 per share. Tangible common equity to tangible assets was 7.85%.
Material changes and management commentary
- Revenue and earnings improved year over year, supported by higher average loans, lower funding costs, stronger mortgage banking revenues and the exceptional securities gains. The margin was slightly lower year over year and unchanged from Q1 2013 at 3.71%.
- Average loans were $66.0 billion in Q2, up 7% year over year, led by commercial, commercial real estate and residential real estate lending. Average core deposits were $63.7 billion, up 8%; low rates contributed to growth in savings and noninterest-bearing balances while time deposits declined.
- Credit quality showed mixed signals: nonaccrual loans and criticized commercial and commercial real estate loans improved from year-end, but Q2 net charge-offs rose sequentially. A $30 million charge-off on a motor-vehicle-parts wholesaler relationship was a notable contributor.
- The company sold substantially all privately issued available-for-sale mortgage-backed securities and Visa/MasterCard holdings as part of actions to improve capital and liquidity. It retained most securities from a $923 million Ginnie Mae mortgage securitization in Q2 and anticipated securitizing about $1.0 billion of FHA loans and up to approximately $1.5 billion of consumer loans in Q3.
Outlook, risks and contingencies
- Hudson City acquisition: the proposed acquisition was valued at about $4.7 billion. Shareholders of both companies had approved it, but regulatory approval remained outstanding. M&T disclosed Federal Reserve Bank of New York concerns about its Bank Secrecy Act and anti-money-laundering procedures, systems and processes. M&T and its bank subsidiary entered a written agreement requiring a revised compliance risk-management program and other remediation. The parties extended the merger termination date to January 31, 2014; completion by then was not assured.
- Capital regulation: final U.S. capital rules issued in July 2013 phase out trust preferred securities from Tier 1 capital—only 25% would count in 2015 and none in 2016. Management estimated fully phased-in CET1 at approximately 8.10%–8.15% as of June 30 and stated it expected to meet the new requirements. The filing notes that the estimate is based on management’s good-faith calculation.
- Business risks: management cited low interest rates and possible margin pressure, economic and real-estate conditions, unemployment, credit losses, loan and collateral valuations, liquidity and funding availability, regulatory changes, and execution risks in acquisitions. Interest-rate sensitivity modeling estimated first-year net interest income would rise about $107 million under a gradual +100-basis-point scenario and fall about $80 million under −100 basis points; actual outcomes may differ materially.
- Legal matters: management did not expect pending and threatened litigation to materially affect consolidated financial position. Beyond recorded liabilities, reasonably possible aggregate losses were estimated at $0–$70 million; outcomes could nevertheless materially affect a particular future reporting period.
- Guidance: the filing provides no specific earnings or revenue guidance. Management stated that available liquidity was adequate for anticipated normal-course needs and that it believed the company could meet the new capital requirements.
Important facts for investors to verify
- Progress and effectiveness of the AML/BSA remediation, regulatory approval status, and the revised timing and terms of the Hudson City transaction.
- How much Q2 earnings depended on securities-sale gains and the compensation-accrual reversal, and whether recurring operating trends support the reported improvement.
- Subsequent loan performance, charge-offs and allowance adequacy, particularly in commercial relationships, residential builder/developer lending, Alt-A mortgages and home-equity loans.
- Execution and accounting effects of planned loan securitizations, including the amount retained and the resulting impacts on liquidity, capital, earnings and risk.
- Actual capital ratios under the new rules, including the trust-preferred phase-out and any effects of regulatory remediation or acquisition plans.
- Exposure to litigation and off-balance-sheet commitments, including credit commitments, letters of credit and mortgage-loan repurchase obligations.